Legal Document

543 U.S. 426 COMMISSIONER OF INTERNAL REVENUEv.BANKS No. 03-892. Supreme Court of United States. Argued November 1, 2004. Decided January 24, 2005.* Respondent Banks settled his federal employment discrimination suit against a California state agency and respondent Banaitis Oregon case former employer, but neither included fees paid to their attorneys under contingent-fee agreements as gross income on tax returns. In each petitioner Commissioner Internal Revenue issued notice deficiency, which the Tax upheld. Banks' case, Sixth Circuit reversed in part, finding that amount attorney was not includable income. Banaitis' Ninth found because law grants superior lien portion any recovery, part settlement Held: When litigant's recovery constitutes income, includes contingent fee. Pp. 432-439. (a) Two preliminary observations help clarify why this issue is consequence. First, taking legal expenses miscellaneous itemized deductions would have been no respondents Alternative Minimum establishes liability floor does allow such deductions. Second, American Jobs Creation Act 2004 — amended Code taxpayer, computing adjusted deduct attorney's those at apply here it passed after these cases arose retroactive. 432-433. (b) The defines "gross income" broadly include all economic gains otherwise exempted. Under anticipatory assignment doctrine, taxpayer cannot exclude an gain from by assigning advance another party, e. g., Lucas v. Earl, 281 U. S. 111, should be taxed "to who earned them," id., 114. doctrine meant prevent taxpayers avoiding taxation through arrangements contracts devised vesting one it. Id., 115. Because rule preventative motivated administrative substantive concerns, inquire whether particular has discernible avoidance purpose. 433-434. (c) agrees with agreement viewed client's litigation recovery. ordinary attribution resolved asking exercises complete dominion over question. However, context assignments, where assignor may moment receipt, question retains income-generating asset. Looking control preserves principle party earns enjoys consequent benefits. asset cause action derived plaintiff's injury. plaintiff throughout litigation. Respondents' counterarguments are rejected. claim's value speculative assignment, limited instances when precise dollar assigned known advance. cases, retained asset, diverted some produced realized benefit doing so. Also rejected respondents' suggestion attorney-client relationship treated sort business partnership or joint venture for purposes. fact, quintessential principal-agent relationship, client ultimate underlying claim. can make tactical decisions without consulting client, still must determine settle proceed judgment make, well, other critical decisions. agent duty bound act principal's interests, so appropriate treat full principal. This applies regardless contract confers special rights protections attorney, long do alter relationship's fundamental character. declines comment theories proposed amici, were advanced earlier stages examined Courts Appeals. 434-438. (d) need address contention application inconsistent purpose statutory fee-shifting provisions, applicable brought 42 C. §§ 1981, 1983, 2000e et seq. He fee calculated based solely contract. There court-ordered award indication lieu might recovered. Also, redresses concern many, perhaps most, claims governed statutes. 438-439. 03-892, 345 F. 3d 373; 03-907, 340 1074, remanded. KENNEDY, J., delivered opinion Court, Members joined, except REHNQUIST, took decision cases. CERTIORARI TO THE UNITED STATES COURT APPEALS FOR SIXTH CIRCUIT. David B. Salmons argued pro hac vice both With him briefs Solicitor General Olson, Acting Clement, Assistant Attorney O'Connor, Deputy Hungar, Richard Farber, Kenneth W. Rosenberg. James R. Carty Robert G. Wilson, Russell Young, Roger J. Jones, Glenn P. Schwartz. Philip N. Jones 03-907. Peter Duffy, Holly Mitchell, Eric Schnapper.† JUSTICE KENNEDY Court. 1 consolidated money Code, 26 § (2000 ed. Supp. I). divides courts appeals. instant Commissioner, 373 (2003), Appeals held Fifth Eleventh Circuits also adhere view, relying holding, Judge Wisdom's dissent, Cotnam 263 2d 119, 125-126 (CA5 1959). Srivastava 220 353, 363-365 2000); Foster States, 249 1275, 1279-1280 (CA11 2001). review, 1074 excluded if gives property interest fee, otherwise. Six entire including plaintiff. Some discuss law, little analysis appears turn factor. Raymond 355 107, 113-116 (CA2 2004); Kenseth 259 881, 883-884 (CA7 2001); Baylin 43 1451, 1454-1455 (CA Fed. 1995). Other explicit always nuances law. O'Brien 38 T. 707, 712 (1962), aff'd, 319 532 (CA3 1963) (per curiam); Young 240 369, 377-379 (CA4 Hukkanen-Campbell 274 1312, 1313-1314 (CA10 We granted certiorari resolve conflict. 541 958 (2004). 2 hold that, general rule, reverse Circuits. * A. 3 1986, John Banks, II, fired job educational consultant Department Education. basis filed civil employer States District complaint alleged violation 1981 Title VII Civil Rights 1964, amended, seq., Cal. Govt. Ann. 12965 (West 1986). original asserted various additional later abandoned these. After trial commenced 1990, parties $464,000. $150,000 pursuant agreement. 4 did $464,000 proceeds 1990 return. 1997 deficiency year. upheld Commissioner's determination, proceeds, had 5 part. (2003). It agreed net received attorney. Relying its prior Estate Clarks ex rel. Brisco-Whitter 202 854 (2000), court already earned, vested, even relatively certain made. A arrangement, reasoned, more like partial income-producing than mere beneficiary largess, rather skill diligence. 3d, 384-385 (quoting Clarks, supra, 857-858). reasoning, held, (e. lien) proceeds. 