Court Opinion

ID: 9494466
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:38:23.041835+00
Date Added: 2024-06-11T17:56:25.565422
License: Public Domain

McKEOWN, Circuit Judge,
dissenting:
The majority concludes that a statutory attorney’s fee, awarded by the district court to the Sinyards’ attorney under the fee-shifting provision of the Age Discrimination in Employment Act (ADEA), 29 U.S.C. § 621 et seq., is taxable to the Sinyards as income. This unfortunate result appears to be at odds with the express statutory language, which provides that the attorney’s fee award is “in addition” to the plaintiffs recovery, and with the intent of the statute, which is to make the plaintiff whole. Because the majority’s conclusion fails to account for the effect of the ADEA’s fee-shifting provision, I respectfully dissent.
I. The Effect Of The ADEA
In my view, the issue is resolved by interpretation and application of the statute. The analysis starts and ends with the language of the ADEA. The ADEA incorporates the fee-shifting provision of the Fair Labor Standards Act, see 29 U.S.C. § 626(b), which states that “[t]he court ... shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorney’s fee to be paid by the defendant,” id. § 216(b).
In this case, as we previously determined, “the attorney’s fees paid in settlement of the Sinyards’ lawsuit were awarded by the court pursuant to the ADEA.” Sinyard v. Commissioner, No. 99-71369 (Apr. 27, 2001) (order). That is to say, the fee obligation arose by operation of the fee-shifting statute itself; the fees were not part of a settlement, nor were they simply a percentage of a judgment. In this respect, the case before us differs from the cases that we have previously decided. In those cases, we were faced with a settlement agreement or a judgment in favor of the plaintiff, a portion of which the plaintiff then paid to the attorney pursuant to a contingent-fee agreement. See, e.g., Benci-Woodward v. Com*761missioner, 219 F.3d 941 (9th Cir.2000) (punitive damages award and contingency fee agreement); Coady v. Commissioner, 213 F.3d 1187 (9th Cir.2000) (wrongful termination judgment following bench trial and contingency fee agreement); see also Kenseth v. Commissioner, 259 F.3d 881, 882-83 (7th Cir.2001) (settlement in age discrimination suit and contingency fee agreement). Under the circumstances of these cases, the plaintiff has received income (the judgment or settlement), the entire amount of which — including the portion paid to the attorney — -is taxable to the plaintiff.
In contrast to attorney’s fees paid pursuant to a contingent fee, which we have previously held to be governed by state law,1 we are guided here by the text of the ADEA. The statute provides for two separate forms of recovery. First, there is the “judgment awarded to the plaintiff or plaintiffs.” 29 U.S.C. § 216(b). Separate, and “in addition to” the plaintiffs recovery, “[t]he court ... shall ... allow a reasonable attorney’s fee to be paid by the defendant.” Id. So under the statute, the attorney’s fees are treated separately from the judgment itself.2 This approach is consistent with the ADEA’s design to ensure that the prevailing party is “made whole.” Under the FLSA, “Congress intended that the wronged employee should receive his full wages plus the penalty without incurring any expense for legal fees or costs.” Maddrix v. Dize, 153 F.2d 274 (4th Cir.1946).
Moreover, those fees are a mandatory obligation, id. (“[t]he court ... shall ... allow” (emphasis added)), which the statute has imposed directly upon the defendant. The defendant itself must pay the plaintiffs attorney’s fees, regardless of any obligation that the plaintiff may have to his attorney. Consequently, the defendant’s payment of the fees discharges a statutory, not a contractual, burden.
Thus, it is mistaken to describe this as a situation in which “A [the plaintiff] owes B [her attorney] a debt, and C [the defendant] pays the debt on 'A’s behalf.” Majority Op. at 13741. If that were an accu*762rate description, the majority is of course correct that the payment from defendant C to attorney B would be taxable to plaintiff A as income. Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 781 (1930). Here, defendant C does not satisfy a debt on behalf of plaintiff A; rather, C satisfies its own statutory obligation, imposed by the ADEA.
Indeed, the FLSA-based award is the exclusive basis for fees and supercedes alternative fee arrangements. See United State, Tile & Composition Roofers, Damp & Waterproof Workers Ass’n. Local No. 307 v. G & M Roofing & Sheet Metal Co., 732 F.2d 495, 504 (6th Cir.1984) (“The fact that the plaintiff has entered into an agreement with the lawyers prosecuting the case does not impact on the statutory burden of the employer.... ”). In this sense, then, the Sinyards are quite right that their case is distinguishable from Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918 (1929). In that venerable case, the Supreme Court considered the tax plight of the estate of William Wood, the president of the American Woolen Company. As part of Wood’s compensation, the Company had paid the income tax due on Wood’s salary. Id. at 720, 49 S.Ct. 499. The question presented was whether these income tax payments also constituted income to Wood. The Court held that they were taxable income. Reasoning that “[t]he payment of the tax by the employers was in consideration of the services rendered by the employee,” the Court therefore held it to be “immaterial that the taxes were directly paid over to the government” and famously concluded that “[t]he discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.” Id. at 729, 49 S.Ct. 499.
Here, by contrast, IDS Financial Services (the defendant in the Sinyards’ age discrimination suits) did not receive consideration in exchange for paying the Sin-yards’ attorneys. Had it done so, then the situation might be different: We would interpret the contract (that is, the settlement agreement) between the Sinyards and IDS; determine whether the Sinyards’ attorneys already had a stake in the funds paid by IDS; and consider the effect of the relevant state law, see supra note 1. But that is not the case before us. After the Sinyards and IDS settled their lawsuit, the district court taxed attorney’s fees against IDS. When IDS paid those fees to the Sinyards’ attorneys, IDS satisfied its own statutory obligation. Old Colony is inap-posite.
Thus, I conclude that the attorney’s fees awarded pursuant to the ADEA’s fee-shifting provision are not taxable as income to the Sinyards.
II. The Equities
With that legal analysis resolved, I pause to note the inequitable result that befalls plaintiffs in certain of these cases. The taxation to a plaintiff of attorney’s fees, combined with the operation of the Alternative Minimum Tax (AMT), sometimes leaves a victorious civil rights plaintiff with a net after-tax loss. For instance:
If the ratio of attorney’s fees to the entire recovery is high enough, a before-tax gain may metamorphose into an after-tax loss. In Alexander v. Commissioner, [72 F.3d 938 (1st Cir.1995),] for example, the plaintiff settled a state law employment claim for $250,000 but incurred $245,000 in attorney’s fees, for a pre-tax profit of $5,000. Under the AMT, the entire $250,000 recovery was taxable but none of the $245,000 in attorney’s fees was deductible. If we assume that the taxpayer files jointly and has no other income, his AMT liability would be $53,900. Under these assumptions, the nondeductibility of the employee’s attorney’s fees under the AMT *763.would convert a $5,000 before-tax gain into a $48,900 after-tax loss.
Laura Sager & Stephen Cohen, How the Income Tax Undermines Civil Rights Law, 73 S. Cal. L.Rev. 1075, 1078 (2000) (footnotes omitted).
This Draconian result under the Tax Code can only undermine our civil rights laws. After all, the purpose of fee-shifting provisions, like the one in the ADEA, is not only to permit plaintiffs without resources to pursue claims but to encourage meritorious civil rights litigation by defraying its cost. But in an example like the one posited above, the “victorious” plaintiff would have been better off without the fee-shifting provision — and, indeed, better off if she had never filed her ultimately victorious suit. This result is surprising, to say the least. See Alexander v. IRS, 72 F.3d 938, 946 (1st Cir.1995) (“We recognize that, because the amounts involved trigger the AMT and, thus, Taxpayer’s deficiency, the outcome smacks of injustice because Taxpayer is effectively robbed of any benefit of the Legal Fee’s below the line treatment.”). Although I continue to believe that this anomaly must ultimately be resolved by Congress, Benci-Woodward, 219 F.3d at 944, it cries out for speedy resolution, particularly in view of the majority’s position. Of course my view is that this case need not await statutory reform because the fees were awarded pursuant to the ADEA, not under state contract law.
III. Conclusion
For the foregoing reasons, I conclude that the attorney’s fees awarded to the Sinyards’ attorneys were not properly taxable as income to the Sinyards. Therefore, I would reverse.

