Opinion ID: 75238
Heading Depth: 2
Heading Rank: 2

Heading: Taxation of Post-Judgment Interest

Text: After the jury verdict, but before an appeal was filed, Foster negotiated with her attorneys that, if they represented her on appeal, they could take all of the postjudgment interest, if any, rather than just the half they were entitled to based on the pre-trial contingency fee agreement. The district court held that Foster should have included half of the post-judgment interest on her tax return, despite the fact that the entire interest amount was paid directly to her lawyers. The district court relied on Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241 (1930) and Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144 (1940) to deny Foster’s claim. In Lucas, the Supreme Court held that a man who contracted with his wife to give her half of everything he earned could not avoid paying taxes on that income, as “the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it.” Lucas, 281 U.S. at 115, 50 S.Ct. at 241. The Court reinforced the assignment of income doctrine in Horst by holding that a man could not avoid paying tax on interest earned from bonds by transferring the bond interest coupons to his son before they matured. In Horst, the Court reasoned that the gift of the interest coupons was an assignment of income, albeit anticipatory, because the father had earned the money (by purchasing the bonds) and enjoyed 8 the benefit of the interest coupons by having the power to give them to his son as a gift. Horst, 311 U.S. at 120, 61 S.Ct. at 149. We find Foster’s payment of the post-judgment interest to her attorneys more analogous to Cotnam than to Lucas or Horst. Foster’s case and fee agreements are governed by Alabama law, which states that attorneys, “have a lien superior to all liens but tax liens, and no person shall be at liberty to satisfy said action or judgment, until the lien or claim of the attorney for his fees is fully satisfied; and attorneys-at-law shall have the same right and power over action or judgment to enforce their liens as their clients had or may have for the amount due thereon to them.” Ala. Code. § 34-3-61 (2000). Based on this law, Foster could never have received the portion of the judgment contracted as attorneys’ fees. Because Foster did not have the authority to access the money she had assigned to her attorneys before the appeal, she did not “fully enjoy[] the benefit of the economic gain represented by [her] right to receive income,” as did the father in Horst who gave the gift to his son. Horst, 311 U.S. at 116, 61 S.Ct. at 147. In Cotnam, we held that fees paid to an attorney subject to a contingency fee agreement should be excluded from a taxpayer’s gross income because, “[t]his sum was income to the attorneys but not to” the client. 263 F.3d at 125.7 When a 7 We recognize the circuit split on this issue. The Fifth and Sixth Circuits have applied the Cotnam ruling, while the Third, Fourth, Ninth, and Federal Circuits include contingency fees 9 contingency fee agreement is signed, it is unclear how much the attorney will get paid, if at all. See id. at 126 (the “fee was contingent upon success, and was fully paid by the assignment of a portion of a doubtful claim.”) It is due to the hard work and expertise of the attorney that he is paid, and the attorney accordingly pays income taxes on the fees collected. We agree with the Sixth Circuit’s characterization of a contingency fee as “more like a division of property than an assignment of income.” Estate of Clarks v. United States, 202 F.3d 854, 857-58 (6th Cir. 2000). That court went on to explain that when a lawyer is paid based on a contingency fee, the lawyer’s income is the result of his own personal skill and judgment, not the skill or largess of a family member who wants to split his income to avoid taxation. The income should be charged to the one who earned it and received it, not . . . to one who neither received it nor earned it. Id. Foster argues that the 50% of post-judgment interest that was paid to her attorneys as the result of the pre-appeal agreement should be controlled by in a taxpayer’s gross income. See Srivastava v. Comm’r, 220 F.3d 353, 365 (5th Cir. 2000); Estate of Clarks v. United States, 202 F.3d 854, 858 (6th Cir. 2000); O’Brien v. Comm’r, 38 T.C. 707, 712 (1962), aff’d, 319 F.2d 532 (3rd Cir. 1963); Young v. Comm’r, 240 F.3d 369, 372 (4th Cir. 2001); Coady v. Comm’r, 213 F.3d 1187, 1187 (9th Cir. 2000), petition for cert. filed, (U.S. Nov. 20, 2000) (No. 00-1326); Baylin v. United States, 43 F.3d 1451, 1452 (Fed.Cir. 1995). Cotnam is binding precedent in our circuit, Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981), and has been upheld in Davis v. Comm’r, 210 F.3d 1346, 1347 n.4 (11th Cir. 2000). 10 Cotnam, even though the agreement was signed after the jury had returned a verdict in her favor. We agree. Before the appeals process, there was no guarantee that Foster would ultimately receive the amount awarded by the jury. In fact, during the appeals process, the final judgment number was altered various times, and the ultimate number we address today is lower than the jury verdict.8 Also, there was no guarantee as to how long the appeals process would last, which plays a significant role in the calculation of post-judgment interest. Therefore, we find that the pre-appeal agreement is analogous to the pre-trial agreement, and the appeal fee, namely Foster’s half of the post-judgment interest, is excludable from Foster’s gross income. Therefore, she is due a refund of the taxes assessed.9