6 leaving president loan officer Bank 1987, Sigitas successor ownership, Mitsubishi Bank. willfully interfered contract, attempted induce breach fiduciary duties customers discharged he refused. jury awarded compensatory punitive damages. resolution appeals post-trial motions, settled. defendants $4,864,547 Banaitis; and, following formula set forth $3,864,012 directly 7 return, deficiency. reversed. contrast Circuit, pivotal. Where said, whole ordinarily 1081. however, As result, operate transfer lawsuit. II 8 To consequence purposes, two useful. first concerns deductibility. For years could taken subject requirements, 67-68 I), operation (AMT). noncorporate individual taxpayers, AMT equal percent taxpayer's "alternative minimum taxable (minus specified exemptions) up $175,000, plus 28 alternative $175,000. 55(a), ed.). unlike 56(b)(1)(A)(i). 9 Congress enacted 2004, 118 Stat. 1418. Section 703 adding 62(a)(19). 1546. amendment allows "attorney costs by, behalf of, connection involving claim unlawful discrimination." Ibid. "unlawful discrimination" number specific statutes, 62(e)(1) (16), whistle-blower statute, 62(e)(17), federal, state, local "providing enforcement rights" "regulating aspect ... prohibiting discharge employee, form retaliation reprisal employee asserting actions permitted law," 62(e)(18). 1547-1548. These permissible applies. Had force transactions now likely arisen. retroactive, while cover future position, pertain here. III 10 purposes "all whatever source derived." 61(a). definition extends Glenshaw Glass Co., 348 426, 429-430 (1955); Jacobson, 336 28, 49 (1949). party. 111 (1930); Sunnen, 333 591, 604 (1948); Helvering Horst, 311 112, 116-117 (1940). rationale so-called Lucas, 114, maxim we called "the taxation," Culbertson, 337 733, 739-740 "arrangements however skillfully [income] second man it." S., well explained, "no distinction according motives leading arrangement fruits attributed different tree they grew." 11 Respondents argue judge-made antifraud relevance maintains agree Commissioner. 12 431; see Indianapolis Power & Light 493 203, 209 (1990); First Security Utah, A., 405 394, 403 (1972). often receipt. instance becomes "who owns controls disposition himself diverts payment others means procuring satisfaction wants." 116-117. See 114-115; Eubank, 122, 124-125 (1940); 604. then, 13 derives understand Rather, counterarguments. say bond coupons worth nothing all. insist claimant's injury only respondents, contributes assets effort expertise claimant prevail. On premises urge us establishing, something combine respective apportion resulting profits. 14 reject arguments. Though signed, supra; Basye, 410 441, 445, 450-452 (1973). Horst involved predetermined sum date, holding depend ascertaining liquidated time assignment. before us, Wesley correctly concluded recent fully 115-116. That produce uncertain 15 further between variations compensation contributes, relationship. Restatement (Second) Agency Comment e (1957) (hereinafter Restatement); ABA Model Rules Professional Conduct Rule 1.3, 1; 1.7, (2002). rely skills achieve result alone. That, true most relationships, fact evident noted although Even independent supervision consultation with, agent, obligated exclusive client-principal, 13, 39, 387. 16 interests principal, respect Posner's observation apt: "[T]he lawyer [is not] owner sense commission salesman employer's accounts receivable." Kenseth, 883. principal relies realize gain, agent's efforts deductible, absent provision excludable 17 character Cf. b, 14G, (an created assigns chose assignee collection security assignor's debtor order compensate efforts). State laws vary strength remedies available attempt defraud No aware, purport give "ownership" fees, 1082-1083 (discussing law); Cotnam, 2d, 125 Alabama law), convert partner. 18 amici propose permit suggestions include: (1) Subchapter K 702, 704, 761, Brief pp. 5-21; (2) recoveries property, subtracted capital expense 1001, 1012, 1016, Association Trial Lawyers America Amicus Curiae 23-28, Charles Davenport 3-13; (3) deductible reimbursed 62(a)(2)(A) Stephen Cohen Curiae. arguments, appears, being presented especially reluctant entertain novel propositions broad implications system decline supplementary theories. addition, reach relator pursues Taxpayers Against Fraud Education Fund 10-20. IV 19 foregoing suffices dispose case. involves consideration. statutes authorize awards prevailing plaintiffs' attorneys. contends provisions. Venegas 495 82, 86 (1990) (observing enable "plaintiffs employ reasonably competent lawyers cost themselves prevail"). typically lodestar approach, Hensley Eckerhart, 461 424, 433 (1983), usually awarded. Sometimes, seeks injunctive relief, statute caps recoveries, reasons damages substantially less court-awarded exceed monetary See, Riverside Rivera, 477 561, 564-565 (1986) (compensatory $33,350; $245,456.25). Treating argued, lead perverse loses winning suit. Furthermore, urged treating plaintiffs undermine effectiveness deputizing private general. 20 claims. award, nor there defendant, entitled recover. added 21 22 stated, judgments reversed, remanded proceedings consistent opinion. 23 ordered. 24 CHIEF Notes: Together 03-907,Commissioner Banaitis, Circuit. &#x2020; brief curiae urging reversal Gregg D. Polsky al. Mr. Polsky, se, Brant Hellwig, se. Briefs affirmance Jeffrey White Todd Smith; Equal Employment Advisory Council Ann Elizabeth Reesman; Lawyers' Committee Law Jerome Libin, Mary E. Monahan, Barbara Arnwine, Michael L. Foreman, Sarah Crawford, Audrey Wiggins, Ira Burnim, Vincent Eng, Dennis Hayes, Dina Lassow; Mountain Legal Foundation William Perry Pendley Scott Detamore; National Douglas Huron, Victoria Ni, Marcantonio, Rothschild, Theodore M. Shaw, Norman Chachkin, H. Stroup, Thomas Osborne; Cooper Hamish Hume; Gideon Gideon, Yugler; Cohen, se; Davenport,

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