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DOJ Maintains Portion of Settlement Paid as Attorney Fees is Includable in Income

FEB. 16, 2000

James T. Sinyard, et ux. v. Commissioner

DATED FEB. 16, 2000
DOCUMENT ATTRIBUTES
  • Case Name
    JAMES T. SINYARD; MONIQUE T. SINYARD Petitioners-Appellants v. COMMISSIONER OF INTERNAL REVENUE Respondent-Appellee
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 99-71369
  • Institutional Authors
    Department of Justice
  • Cross-Reference
    Sinyard v. Commissioner, T.C. Memo 1998-364 (For the full text see

    Doc. 98-29997 (14 pages) or 98 TNT 195-10 Database 'Tax Notes Today 1998', View '(Number'.)
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    gross income
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-5482 (75 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 48-25

James T. Sinyard, et ux. v. Commissioner

 

=============== SUMMARY ===============

 

In a brief for the Ninth Circuit, the Justice Department has argued that the portion of a class-action settlement that was paid by a taxpayer as contingent attorneys' fees was includable in his gross income.

James Sinyard was a participant in two class action lawsuits against IDS Financial Services, Inc. alleging age discrimination. The class plaintiffs signed contingency fee agreements with a law firm, providing that the firm would be paid one-third of any amount recovered. The agreement stated that any attorney's fees awarded would be considered part of the plaintiff's total recovery.

The actions were settled in 1992. Sinyard received $862,900 of which $252,600 was allocable to attorneys' fees attributable to the taxable portion of his award. Sinyard and his wife did not include the $252,600 in income on their 1992 joint return, and the IRS determined a deficiency. The Tax Court held that the portion of the settlement proceeds allocable to attorneys' fees is includable in a couple's income and deductible only as a miscellaneous itemized deduction under section 67. (For the full text see Doc. 98-29997 (14 original pages or 98 TNT 195-10 Database 'Tax Notes Today 1998', View '(Number'). Sinyard disputes the Tax Court's determination, arguing that the attorneys' fees portion of the settlement proceeds did not belong to him. He maintains that the fee- shifting provision of the Age Discrimination in Employment Act (ADEA) provides for a reasonable attorneys' fee, to be determined and awarded by the court directly to the attorneys.

The Justice Department insists that Sinyard's reliance on the ADEA is misplaced, because the attorneys' fees in this case were not paid under the ADEA, but were paid in accordance with the terms of the parties' settlement and the plaintiffs' contingent fee agreements. The DOJ maintains Sinyard contracted with his attorneys to pay a one-third contingent fee, and the settlement agreement gave effect to that contract. The DOJ explains that in order for attorneys' fees to be paid under the ADEA, there must be a judgment for the plaintiffs in the case, and the district court must calculate the fee by making a lodestar computation, i.e., the court must determine the number of hours reasonably spent on the litigation and multiply that figure by what the court determines is a reasonable hourly rate. The DOJ maintains that in this case, the court simply approved the settlement agreement providing for the payment of attorneys' fees in accordance with the terms of the contingent fee agreements and therefore the portion of the settlement proceeds that was paid to Sinyard's attorneys is includable in his gross income.

The Justice Department also argues that the attorneys' fees here were not paid under the common fund doctrine and further asserts that the fact that the alternative minimum tax may deprive Sinyard of all or part of the benefit of the deduction for the attorneys' fees is irrelevant to the proper resolution of this case. Finally, the DOJ asserts that the Tax Court properly denied Sinyard's post-decision motions in which he argued for the first time that the contingent fee agreement transferred ownership of a portion of the cause of action to his attorneys.

 

=============== FULL TEXT ===============

 

IN THE UNITED STATES COURT OF APPEALS

 

FOR THE NINTH CIRCUIT

 

 

ON APPEAL FROM THE DECISION

 

OF THE UNITED STATES TAX COURT

 

 

BRIEF FOR THE APPELLEE

 

 

PAULA M. JUNGHANS

 

Acting Assistant Attorney General

 

 

RICHARD FARBER (202) 514-2959

 

KENNETH W. ROSENBERG (202) 514-1919

 

Attorneys

 

Tax Division

 

Department of Justice

 

Post Office Box 502

 

Washington, D.C. 20044

 

 

TABLE OF CONTENTS

 

 

Statement of jurisdiction

 

Statement of the issue

 

Statement of the case

 

Statement of facts

 

Summary of argument

 

Argument:

 

 

The Tax Court correctly held that the portion of the taxable

 

proceeds of settlement of a class-action lawsuit that was paid

 

as a contingent fee to taxpayer's attorneys was includable in

 

taxpayer's gross income

 

 

Standard of review

 

 

A. Introduction

 

 

B. The attorneys' fees were not awarded under the ADEA; rather,

 

they were paid by taxpayer from his share of the settlement

 

fund

 

C. The attorneys' fees are not excludable from taxpayer's income

 

under the common fund doctrine

 

 

D. That the alternative minimum tax may deprive taxpayer of all

 

or part of the benefit of the deduction for the attorneys'

 

fees is irrelevant to the proper resolution of this case

 

 

E. The Tax Court properly denied taxpayer's post-decision

 

motions in which he argued for the first time that the

 

contingent fee agreement transferred ownership of a portion

 

of the cause of action to his attorneys

 

 

Conclusion

 

Statement of related cases

 

Addendum

 

Certificate of compliance

 

 

TABLE OF AUTHORITIES

 

 

CASES:

 

 

Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988)

 

Alexander v. IRS, 72 F.3d 938 (1st Cir. 1995)

 

Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240 (1975)

 

Badaracco v. Commissioner, 464 U.S. 386, 398 (1984)

 

Bagley v. Commissioner, 105 T.C. 396 (1995), aff'd on other grounds,

 

121 F.3d 393 (8th Cir. 1997)

 

Banker's Pocahontas Coal Co., 287 U.S. 308 (1932)

 

Barnhart-Morrow Consolidated v. Commissioner, 150 F.2d 285 (9th Cir.

 

1945)

 

Baylin v. United States, 43 F.3d 1451 (Fed. Cir. 1995)

 

Bean v. Crocker National Bank, 600 F.2d 754 (9th Cir. 1979)

 

Boeing Co. v. Van Gemert, 444 U.S. 472 (N.Y. 1980)

 

Brewer v. Commissioner, T.C. Memo 1997-542, 1997 WL 755264, aff'd,

 

172 F.3d 875 (9th Cir. 1999)

 

Burlington Northern Railroad Co. v. Oklahoma Tax Commission, 481 U.S.

 

454 (1987)

 

Cann v. Carpenters' Pension Trust Fund for Northern California, 989

 

F.2d 313 (9th Cir. 1993)

 

Chemical Bank v. City of Seattle (In re Washington Public Power

 

Supply System Securities Litigation), 19 F.3d 1291 (9th Cir.

 

1994)

 

Church v. Commissioner, 80 T.C. 1104 (1983)

 

City of Burlington v. Dague, 505 U.S. 557 (1992)

 

Clarks, Estate of v. United States, ___ F.3d ___, 2000 WL 19118

 

(6th Cir. 2000)

 

Commissioner v. Jacobson, 336 U.S. 28 (1949)

 

Commissioner v. Lundy, 516 U.S. 235 (1996)

 

Commissioner v. Schleier, 515 U.S. 323 (1995)

 

Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959)

 

Davis v. City and County of San Francisco, 976 F.2d 1536 (9th

 

Cir. 1992)

 

Devore v. Commissioner, 963 F.2d 280 (9th Cir. 1992)

 

Eddleman v. Switchcraft, Inc., 927 F.2d 316 (7th Cir. 1991)

 

Eirhart v. Libbey-Owens-Ford Co., 726 F. Supp. 700 (N.D. Ill. 1989)

 

Gadlow v. Commissioner, 50 T.C. 975 (1968)

 

Gates v. Deukmejian, 987 F.2d 1392 (9th Cir. 1992)

 

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 (1982)

 

Haworth v. State of Nevada, 56 F.3d 1048 (9th Cir. 1995)

 

Heckett Engineering, Inc. v. Commissioner, 173 F.2d 572 (3d Cir.

 

1949)

 

Helvering v. Clifford, 309 U.S. 331 (1940)

 

Huntsberry v. Commissioner, 83 T.C. 742 (1984)

 

Kennedy v. Whitehurst, 690 F.2d 951 (D.C. Cir. 1982)

 

Kirsch v. Fleet Street, Ltd., 148 F.3d 149 (2d Cir. 1998)

 

McKenna v. Champion International Corp., 747 F.2d 1211 (8th Cir.