. On this point, the majority and I disagree. The majority appears to conclude that state law is irrelevant to the taxability of a contractually-determined attorney’s fee. Majority Op. at 13743. Our precedents clearly rely on the operation of state law to determine the tax treatment of that portion of the judgment ultimately paid to the attorney. See Benci-Woodward, 219 F.3d at 942 ("The question before us is whether the taxpayers may exclude from gross income the portion of a punitive damages award retained by their attorney pursuant to a contingent fee agreement. The answer is no and is dictated by our recent case of Coady .... Although Coa-dy involved analysis of an attorney lien under Alaska law, the result is the same under California law.”); see also id. at 943 ("In light of California law....”); Coady, 213 F.3d at 1190 ("This case is unlike Cotnam [v. Commissioner, 263 F.2d 119 (5th Cir.1959)] and [Estate of Clarks v. United States, 202 F.3d 854 (6th Cir.2000) ] because under Alaska law, attorneys do not have a superior lien or ownership interest in the cause of action as they do in Alabama and Michigan .... ” (emphasis added)).

. In relying on this statutory language, I express no opinion on the appropriate lax treatment of attorney’s fees awarded under the slightly different language of the Civil Rights Attorney’s Fees Awards Act, 42 U.S.C. § 1988(b). Although that statute specifies that attorney's fees are to be awarded to "the prevailing party,” and although in other contexts the Supreme Court has suggested that it is the prevailing party who retains control over fees awarded pursuant to § 1988, see Venegas v. Mitchell, 495 U.S. 82, 87-88, 110 S.Ct. 1679, 109 L.Ed.2d 74 (1990); Evans v. Jeff D., 475 U.S. 717, 730-31, 106 S.Ct. 1531, 89 L.Ed.2d 747 (1986), that statute is not before us here. Indeed, those cases addressing § 1988 were decided in a different context — namely, client control over the resolution of a case.