 

1984)

 

McKennon v. Nashville Banner Publishing Co., 513 U.S. 352 (1995)

 

Mobil Oil Corp. v. Higginbotham, 436 U.S. 618 (1978)

 

Molloy v. Wilson, 878 F.2d 313 (9th Cir. 1989)

 

Murphy Oil Co. v. Burnet, 287 U.S. 299 (1932)

 

Newhouse v. McCormick & Co., 110 F.3d 635 (8th Cir. 1997)

 

O'Brien v. Commissioner, 38 T.C. 707 (1962), aff'd, 319 F.2d 532 (3d

 

Cir.), cert. denied, 375 U.S. 931 (1963)

 

Paccar, Inc. v. Commissioner, 849 F.2d 393 (9th Cir. 1988)

 

Parkinson v. Commissioner, 647 F.2d 875 (9th Cir. 1981)

 

Pennsylvania v. Delaware Valley Citizens' Counsel for Clean Air, 478

 

U.S. 546 (1986)

 

Rawlins v. Commissioner, T.C. Memo 1995-502, 1995 WL 610605 at 8

 

Robin Haft Trust v. Commissioner, 62 T.C. 145 (1974)

 

Robinson v. Commissioner, 70 F.3d 34 (5th Cir. 1995), cert. denied,

 

519 U.S. 824 (1996)

 

Rubin v. United States, 449 U.S. 424 (1981)

 

Scott v. Commissioner, 117 F.2d 36 (8th Cir. 1941)

 

Selwyn Operating Corp. v. Commissioner, 11 B.T.A. 593 (1928)

 

Skelton v. General Motors Corp., 860 F.2d 250 (7th Cir. 1988),

 

cert. denied, 493 U.S. 810 (1989)

 

Standard Knitting Mills, Inc. v. Commissioner, 141 F.2d 195

 

(6th Cir. 1944), cert. denied, 322 U.S. 753 (1944)

 

Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001

 

(9th Cir. 1985), cert. denied, 474 U.S. 1059 (1986)

 

United States v. Locke, 471 U.S. 84 (1985)

 

Vincent v. Hughes Air West, Inc., 557 F.2d 759 (9th Cir. 1977)

 

Wilson v. Commissioner, 500 F.2d 645 (2d Cir. 1974)

 

 

STATUTES:

 

 

Age Discrimination in Employment Act of 1967 ("ADEA"),

 

Pub. L. No. 90-202, 81 Stat. 602, 29 U.S.C.:

 

Section 621 et seq

 

Section 626(b)

 

 

Employee Retirement Income Security Act of 1974 ("ERISA"),

 

Pub. L. No. 93-406, 88 Stat. 829, 29 U.S.C. section 1991 et seq

 

Fair Labor Standards Act, 29 U.S.C. section 216(b)

 

 

Internal Revenue Code of 1986 (26 U.S.C.):

 

Section 55

 

Section 55(a)

 

Section 55(b)(1)(A)

 

Section 55(b)(2)

 

Section 55(c)

 

Section 55(d)(1)(A)(i)

 

Section 56

 

Section 56(b)(1)(A)

 

Section 56(b)(1)(A)(i)

 

Section 57(b)

 

Section 61(a)

 

Section 63

 

Section 63(d)

 

Section 67

 

Section 67(b)

 

Section 212(1)

 

Section 6213

 

Section 6214

 

Section 7442

 

Section 7482(a)(1)

 

Section 7483

 

 

Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520,

 

Section 301(c)(2)

 

42 U.S.C. section 2000-e5(k)

 

 

MISCELLANEOUS:

 

 

Annotation, Construction and Application of "Common Fund

 

Doctrine" in Allocating Attorneys' Fees Among Multiple Attorneys

 

Whose Efforts Were Unequal in Benefiting Multiple Claimants,

 

42 A.L.R. Fed. 134 (1979)

 

Federal Rules of Appellate Procedure, Rule 13(a)(2)

 

H.R. Rep. No. 94-658 at 131 (1975), reprinted in 1976-3 C.B. (vol.2)

 

695, 823

 

N. Singer, Statutes and Statutory Construction, section 46.01 at p.83

 

(5th ed. 1992)

 

Tax Court Rules:

 

Rule 143 (b)

 

Rule 155

 

Rule 161

 

Rule 162

 

 

STATEMENT OF JURISDICTION

[1] On March 14, 1996, the Commissioner of Internal Revenue mailed a notice of deficiency to taxpayers James T. and Monique T. Sinyard, asserting a deficiency in federal income taxes in the amount of $115,679 for taxpayers' 1992 tax year. (ER 8.) 1 On June 3, 1996, taxpayers filed a petition in the Tax Court seeking redetermination of the deficiency. (ER 1, 556.) The Tax Court had jurisdiction under Internal Revenue Code sections 6213, 6214 and 7442. 2

[2] On October 7, 1998, the Tax Court entered a decision in the case. (ER 523.) On November 6, 1998, taxpayers filed, under Tax Court Rule 162, a timely motion to vacate or revise the decision. (ER 558.) On November 9, 1998, the Tax Court vacated its decision. (ER 549.) On July 21, 1999, the Tax Court entered a new decision. (ER 553.) The decision was a final order that disposed of all issues with respect to all parties.

[3] On October 15, 1999, taxpayers filed their notice of appeal. (ER 555, 558.) The appeal was timely under section 7483 and Rule 13(a)(2) of the Federal Rules of Appellate Procedure. This Court has jurisdiction under section 7482(a)(1).

STATEMENT OF THE ISSUE

[4] Taxpayer James T. Sinyard received taxable proceeds from the settlement of a class action lawsuit. A percentage of the taxable proceeds was paid to taxpayer's attorneys, under a contingent fee agreement, for legal services rendered. The issue presented is whether the Tax Court correctly held that the portion of the settlement award paid to taxpayer's attorneys was includable in his gross income.

STATEMENT OF THE CASE

[5] This case was submitted to the Tax Court on stipulated facts. The Tax Court upheld the Commissioner's determination that the portion of the taxable proceeds of settlement of a class-action lawsuit that was paid as a contingent fee to taxpayer's attorneys was includable in his gross income.

STATEMENT OF FACTS

[6] Taxpayer James T. Sinyard was employed by IDS Financial Services, Inc., IDS Life Insurance Co., and IDS Financial Corp. (collectively referred to hereinafter as "IDS") between 1983 and 1987./3/ (ER 186.) IDS is a national company whose business involves financial planning for individuals, businesses, and institutions. (SER 20-21.) IDS comprises thirteen marketing regions, which are further broken down into approximately 170 divisions, each of which is headed by a division manager. (Ibid.; ER 32.) Taxpayer served as a division manager for IDS for 2 1/2 years, until he was forced to resign in or about June, 1987. (ER 186.) In 1989, taxpayer joined as a plaintiff in two lawsuits that were pending against IDS in the United States District Court in Minnesota. (ER 30, 151, 180, 503, 507, 510; SER 14.) The lawsuits, entitled Glass v. IDS Financial Services, Inc., and Stephens v. IDS Financial Services, Inc. (ER 137, 151), alleged that IDS had: (1) engaged in a pattern and practice of age discrimination against older division managers in violation of the Age Discrimination in Employment Act of 1967 ("ADEA"), Pub. L. No. 90-202, 81 Stat. 602, 29 U.S.C. section 621 et seq., the Employee Retirement Income Security Act of 1974 ("ERISA"), Pub. L. No. 93-406, 88 Stat. 829, 29 U.S.C. section 1991 et seq., and state law; (2) imposed illegal chargebacks against its division managers; and (3) intentionally inflicted emotional distress on its employees. (ER 14- 48, 165-76, 199-203, 207.) The relief requested in Glass and Stephens included punitive damages and attorneys' fees. (ER 149, 211.) The law firm of Winthrop and Weinstine represented the plaintiffs in the suits, which were consolidated for pre-trial purposes. (ER 136, 179; SER 22.)

[7] The district court certified Glass and Stephens as class actions under the ADEA. (ER 359-60.) As is generally the case in ADEA class actions, Glass and Stephens were "opt-in" class actions, i.e., plaintiffs must elect to become members of the class, and after the class is closed, no new plaintiffs may join. (ER 59, 457-58.) At the time the class was closed in the Glass and Stephens actions, there were 32 plaintiffs, including taxpayer. (ER 30, 40.)

[8] The plaintiffs in the class actions, including taxpayer, entered into contingency fee agreements with Winthrop and Weinstine providing that the plaintiffs would be obligated to reimburse Winthrop and Weinstine for out-of-pocket expenses and to pay Winthrop and Weinstine attorneys' fees on a contingency fee basis. The agreements provided that out-of-pocket expenses incurred during the pendency of the actions would be billed to the class plaintiffs on a monthly basis and attorneys' fees would be billed at the conclusion of the actions. (ER 507-15.) The fee agreement entered into by taxpayer provided as follows with regard to payment of attorneys' fees (ER 511):

In the event of a recovery, Winthrop & Weinstine will be paid

 

one third (1/3) of the amount you obtain in the lawsuit, whether

 

by settlement or jury award.

 

 

. . . . .

 

 

In the event that an award of attorneys' fees is received by you

 

as a plaintiff, then that award will be considered as part of

 

your total recovery with one-third of the amount to be paid to

 

Winthrop & Weinstine and the remainder to be retained by you.

 

 

See also ER 527 (correspondence from Winthrop & Weinstine to class action plaintiffs stating: "Any court-awarded attorney's fees would be part of your recovery from which the contingent fee will be calculated"). 4

[9] An amendment to the fee agreement further provided that "Winthrop & Weinstine's contingent fee will be determined from the total monetary award actually received by each plaintiff." (ER 514.) In this regard, a steering committee authorized to make decisions for the plaintiffs in the class actions (see ER 51) recommended as follows (ER 527): 5

that attorney's fees, sanctions, costs and disbursements and

 

similar awards which are not individualized to any particular

 

plaintiff should be awarded equally on a pro rata basis to every

 

plaintiff. For example, if the plaintiffs collectively receive a

 

$3,200,000 award for attorney's fees for prevailing in the

 

action, then each individual plaintiff would be entitled to

 

$100,000 of that award.

 

 

That recommendation was adopted in an amendment to the fee agreement dated May 29, 1990. (ER 514.)

[10] The United States Equal Employment Opportunity Commission ("EEOC") moved to intervene in the class actions, and in May 1990, its motion was granted. (ER 41-42.) The EEOC sought a permanent injunction prohibiting IDS from engaging in age discrimination, and an order requiring IDS to institute and carry out policies, practices, and programs to provide equal opportunity for employees age 40 and older. (ER 41.) The efforts of Winthrop and Weinstine on behalf of the class action plaintiffs complemented the efforts of the EEOC's attorneys, and vice versa. (ER 44, 46.)

[11] In November 1991, the district court granted partial summary judgment in the class actions in favor of IDS, dismissing certain of the plaintiffs' breach of contract, ERISA, and tort claims. (ER 40.)

[12] In August 1992, a comprehensive settlement agreement was entered into by the parties to the class actions and approved by the district court. (ER 50-51.) The agreement stated as follows (SER 23):

This Settlement Agreement fully and finally resolves all claims

 

that have been or could have been raised [in the class actions],

 

including but not limited to claims for discrimination, back

 

pay, front pay, liquidated damages, compensatory or punitive

 

damages, tort claims, pre or post-judgment interest, attorneys'

 

fees and costs, as well as all other claims for monetary or

 

injunctive or other forms of equitable relief that have been or

 

could have been raised by the EEOC based upon the allegation of

 

a pattern and practice of age discrimination against division

 

managers over 40 . . . . All claims for attorneys' fees and

 

costs, incurred both by the private plaintiffs and the EEOC, are

 

expressly included within the settlement sum set forth below.

 

 

The sum IDS agreed to pay in the settlement was $35 million. (ER 48,

 

50.) The settlement agreement allocated the $35 million payment as

 

follows (ER 52):

 

 

After deduction for costs and disbursements . . . the 32

 

individual plaintiffs allocate one-third of the remaining total

 

settlement amount as compensation for tort injuries to the

 

plaintiffs, allocate one-third of the settlement amount as

 

compensation for lost wages, and allocate one-third of the

 

settlement amount for payment of attorneys' fees pursuant to 29

 

U.S.C. section 626(b) and 29 U.S.C. section 216(b).

 

 

[13] In accordance with the settlement agreement, the proceeds were allocated as follows (ER 53):

     Total settlement payment                   $35,000,000

 

     Less costs and disbursements                 1,500,000

 

                                                ___________

 

     Net settlement proceeds                    $33,500,000

 

                                                ===========

 

     Allocation of net settlement proceeds:

 

     Attorneys' fees (1/3)                   $11,166,666.65

 

     Tort damages                             12,616,666.70

 

     Lost wages                                9,716,666.65 6

 

                                             ______________

 

                                             $33,500,000.00

 

                                             ==============

 

 

[14] IDS issued a single check directly to Winthrop and Weinstine in the amount of $23,783,333.35, the sum of the attorneys' fees and the tort damages. (ER 53.) The check was deposited to a trust account on behalf of the class action plaintiffs. (SER 24.) IDS issued checks directly to each plaintiff in the amount of that plaintiff's lost wages, net of withholding taxes. (ER 54.)

[15] Taxpayer's share of the proceeds of the settlement of the class actions equaled $820,717.92. (SER 25.) On their joint federal income tax return for their 1992 tax year, taxpayers reported $273,573 of that amount as income. (ER 15.) The Commisioner determined that the entire proceeds were taxable, and recomputed taxpayers' income, allowing an itemized deduction in the amount of $273,573, equal to the 1/3 of taxpayers' share of the proceeds that was paid as attorneys' fees. (ER 15.) See IRC sections 67, 212(1). The Commissioner asserted a deficiency in tax in the amount of $115,679 (ER 8), and taxpayers petitioned the Tax Court (ER 1).

[16] In the Tax Court, the parties stipulated that taxpayer received the following amounts from the settlement of the class action suits: taxable back wages, $273,573; nontaxable tort damages, $109,429; taxable tort damages, $164,144; legal fees and reimbursed costs related to nontaxable proceeds, $63,152; and legal fees and reimbursed costs related to taxable proceeds, $252,608. (ER 24-25.) The tax consequences of only the last amount were disputed.

[17] The case was submitted to the Tax Court on stipulated facts, without trial. The Tax Court held that the disputed portion of the legal fees and costs, $252,608, was includable in taxpayer's gross income. (ER 537.) The Tax Court stated that attorneys' fees and costs awarded to prevailing parties in litigation generally are includable in the prevailing party's income. (ER 531.) That is in accordance, the Tax Court noted, with the general rule that taxpayers are treated as realizing taxable income when their expenses are paid by a third party. (ER 532.) Notwithstanding the general rule, the Tax Court observed, in Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959), an amount received by attorneys under a contingent fee agreement was excluded from the client's income, on the theory that under Alabama law a contingent fee agreement transfers to the attorneys an ownership interest in the client's cause of action. (ER 533.) Because taxpayers resided in Arizona when the Tax Court petition was filed and Arizona attorneys appear to have no ownership interest in monetary awards made to their clients, the Tax Court held that this case is distinguishable from Cotnam. (ER 534.)

[18] Taxpayer relied on Eirhart v. Libbey-Owens-Ford Co., 726 F. Supp. 700 (N.D. Ill. 1989), in which an employer paid attorneys' fees in the settlement of a Title VII employment discrimination class action lawsuit. The employer was ordered not to file informational returns with the IRS reporting the attorneys' fees as taxable income to the plaintiffs. The Tax Court distinguished Eirhart from this case, however, on grounds that Eirhart was based "on a common fund theory that would appear to be applicable only to opt-out class actions in which, as of the time fees are awarded, not all members of a class have become identified or contractually obligated to compensate the attorneys who perform legal services for the members' benefit." (ER 535.) In opt-out class actions, the court explained, "there may be policy reasons to treat funds recovered and used to pay attorney's fees as nontaxable to the class members (namely, additional members of the class may later be identified and held responsible for a portion of the legal fees)." (Ibid.) In an opt-in class action such as this one, in contrast, all class plaintiffs were identified when the class closed, well before the settlement was entered, and potential plaintiffs who did not join were notified that they were not entitled to share in any recovery. (ER 536.)

[19] Nor was it of any consequence, the Tax Court held, that the attorneys' fees portion of the settlement proceeds here was paid directly to Winthrop and Weinstine, because the tort damages portion of the award was combined with the attorneys' fees and paid directly in one check to Winthrop and Weinstine. In this regard, the court stated, "[p]resumably, if the class action plaintiffs had no interest in the portion of the funds allocable to attorney's fees, two checks would have been requested, and each check would have been deposited into separate accounts-one for the class action plaintiffs in the amount of $12,616,666 representing the tort damages received and one for Winthrop and Weinstine in the amount of $11,166,666 representing the attorney's fees." (ER 536-37.)

[20] Finally, the Tax Court rejected taxpayer's argument that the class actions provided benefits to persons other than the class plaintiffs, noting that no relief was sought by Winthrop and Weinstine on behalf of unnamed plaintiffs. (ER 537.) The court thus concluded that the disputed portion of the attorneys' fees was includable in taxpayer's gross income. (Ibid.)

[21] Decision was entered finding a deficiency in taxpayer's income in the amount asserted in the notice of deficiency. (ER 523.) Taxpayer filed a motion to vacate or revise the decision, arguing that the Tax Court should not have looked to the law of Arizona to determine the effect of the contingent fee agreement, but should have looked to the law of Alabama, where taxpayer assertedly resided when he signed the initial contingent fee agreement, and thus should have followed the Cotnam decision. (ER 558.) In support of that argument, an affidavit of taxpayer was submitted. (ER 538.) Taxpayer also filed a motion for reconsideration of the opinion, repeating the same argument and attaching the same affidavit. (ER 557.)

[22] The Tax Court vacated its decision, and ordered its opinion revised by deleting "Decision will be entered for Respondent" and substituting "Decision will be entered under Rule 155." (ER 549.) Tax Court Rule 155 provides a procedure whereby the parties stipulate to the deficiency resulting from the court's opinion.

[23] Taxpayer filed a supplemental motion for reconsideration of the opinion, incorporating by reference his two previous post- trial motions. (ER 558.) In opposition to the motion and supplemental motion, the Commissioner asserted that taxpayer was raising new issues in an untimely manner and making factual assertions that were contradicted by the record. (Ibid.) The Commissioner pointed out that taxpayer had not argued prior to the entry of the Tax Court's decision that the attorneys' fees were excludable from income under Cotnam, and that the record indicated that taxpayer was a resident of Georgia when he signed the contingency fee agreements and when he joined the class action. The Tax Court denied the motion for reconsideration and supplemental motion, "for the reasons set forth in respondent's objections." (ER 552.)

[24] Pursuant to the Tax Court's orders and revised opinion, the parties stipulated that the resulting deficiency in tax was $84,384. (ER 553-54.) The Tax Court entered a decision finding a deficiency in that amount. (ER 553.) This appeal followed.

SUMMARY OF ARGUMENT

[25] Taxpayer James T. Sinyard was one of 32 plaintiffs in a class action age discrimination lawsuit. The suit was settled, with the defendant/employer paying $35 million into a settlement fund. After costs were deducted, 1/3 of the fund was paid to the plaintiffs' attorneys. The attorneys' fees were paid pursuant to contingent fee agreements that taxpayer and the other class action plaintiffs had executed, and to which the settlement agreement conformed. In the Tax Court, the parties stipulated to the allocation of taxpayer's portion of the settlement proceeds between nontaxable damages, taxable damages, and attorneys' fees. The Tax Court correctly held that the portion of the taxable proceeds that was paid as a contingent fee to taxpayer's attorneys was includable in his gross income and therefore was reportable on the joint tax return he filed with his wife.

[26] Taxpayer argues that the Tax Court erred because, he asserts, the attorneys' fees portion of the settlement proceeds did not belong to him. He contends in this regard that the fee-shifting provision of the Age Discrimination in Employment Act (ADEA) provides for a reasonable attorneys' fee, to be determined and awarded by the court directly to the attorneys. Taxpayer's reliance on the ADEA is misplaced, however, since the attorneys' fees here were not paid under the ADEA, but were paid in accordance with the terms of the parties' settlement and the plaintiffs' contingent fee agreements. Taxpayer contracted with his attorneys to pay a 1/3 contingent fee, and the settlement agreement gave effect to that contract. In order for attorneys' fees to be paid under the ADEA, there must be a judgment for the plaintiffs in the case, and the district court must calculate the fee by making a lodestar computation, i.e., the Court must determine the amount of hours that was reasonably expended on the litigation and multiply that figure by what the court determines is a reasonable hourly rate. In the present case, no judgment was entered for the plaintiffs because the case was settled and the district court therefore had no occasion to make the required lodestar computation. Instead, the court simply approved the settlement agreement providing for the payment of attorneys' fees in accordance with the terms of the contingent fee agreements. In these circumstances, the portion of the settlement proceeds that was paid to taxpayer's attorneys is includable in his gross income, as the Tax Court correctly held.

[27] Equally without merit is taxpayer's alternative argument that the attorneys' fees were paid under the "common fund" doctrine. That equitable doctrine provides that where the efforts of counsel create a common fund from which pecuniary benefits are payable not only to the named plaintiffs, but also to third parties who are under no obligation to pay attorneys' fees, a district court may award reasonable fees to the attorneys, to be paid from the common fund. The purpose of the common fund doctrine is to apportion the attorneys' fees among all the beneficiaries of the litigation.

[28] The attorneys' fees here were not paid under the common fund doctrine. All of the plaintiffs in the class action suit here executed contingent fee agreements with their attorneys, and the settlement agreement gave effect to the terms of those agreements. The settlement fund was payable exclusively to the named plaintiffs. From the inception of the suits, the attorneys made clear to all potential class members that unless they opted to participate in the suit, they would receive none of the proceeds. Thus, at the time the settlement was reached, the class was closed, and there were no other parties who were eligible to receive any of the proceeds from the settlement fund. Accordingly, the district court never had any occasion to, and never did, make a determination of attorneys' fees required to be paid to avoid unjust enrichment of unnamed plaintiffs. There were no such beneficiaries.

[29] Taxpayer makes a policy-based argument that Congress did not intend to impose the alternative minimum tax (AMT) on him and, in effect, request this Court to relieve him of his AMT liability by allowing him to exclude from his income the portion of his settlement proceeds that was paid to his attorneys, in lieu of including that portion of the proceeds in his gross income and claiming a deduction for the attorneys' fees. Such a deduction triggers the application of the AMT in the circumstances of this case, which taxpayer seeks to avoid by his claimed exclusion. The AMT statute operates mechanically, however, imposing the tax where a certain level of income is received and certain types of deductions are claimed. It is beyond the province of the courts to override the result clearly mandated by the statute.

[30] Finally, taxpayer claims that the contingent fee agreement transferred a portion of his cause of action to his attorneys, and that the portion of the recovery that was paid to the attorneys was therefore excludable from his income. In this regard, taxpayer relies on Cotnam v. United States, 263 F.2d 119 (5th Cir. 1959), which so held under Alabama law. Taxpayer did not raise this argument in the Tax Court until after the court's opinion had been rendered and decision entered. When he did raise the argument, he relied on factual assertions that were not in evidence, but were only submitted in an affidavit with the post-decision motions. There was no reason why taxpayer could not have made this argument on a timely basis in the Tax Court. Under these circumstances, the Tax Court did not abuse its discretion in denying taxpayer's post-decision motions.

[31] The decision of the Tax Court is correct and should be affirmed.

ARGUMENT

 

 

THE TAX COURT CORRECTLY HELD THAT THE PORTION OF THE TAXABLE

 

PROCEEDS OF SETTLEMENT OF A CLASS-ACTION LAWSUIT THAT WAS PAID

 

AS A CONTINGENT FEE TO TAXPAYER'S ATTORNEYS WAS INCLUDABLE IN

 

TAXPAYER'S GROSS INCOME

 

 

Standard of review

 

 

[32] The tax treatment of the attorneys' fees at issue in this case presents a question of law. The Tax Court's decision therefore is reviewable de novo. Alexander v. IRS, 72 F.3d 938, 941 (1st Cir. 1995).

A. Introduction

[33] Taxpayer James T. Sinyard was forced to resign from his employment as a division manager for IDS, a financial services company. Taxpayer became a plaintiff in two class action suits alleging that IDS discriminated against its division managers on the basis of age, causing injuries redressable under federal statutes and common law. Taxpayer executed a contingent fee agreement under which he agreed to pay his attorneys, Winthrop and Weinstine, one-third of any amounts he recovered from the suit. Taxpayer's fellow plaintiffs in the class actions executed similar agreements.

[34] The suit was settled, with IDS paying $35 million in satisfaction of all claims, including attorneys' fees. One-third of taxpayer's share of the proceeds of the settlement was paid to his attorneys pursuant to the contingent fee agreement. In the Tax Court, the parties stipulated that the portion of the attorneys' fees allocable to taxable damages equaled $252,608. Taxpayer contends that such portion is excludable from his gross income. As we will demonstrate, however, the Tax Court correctly held that the attorneys' fees were includable in his income. 7

[35] Internal Revenue Code section 61(a) provides that "[e]xcept as otherwise provided in this subtitle, gross income means all income from whatever source derived . . . ." That statutory definition of gross income sweeps broadly and reflects Congress's intent to exert the full measure of its taxing power. E.g., Commissioner v. Schleier, 515 U.S. 323, 327-28 (1995); Helvering v. Clifford, 309 U.S. 331, 333 (1940). Conversely, it is well settled that exclusions from gross income are allowable only to the extent there is clear authority therefor. Schleier, 515 U.S. at 327-28; Commissioner v. Jacobson, 336 U.S. 28, 49 (1949). In light of these basic principles, the courts generally have held that, unless a specific statutory exclusion applies, the proceeds of litigation are includable in gross income, including the portion of the award the successful litigant is obligated to pay his or her attorneys. See Brewer v. Commissioner, T.C. Memo. 1997-542, 1997 WL 755264, aff'd, 172 F.3d 875 (9th Cir. 1999) (table); Alexander v. IRS, 72 F.3d 938, 942 (1st Cir. 1995); Baylin v. United States, 43 F.3d 1451 (Fed. Cir. 1995); O'Brien v. Commissioner, 38 T.C. 707 (1962), aff'd, 319 F.2d 532 (3d Cir.), cert. denied, 375 U.S. 931 (1963); Bagley v. Commissioner, 105 T.C. 396, 418-19 (1995), aff'd on other grounds, 121 F.3d 393 (8th Cir. 1997); Gadlow v. Commissioner, 50 T.C. 975, 980 (1968). Contra, Estate of Clarks v. United States, ___ F.3d ___, 2000 WL 19118 (6th Cir. 2000); Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959). The Tax Court correctly followed that general rule here.

B. The attorneys' fees were not awarded under the ADEA; rather,

 

they were paid by taxpayer from his share of the settlement

 

fund

 

 

[36] 1. Taxpayer argues (Br. 26-37) that the attorneys' fees here at issue were awarded under the attorneys' fees provision of the ADEA. Under that provision, he maintains, the district court ordered that attorneys' fees be paid directly by the defendant (IDS) to the plaintiffs' attorneys and that this award of attorneys' fees was entirely separate from the damages that were paid to taxpayer and the other class members. Taxpayer asserts that the attorneys' fees accordingly were not paid from the damages he received, and were not includable in his gross income. As we will demonstrate, that argument fails because the fees here were not paid under the ADEA, but, rather, were paid pursuant to the settlement agreement, out of the fund that was created by the settlement. In these circumstances, the general rule that attorneys' fees paid pursuant to a contingent fee agreement from the proceeds of a settlement are includable in the gross income of the client applies.

[37] In the United States, parties to a lawsuit usually bear their own expenses, including attorneys' fees, regardless of which party prevails. This is sometimes called the "American Rule." See Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247 (1975). Congress, however, has created exceptions to the American Rule, by inserting fee-shifting provisions in certain statutes, such as the one in the ADEA, which provides for the award of attorneys' fees by incorporating the remedial provisions of the Fair Labor Standards Act (hereinafter "FLSA"). See, e.g., Alyeska Pipeline, 421 U.S. at 260-61; McKennon v. Nashville Banner Publishing Co., 513 U.S. 352, 357 (1995) ("[ADEA's] remedial provisions incorporate by reference the provisions of the Fair Labor Standards Act of 1938"). In pertinent part, section 626(b) of the ADEA provides as follows (29 U.S.C. section 626(b), Addendum, infra):

The provisions of this chapter shall be enforced in accordance

 

with the powers, remedies, and procedures provided in sections

 

211(b), 216 (except for subsection (a) thereof), and 217 of this

 

title, and subsection (c) of this section.

 

 

[38] Congress provided for the award of attorney's fees under the FLSA under specific circumstances. In pertinent part, FLSA section 16(b) provides as follows (29 U.S.C. section 216(b), Addendum, infra; emphasis supplied):

Any employer who violates the provisions of section 206 or

 

section 207 [of the FLSA] shall be liable to the employee or

 

employees affected in the amount of their unpaid minimum wages,

 

or their unpaid overtime compensation, as the case may be, and

 

in an additional equal amount as liquidated damages. Any

 

employer who violates the provision of section 215(a)(3) of this

 

title shall be liable for such legal or equitable relief as may

 

be appropriate . . . An action to recover the liability

 

prescribed in either of the preceding sentences may be

 

maintained against any employer . . . THE COURT IN SUCH ACTION

 

SHALL, IN ADDITION TO ANY JUDGMENT AWARDED TO THE PLAINTIFF OR

 

PLAINTIFFS, ALLOW A REASONABLE ATTORNEYS FEE TO BE PAID BY THE

 

DEFENDANT, and costs of the action.

 

 

[39] 2. The settlement agreement here states as follows (ER 391-92):

After deduction for costs and disbursements, . . . which private

 

counsel agree shall not exceed 1.7 million dollars, the 32

 

individual plaintiffs allocate one-third of the remaining total

 

settlement amount as compensation for tort injuries to the

 

plaintiffs, allocate one-third of the settlement amount as

 

compensation for lost wages, and allocate one-third of the

 

settlement amount for payment of attorneys' fees pursuant to 29

 

U.S.C. section 626(b) and 29 U.S.C. section 216(b).

 

 

The district court restated the terms of the settlement in its order approving the settlement (ER 423), but the district court did not state that it had examined the fees under the applicable legal standards and made a finding that they were reasonable. Indeed, the parties stipulated in the court below that "Winthrop & Weinstine proposed that the issue of attorneys' fees be submitted to the Court for determination regarding the proper attorneys' fees award," but "[t]he proposal that attorneys' fees be submitted to the Court was rejected by IDS." (ER 49.) If the attorneys' fees had been determined by the court, a different methodology would have been used, and the amount awarded likely would not have been the amount provided in the contingent fee agreements, which amount was reflected in the settlement agreement.

[40] "The court's normal starting point for calculating reasonable attorneys' fees to be awarded to a prevailing civil rights plaintiff is the calculation of a so-called 'lodestar' figure, which is arrived at by multiplying 'the number of hours reasonably expended on the litigation . . . by a reasonable hourly rate.'" Kirsch v. Fleet Street, Ltd., 148 F.3d 149, 172 (2d Cir. 1998) (ADEA case), quoting Hensley v. Eckerhart, 461 U.S. 424, 433 (1983). In City of Burlington v. Dague, 505 U.S. 557, 562 (1992), the Supreme Court noted that "our case law construing what is a 'reasonable' fee applies uniformly to all" federal fee-shifting statutes. The Court added, "[t]he 'lodestar' figure has, as its name suggests, become the guiding light of our fee-shifting jurisprudence. We have established a 'strong presumption' that the lodestar represents the 'reasonable' fee." Ibid., quoting Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 565 (1986).

[41] In Dague, the Court considered whether the "lodestar" determination could be augmented where the plaintiff had entered into a contingent fee agreement with his attorneys, to reflect the risk that the suit would be unsuccessful and the attorneys would not be compensated for their efforts. The Court concluded, for "a number of reasons," that "no contingency enhancement whatever is compatible with the fee-shifting statutes at issue." 505 U.S. at 566. That holding applies to cases under the ADEA fee-shifting statute. See Davis v. City and County of San Francisco, 976 F.2d 1536, 1549 (9th Cir.1992) ("Dague represents an outright rejection of contingency as a factor relevant to the establishment of a reasonable fee"); Newhouse v. McCormick & Co., 110 F.3d 635, 643 (8th Cir. 1997) (under Dague, in ADEA cases, fee enhancement beyond the lodestar amount on the basis of a contingency arrangement is prohibited); see also Haworth v. State of Nevada, 56 F.3d 1048, 1051 (9th Cir. 1995) (Dague applies to FLSA fee-shifting statute); Cann v. Carpenters' Pension Trust Fund for Northern California, 989 F.2d 313, 318 (9th Cir. 1993); Gates v. Deukmejian, 987 F.2d 1392, 1403 (9th Cir. 1992).

[42] In accordance with the foregoing, in Eddleman v. Switchcraft, Inc., 927 F.2d 316, 319-20 (7th Cir. 1991), the court reversed a district court's award of attorneys' fees under the ADEA, because the district court appeared to have simply adopted the terms of a contingent fee agreement. The court held that determination of a reasonable attorney's fee award must begin with the "lodestar" calculation (id. at 318; citations omitted):

[T]he Supreme Court has made it clear that, in determining

 

an attorney's fee award, certain basic principles of methodology

 

must be followed. . . . A district court should begin its

 

determination by multiplying the hours reasonably expended by a

 

reasonable hourly rate to arrive at a base figure commonly known

 

as a "lodestar."

 

 

. . . . .

 

 

It is not clear to us . . . how the district court

 

determined that the contingency fee arrangement was the

 

appropriate recoverable attorney's fee. . . . [I]t appears that

 

the district court never completed the calculation of its

 

lodestar figure.

 

 

The court remanded the case because a contingency fee agreement "cannot serve as the determinative factor in a fee award." Id. at 320.

[43] In light of the fact that the district court here made no determination of what was a "reasonable" attorneys' fee using the required lodestar methodology, the attorneys' fees could not have been paid pursuant to the ADEA, but could only have been paid pursuant to the agreement reached between the parties, which explicitly designated 1/3 of the settlement proceeds as attorneys' fees. That conclusion is confirmed repeatedly by the record. The initial fee agreement executed by taxpayer, dated January 18, 1989, provided as follows (ER 507-08):

Winthrop & Weinstine agrees to represent you in your personal

 

age discrimination lawsuits against IDS on a contingent fee

 

basis. That is, you will pay no attorneys' fees to Winthrop &

 

Weinstine unless there is a recovery on your behalf in this

 

lawsuit. In the event of a recovery, Winthrop & Weinstine will

 

be paid one third (1/3) of the monetary amount obtained in the

 

lawsuit, whether by settlement or jury award.

 

 

. . . . .

 

 

In the event the lawsuit is certified as a class action age

 

discrimination case, but the Court does not determine the amount

 

of attorneys' fees to be paid to Winthrop & Weinstine, then the

 

contingent fee would apply.

 

 

The revised fee agreement executed by taxpayer, dated September 18,

 

1989, provided as follows (ER 510-11):

 

 

In the event of a recovery, Winthrop & Weinstine will be paid

 

one third (1/3) of the amount you obtain in the lawsuit, whether

 

by settlement or jury award.

 

 

. . . . .

 

 

In the event that an award of attorneys' fees is received by you

 

as a plaintiff, then that award will be considered as part of

 

your total recovery with one-third of the amount to be paid to

 

Winthrop & Weinstine and the remainder to be retained by you. If

 

the settlement or court award does not allocate an attorneys'

 

fee award specifically by each plaintiff, then the attorneys'

 

fee award will be pro rated equally in favor of each plaintiff

 

who prevails either by settlement or judgment in the action.

 

 

A further amendment to the fee agreement, dated May 29, 1990, stated, "Winthrop & Weinstine's contingent fee will be determined from the total monetary award actually received by each plaintiff." (ER 514.) The first line of the "Calculation of Net Recovery Attributable to J. Thomas Sinyard" (SER 25) is captioned, "Your portion of damages and statutory fees after pooling agreement reallocation . . . $820,717.92," from which is subtracted taxpayer's share of costs and "One-third contingent fee payable to Winthrop & Weinstine, P.A. . . . $273,572.64," to reach taxpayer's net recovery. All class members received a calculation of net recovery substantially similar to that received by taxpayer. (ER 63.) The settlement agreement stated, "[t]he 32 individual plaintiffs agree that the payment of $35 million is full and complete compensation for all of their claims as described in this Agreement and the exhibits thereto." (ER 391.)

[44] Indeed, the fact that attorneys' fee awards under the ADEA must be determined using the lodestar analysis may well have prompted the provision in the contingent fee agreement expressly overriding any such determination. See ER 511 ("[i]f the settlement or court award does not allocate an attorneys' fee award specifically by each plaintiff, then the attorneys' fee award will be pro rated equally in favor of each plaintiff who prevails either by settlement or judgment in the action"). Correspondence from Winthrop & Weinstine to class action plaintiffs reinforced that point, stating: "[a]ny court- awarded attorney's fees would be part of your recovery from which the contingent fee will be calculated." (ER 527.) Thus, even if an attorneys' fee award had been made under the ADEA fee-shifting provision and the lodestar analysis, taxpayer agreed to disregard it and to pay Winthrop & Weinstine the agreed-upon contingent fee, wherein any attorneys' fees awarded by the court would be treated as part of his total recovery of damages. Moreover, this point answers taxpayer's argument (Br. 30) that treating the fees here as being paid under the contingent fee agreement would thwart Congress's intent that ADEA plaintiffs bear no costs in such litigation. Taxpayer and his counsel made a conscious, well-documented decision to be governed by their agreement rather than by the fee-shifting provision of the ADEA. Specifically, taxpayer agreed that any attorneys' fees ordered paid by the court or included in a settlement payment would be considered part of this total recovery, and that he would pay 1/3 of such total recovery as attorneys' fees. By so doing, taxpayer elected not to have his obligation to his attorneys satisfied in the manner specified in the statute. Having done so, taxpayer cannot now complain that the policies underlying the provision in the ADEA for award of attorneys' fees have not been served as a result of the Tax Court's decision in this case.

[45] There is yet another reason why attorneys' fees were not and could not have been awarded under the ADEA here. No judgment was entered in the class actions; rather, the cases were simply dismissed pursuant to the settlement agreement. (ER 452.) The fee-shifting statute incorporated by reference in the ADEA, 29 U.S.C. section 216(b), provides that "[t]he court in such action shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorneys fee . . ." (emphasis supplied). Under the plain language of the statute, a judgment in favor of the plaintiffs is a prerequisite to an award of attorneys' fees. Since no judgment was awarded to the plaintiffs in the class actions here, that prerequisite was not satisfied. See Kennedy v. Whitehurst, 690 F.2d 951, 964 (D.C. Cir. 1982) (no award of attorney's fees could be made under ADEA where case was settled at administrative level); Skelton v. General Motors Corp., 860 F.2d 250, 256 (7th Cir. 1988), cert. denied, 493 U.S. 810 (1989) (where case was settled, Magnuson-Moss Act provision for award of attorney's fees, applicable if consumer "finally prevails," did not control determination of attorneys' fees). This reinforces the conclusion mandated by the record as a whole: the attorneys' fees here were paid to taxpayer's counsel under the contingent fee agreement as implemented in the settlement agreement, and not under the ADEA fee-shifting provision.

[46] 3. Taxpayer appears to rely on the fact that the settlement agreement recites that the attorneys' fees were paid under 29 U.S.C. section 626(b), the ADEA provision which incorporates by reference the FLSA attorneys' fees provision, 29 U.S.C. section 216(b). Indeed, that is the sole indication in the record that the fees were paid under that provision. The reference in the settlement agreement to 29 U.S.C. section 626(b) was of no consequence, notwithstanding the district court's entry of an order approving the settlement. As explained above, the plaintiffs were not entitled to an award of attorneys' fees under the ADEA because no judgment was entered in their favor by the district court. Moreover, the district court would have been required to make a lodestar computation to determine a "reasonable" award of attorneys' fees and it never undertook to make such a computation. Instead, the court simply approved the entire settlement, which included a payment of 1/3 of the total settlement sum as attorneys' fees, which, in turn, reflected the terms agreed to by the class action plaintiffs in the contingent fee agreement. In these circumstances, the reference to 29 U.S.C. section 626(b) in the settlement agreement was of no legal significance.

[47] It should be further noted that IDS was concerned only with obtaining a global settlement of all issues, including attorneys' fees. See ER 45 (stipulation that "IDS insisted on a global resolution of every single issue in the litigation, including attorneys' fees"); ER 388 (provision in settlement agreement stating that "[a]ll claims for attorneys' fees and costs . . . are expressly included within the settlement sum"). As this Court stated in Chemical Bank v. City of Seattle (In re Washington Public Power Supply System Securities Litigation), 19 F.3d 1291, 1301 (9th Cir. 1994), where attorneys' fees are paid out of a settlement fund, "[h]ow the fund is divided between members of the class and class counsel is of no concern whatsoever to the defendants who contributed to the fund." See also Robinson v. Commissioner, 70 F.3d 34, 37-38 (5th Cir. 1995), cert. denied, 519 U.S. 824 (1996) (allocation of damages contained in state court judgment was not binding for federal tax purposes because judgment was not entered in bona fide adversary proceeding; rather, state court simply "rubber stamped" judgment drafted by taxpayers' counsel).

[48] Taxpayer claims that the fees received by Winthrop and Weinstine did not equal 1/3 of the settlement proceeds, but the record does not support that claim. Taxpayer asserts (Br. 31) that if Winthrop and Weinstine had received the fees provided in the contingent fee agreements, they would have received $11.5 million, rather than the $11,166,666.65 they actually received. But $11.5 million is 1/3 of $34.5 million, and the actual settlement proceeds (net of expenses of $1.5 million as provided in the settlement agreement, see ER 391-92) equaled $33.5 million. The parties stipulated that "[p]ursuant to the parties' Settlement Agreement and the Court's Order of August 26, 1992, costs and disbursements in the amount of $1.5 million were first deducted from the settlement amount, and one-third of the remaining $33.5 million amount was then allocated for payment of attorneys' fees." (ER 53.) 1/3 of $33.5 million equals $11,166,666.65, which is the exact amount of attorneys' fees paid to Winthrop and Weinstine. Taxpayer does not explain his apparent assertion that the settlement proceeds equaled $34.5 million, nor does he provide a record reference to support that figure. Moreover, even if there was a slight discrepancy, which taxpayer has failed to show, that hardly would support the conclusion that the attorneys' fees were paid pursuant to the ADEA rather than under the settlement agreement and contingent fee agreement.

[49] Taxpayer contends (Br. 51-54) that including the attorneys' fees in his gross income would defeat the congressional purpose behind the ADEA to encourage vindication of age discrimination violations and "make whole" the victims of such discrimination. That argument ignores the fact that taxpayer agreed with his attorneys to proceed under a contingent fee arrangement, and the attorneys were paid in accordance with that arrangement. As we have shown, the ADEA attorneys' fees provision applies when the plaintiffs receive judgment and the court then determines a reasonable attorneys' fee, using the lodestar methodology. That did not occur here; the case was settled and the amount of attorneys' fees was based on the plaintiffs' contingency fee argument with their attorneys. Taxpayer and the other class members received the full amount of damages they negotiated for, i.e., 2/3 of the net settlement fund of $33.5 million. Indeed, after payment of attorneys' fees, taxpayer received over $551,000. (SER 25.) Had he litigated the case to judgment, he may not have received that much. In any event, he chose this route and the policies underlying the ADEA provide no basis for treating taxpayer differently from other taxpayers who obtain recoveries under contingent fee agreements.

C. The attorneys' fees are not excludable from taxpayer's income

 

under the common fund doctrine

 

 

[50] 1. Taxpayer argues (Br. 38, 45) that Winthrop and Weinstine's right to receive attorneys' fees from the class action arose "under the common fund doctrine," and that the fees represent compensation for "services as class counsel rather than as attorneys for any particular individual." Taxpayer emphasizes (Br. 40) that the efforts of counsel were directed at establishing a company-wide pattern or practice of age discrimination, and that (Br. 45) the attorneys' fees were paid, with the district court's approval, from the settlement fund created by IDS's $35 million payment. In this regard, taxpayer asserts (Br. 47), the fact that the class members may have been identified or were contractually obligated to compensate their attorneys is "irrelevant to class counsel's right to recover attorneys' fees under the common fund doctrine," because the payment of attorneys' fees under that doctrine "is predicated on the court's equitable power to compensate legal counsel on the basis of quantum meruit for recovery in a common settlement fund for the benefit of the class." Because the focus of the litigation was on the class, and the payment came from the settlement fund, taxpayer contends (Br. 38), the attorneys' fees "cannot be reasonably construed as income to individual class members such as Mr. Sinyard." Taxpayer's reliance on the common fund doctrine is misplaced. That doctrine has no application to this case.

[51] As previously noted, fee-shifting statutes are an exception to the "American Rule" that parties to a lawsuit bear their own expenses. The equitable "common fund" doctrine is another exception to the American Rule. This Court has summarized the purpose and operation of the common fund doctrine as follows (Vincent v. Hughes Air West, Inc., 557 F.2d 759, 769 (9th Cir. 1977) (internal quotation marks and citation omitted)):

The common fund doctrine provides that a private plaintiff,

 

or his attorney, whose efforts create, discover, increase or

 

preserve a fund to which others also have a claim is entitled to

 

recover from the fund the costs of his litigation, including

 

attorneys' fees. The doctrine is employed to realize the broadly

 

defined purpose of recapturing unjust enrichment. . . . That is,

 

the doctrine is designed to spread litigation costs

 

proportionately among all the beneficiaries so that the active

 

beneficiary does not bear the entire burden alone and the

 

"stranger" beneficiaries do not receive their benefits at no

 

cost to themselves.

 

 

See also Boeing Co. v. Van Gemert, 444 U.S. 472, 478 (N.Y. 1980); Annotation, Construction and Application of "Common Fund Doctrine" in Allocating Attorneys' Fees Among Multiple Attorneys Whose Efforts Were Unequal in Benefiting Multiple Claimants, 42 A.L.R. Fed. 134 (1979). Thus, the essence of the common fund doctrine is that the court is allowed, in an exercise of its equitable powers, to divide the proceeds of litigation so as to impose upon all the beneficiaries of a class action, named or unnamed, their fair share of attorneys' fees.

[52] 2. The parties stipulated in the court below that "ADEA class actions are 'opt in' class actions and after closure of the class, only 'opt in' plaintiffs are part of the class." (ER 59.) See Bean v. Crocker National Bank, 600 F.2d 754, 759 (9th Cir. 1979) ("[t]he statute permitting class actions under the ADEA [FLSA section 16(b), 29 U.S.C. section 216(b)] establishes a procedure for 'opt-in' classes requiring the written consent of parties desiring to join the action"; footnote omitted); McKenna v. Champion International Corp., 747 F.2d 1211, 1213 (8th Cir. 1984) ("[u]nder section 16(b) of FLSA . . . no person can become a party plaintiff and no person will be bound by or may benefit from judgment unless he has affirmatively 'opted into' the class; that is, given his written, filed consent"). Here, class counsel accordingly advised all potential class members of their right to participate in the class actions, and informed them that "[i]f you do not elect to join in this lawsuit, you will not receive any damages or other relief if the plaintiffs prevail." (SER 16.) Therefore, once the class was closed, no other potential class members or third parties were entitled to share in the settlement fund.

[53] Because class counsel obtained their 1/3 fee through the express provisions contained in the contingent fee agreements and the settlement agreement, there was no need for them to request a judicial determination of the equitable amount of fees to be paid from the settlement fund, and no such determination was requested. See ER 49 (stipulation that the amount of attorneys' fees to be paid from the fund was not submitted to the district court for determination). Accordingly, the essential condition for application of the common fund doctrine did not exist here.

[54] As we have shown, the agreement of the parties here, as set forth in the contingent fee agreement and reflected in the settlement agreement, was that class counsel would receive 1/3 of any damages received by the class, and that, even if the district court made a separate award of attorneys' fees, that award would be pro- rated among the class members and treated as part of their total recovery for purposes of computing counsel's 1/3 contingent fee. As we have also shown, the district court approved the settlement agreement without analysis or comment on the attorneys' fees element, and 1/3 of the settlement fund was paid to counsel in accordance with the settlement agreement. Because there were no beneficiaries of the settlement fund here who were not named plaintiffs, the district court would have had no occasion to invoke the common fund doctrine, had it been requested to do so, and, in fact, no request was made for application of that doctrine.

[55] 3. Taxpayer contends (Br. 38) that "the nonmonetary injunctive relief [to which IDS agreed under the settlement agreement] largely benefited persons who did not actively participate as parties to the litigation," i.e., other IDS employees who were spared age discrimination as a result of the settlement. Taxpayer deduces from this that the fees were paid under the common fund doctrine. But if the attorneys' fees did contain any significant element of compensation for obtaining such injunctive relief, taxpayer's attorneys would have sought additional fees, beyond the 1/3 they were entitled to under the contingent fee agreement with the class members, to compensate for the enrichment of the persons who benefited from the litigation but were not members of the plaintiff class. Taxpayer does not contend, nor is there is any evidence, that any such additional compensation was sought or paid.

[56] Moreover, the only injunctive relief sought by plaintiffs was barring IDS from "engaging in retaliatory conduct [against] Plaintiff or any member of the class on whose behalf he brings this action . . . ." (ER 149, 178.) It was the EEOC that sought injunctive relief that benefited a broader class of employees; the EEOC sought "a permanent injunction enjoining IDS from age discrimination, ordering IDS to institute and carry out policies, practices and programs which provide equal opportunities for individuals who are at least age 40 and which eradicate the effects of their past and present unlawful employment practices . . . ." (ER 41.) Thus, the attorneys' fees paid to taxpayer's counsel did not compensate for efforts expended on behalf of unnamed third parties; rather, the fees compensated them directly and exclusively for the pecuniary and other benefits conferred upon the 32 class members.

[57] Taxpayer relies heavily (Br. 43-47) on Eirhart v. Libbey- Owens-Ford Co., 726 F. Supp. 700 (N.D. Ill. 1989), for the proposition that the attorneys' fees here were paid under the common fund doctrine. Eirhart was a single-plaintiff class action employment discrimination suit under Title VII. As part of a settlement of the case, the defendant-employer agreed to pay attorneys' fees in the amount of $1.85 million. At the time the court approved the settlement agreement, "both the identity of the individual Class members and the quantification of their claims remained unknown." 726 F. Supp. at 706. Counsel for the plaintiff class sought an order directing the defendant-employer not to file information returns with the IRS reporting the attorneys' fees as taxable income to the members of the class.

[58] Although the Title VII fee-shifting statute, 42 U.S.C. section 2000-e5(k), provides for an award of attorneys' fees to the "prevailing party," the court stated, "the nature of the award in this case is no different from the award in class actions that have nothing corresponding to Title VII's fee-shifting provision . . . . [T]he award to the class' attorneys . . . is really grounded on the equitable doctrine of the common fund." 726 F. Supp. at 705. Under these circumstances, the court held, "that award, separately deposited for the benefit of the lawyers, must be perceived as theirs-not as taxable to the later-ascertained individual Class members." Id. at 706.

[59] The present case is distinguishable from Eirhart. In Eirhart, the attorneys' fees award represented compensation for services that enriched an undetermined class of plaintiffs; at the time the settlement agreement was approved by the court, "the specific class members (let alone their ratable shares of any back pay and other awards) were then not known." 726 F. Supp. at 706. Accordingly, the essential characteristic of the common fund doctrine -- that the attorneys' fees be apportioned among all the beneficiaries of a class action by having such fees paid out of the proceeds of such action -- was present in the Eirhart case. As we have shown, in the instant case the plaintiffs' attorneys did not secure benefits for other, unnamed third parties. On the contrary, because the class was closed before the settlement was entered, the beneficiaries of the settlement here were fixed and determined and included only the 32 named plaintiffs. No one other than the named plaintiffs was eligible to receive any part of the settlement fund, and that is what made it possible for the settlement agreement to allocate 1/3 of the settlement fund to attorneys' fees, carrying out the exact terms of the pre-existing contingent fee agreements.

[60] In sum, the attorneys' fees here were not paid under the common fund doctrine. Instead, the attorneys' fees were paid pursuant to the contingent fee agreement and the settlement agreement, under which taxpayer (like all the other class members) was obligated to pay counsel 1/3 of his share of the settlement proceeds. The fees accordingly are includable in taxpayer's gross income.

D. That the alternative minimum tax may deprive taxpayer of all

 

or part of the benefit of the deduction for the attorneys'

 

fees is irrelevant to the proper resolution of this case

 

 

[61] 1. Taxpayer argues (Br. 49) that the inclusion of the attorneys' fees in his gross income "depriv[ed him] of the benefit of a deduction for these fees by application of the Alternative Minimum Tax." That is error, according to taxpayer, because it "extends the AMT far beyond the stated objectives and purposes envisioned by Congress . . . ." Taxpayer maintains (Br. 50) that he "clearly [is] not the type of 'high-income taxpayer' who [is] attempting to use exclusions, deductions, and credits available under the Internal Revenue Code about whom Congress was concerned in the enactment of the AMT." As we will demonstrate, this argument is misconceived. The alternative minimum tax (AMT) is a purely mechanical provision whose applicability has no bearing on whether the Tax Court correctly held that taxpayer was required to include in his gross income the portion of the settlement proceeds that was paid to his attorneys.

[62] The alternative minimum tax is imposed by sections 55 through 59 of the Internal Revenue Code. In general, the AMT is computed by making certain modifications to taxable income to reach "alternative minimum taxable income." An exemption amount is then subtracted from alternative minimum taxable income, and the excess is multiplied by a special tax rate. The taxpayer must pay the greater of the tax computed by this alternative method or the tax liability computed in the usual way. The relevant provisions of the Internal Revenue Code and how they apply here may be summarized as follows.

[63] The calculation of alternative minimum taxable income begins with taxable income, the usual measure of income to which statutory tax rates are applied. section 55(b)(2); see section 63. To reach alternative minimum taxable income, taxable income is adjusted as provided in section 56 and increased by the tax preference items described in Section 57. section 55(b)(2). For individual taxpayers, among the adjustments provided by section 56 is the following: "No deduction shall be allowed . . . for any miscellaneous itemized deduction (as defined in section 67(b))." section 56(b)(1)(A). section 67(b) defines the term "miscellaneous itemized deductions" as "the itemized deductions, other than" certain deductions not relevant here. section 63(d) defines the term "itemized deductions" as "the deductions allowable under this chapter other than" certain deductions, which are again not relevant here. Among the deductions allowable under Chapter 1 of the Internal Revenue Code is the deduction allowed by section 212(1) for "all the ordinary and necessary expenses paid or incurred during the taxable year . . . for the production or collection of income." Attorneys' fees paid that are allocable to an award of taxable damages are deductible under section 212(1) as an expense incurred for the production of income. See, e.g., Church v. Commissioner, 80 T.C. 1104, 1111 (1983). Thus, the deduction allowed to taxpayer for the attorneys' fees at issue here is a miscellaneous itemized deduction and, as such, must be added back to his regular taxable income to compute his alternative minimum taxable income.

[64] Once the alternative minimum taxable income is determined, the exemption amount is subtracted from it. section 55(b)(1)(A). For individual taxpayers filing a joint return (as was done here), the exemption amount is $40,000. section 55(d)(1)(A)(i). The balance is then multiplied by the alternative minimum tax rate of 24 percent to reach the "tentative minimum tax." section 55(b)(1)(A). Finally, the tax as regularly computed is subtracted from the tentative minimum tax, and any remainder is added to the regular tax liability to reach the total tax liability. section 55(a); see section 55(c) (certain modifications to regular tax liability for this purpose).

[65] 2. Applying these purely mechanical statutory rules, the parties stipulated in the Tax Court that, under the court's opinion, taxpayer's tax liability for 1992 included an AMT liability of $22,794. (SER 4.) Taxpayer contends, however, that imposing the AMT on him is contrary to congressional intent. That argument is without merit. The plain language of a statute is conclusive, except in the "rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters." Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982); see also Burlington Northern Railroad Co. v. Oklahoma Tax Commission, 481 U.S. 454, 461 (1987) ("[u]nless exceptional circumstances dictate otherwise, '[w]hen we find the terms of a statute unambiguous, judicial inquiry is complete'"; quoting Rubin v. United States, 449 U.S. 424, 430 (1981)).

[66] Deductions under section 212(1) have been subject to the minimum tax since 1976, when they (along with most other itemized deductions) were first classified as a tax preference item. See section 57(b), as amended by the Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520, section 301(c)(2). Regarding that classification, the legislative history of the 1976 Act states, "[t]he addition of this preference should largely eliminate situations where individuals with high adjusted gross incomes pay no tax." H.R. Rep. No. 94-658 at 131 (1975), reprinted in 1976-3 C.B. (vol.2) 695, 823. The exemption amount-in taxpayer's case, $40,000- reflects Congress's judgment as to the income level at which the AMT is imposed. Given the mechanical operation of the statute, there is no basis for taxpayer's assertion that he is not a "high-income" taxpayer for purposes of the AMT. See Rawlins v. Commissioner, T.C. Memo. 1995-502, 1995 WL 610605 at 8 (for purposes of AMT, "what constitutes a 'high-income' taxpayer or a taxpayer having 'substantial economic income' lies within the eyes of the beholder"). By limiting the exemption amount to $40,000, Congress has made a determination that taxpayers who claim certain deductions or preferences (including miscellaneous itemized deductions) of more than $40,000, will, in most cases, be subject to the AMT. Here, because taxpayer's miscellaneous itemized deductions exceeded $250,000, he was unquestionably liable for the alternative minimum tax.

[67] Indeed, the reason that taxpayer seeks to exclude from his gross income the portion of his settlement proceeds that was to paid to his attorneys (rather than include all the proceeds and claim a deduction for the attorneys' fees) is to avoid the application of the AMT (and to a lesser extent the 2 percent floor on miscellaneous itemized deductions). But the determination as to whether the AMT, as currently written, is too broad is a policy decision to be made by the Congress. It is not the proper province of the courts to judicially modify the terms of a statute in order to alleviate what may viewed by some as a harsh result.

[68] If a statute casts too broad a net, overshooting its intended target, it is for Congress, not the courts, to rectify the situation by amending the statute. See Commissioner v. Lundy, 516 U.S. 235, 252 (1996) ("[w]e are bound by the language of the statute as it is written, and even if the rule Lundy advocates might 'accor[d] with good policy,' we are not at liberty 'to rewrite [the] statute because [we] might deem its effects susceptible of improvement'"; quoting, with modifications, Badaracco v. Commissioner, 464 U.S. 386, 398 (1984); United States v. Locke, 471 U.S. 84, 95 (1985) (judiciary is not "licensed to attempt to soften the clear import of Congress' chosen words whenever a court believes those words lead to a harsh result"); Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978) ("[t]here is a basic difference between filling a gap left by Congress' silence and rewriting rules that Congress has affirmatively and specifically enacted"); N. Singer, Statutes and Statutory Construction, section 46.01 at p.83 (5th ed. 1992) ("[c]ourts are not free to read unwarranted meanings into an unambiguous statute even to support a supposedly desirable policy not effectuated by the act as written"); see also Huntsberry v. Commissioner, 83 T.C. 742, 752-53 (1984) (AMT rules reflect Congress' balancing of various policy considerations, which are outside purview of courts where meaning of statute is clear).

[69] Taxpayer here is asking this Court, in effect, to limit the scope of the AMT by allowing him to exclude from his gross income the portion of the settlement proceeds paid to his attorneys; that would enable him to avoid claiming a deduction for those fees and the resulting AMT. Taxpayer's request to the Court is improper and should be rejected. If the scope of the AMT is to be limited, the statute must be amended by the Congress.

E. The Tax Court properly denied taxpayer's post-decision

 

motions in which he argued for the first time that the

 

contingent fee agreement transferred ownership of a portion

 

of the cause of action to his attorneys

 

 

[70] 1. Taxpayer argues (Br. 54-57) that the portion of the settlement proceeds that was paid to his attorneys should be excluded from his gross income under the decision in Cotnam v. United States, 263 F.2d 119 (5th Cir. 1959). In Cotnam, it was held that, under Alabama law, a contingent fee agreement transferred a portion of the taxpayer's cause of action to her attorneys, and that the portion of the recovery that was paid to the attorneys was therefore excludable from the taxpayer's income. In the Tax Court, taxpayer did not argue that the attorneys' fees were excludable from gross income under Cotnam. 8

[71] With regard to the effect of the contingent fee agreement, the Tax Court here stated as follows (ER 534):

In this case, petitioner resided in Arizona when he filed

 

his petition herein. The parties, however, have not cited any

 

provision of Arizona statutory law, and we have found none, that

 

pertains to the legal rights of Arizona attorneys in monetary

 

awards recovered on behalf of their clients.

 

 

. . . . .

 

 

It . . . appears that, in Arizona, attorneys do not have

 

the same substantive rights in funds recovered on behalf of

 

their clients as do attorneys in Alabama. In Arizona, the total

 

funds recovered constitute property of the clients. Based on the

 

foregoing, this case is distinguishable from Cotnam v.

 

Commissioner . . . .

 

 

[72] After the Tax Court's opinion and decision were entered, taxpayer filed a motion to reconsider the opinion (pursuant to Tax Court Rule 161) and a motion to vacate or revise the decision (pursuant to Tax Court Rule 162). In support of the motions, taxpayer argued that the Tax Court should not have looked to the law of Arizona to determine the effect of the contingent fee agreement, but should have looked to the law of Alabama, where he assertedly resided when he signed the initial contingent fee agreement, and should have followed the Cotnam decision. (ER 558.) To support that factual assertion, an affidavit of taxpayer was submitted with the motions. (ER 538.) The Tax Court vacated its decision solely to allow computation of the correct amount of the tax deficiency under Rule 155. (ER 549.) Taxpayer then filed a supplemental motion for reconsideration, reiterating the same argument. (ER 558.) The Tax Court denied the motions for reconsideration. (ER 551.)

[73] On appeal, taxpayer renews his post-decision argument, contending (Br. 54) that he and his wife "were Alabama residents at all relevant times herein, including the period of time in which the discriminatory activities in question took place, the initial contingent fee agreement was executed, and the underlying lawsuits were commenced." In support of his factual assertion, taxpayer cites only the affidavit he submitted with his post-decision motions./9/

[74] The Tax Court's refusal to reconsider its opinion is reviewed for an abuse of discretion. See Banker's Pocahontas Coal Co., 287 U.S. 308, 313 (1932); Devore v. Commissioner, 963 F.2d 280, 282 (9th Cir. 1992); Molloy v. Wilson, 878 F.2d 313, 315 (9th Cir. 1989); Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1014 (9th Cir. 1985), cert. denied, 474 U.S. 1059 (1986); Parkinson v. Commissioner, 647 F.2d 875, 876 (9th Cir. 1981). This Court will reverse for abuse of discretion only if it has a "definite and firm conviction that the Tax Court committed a clear error of judgment in the conclusion it reached." Abatti v. Commissioner, 859 F.2d 115, 117 (9th Cir. 1988).

[75] Tax Court Rule 161 allows the court to modify its opinion on motion filed within 30 days of the filing of the opinion. The Tax Court's power to modify its opinions (and to vacate its decisions) is reserved for extraordinary circumstances. Robin Haft Trust v. Commissioner, 62 T.C. 145, 147 (1974); see Wilson v. Commissioner, 500 F.2d 645, 648 (2d Cir. 1974). It is well settled that there is no abuse of discretion on the Tax Court's part in denying rehearing where there is no showing that evidence belatedly tendered was not available to the party in ample time to present it before the court filed its findings of fact and opinion. Scott v. Commissioner, 117 F.2d 36, 40 (8th Cir. 1941); see Heckett Engineering, Inc. v. Commissioner, 173 F.2d 572, 573 (3d Cir. 1949); Standard Knitting Mills, Inc. v. Commissioner, 141 F.2d 195, 198-99 (6th Cir. 1944), cert. denied, 322 U.S. 753 (1944); see also Selwyn Operating Corp. v. Commissioner, 11 B.T.A. 593, 595 (1928) (party requesting reconsideration must "show affirmatively that the failure to ascertain the additional facts prior to the hearing was due to no lack of diligence on his part").

[76] Here, taxpayer did not argue, prior to the Tax Court's opinion and decision, that the attorneys' fees at issue were excludable from his gross income under the Cotnam decision. Rather, his arguments were confined to those addressed earlier in this brief. Only after the opinion and decision were entered did taxpayer advance the theory that the holding of Cotnam-that the contingent fee agreement conveyed a portion of the cause of action to his attorneys under Alabama law-applied to this case. Indeed, it was stipulated in the Tax Court that taxpayer and his wife resided in Arizona when the petition was filed (ER 26), and because taxpayer did not make this argument, he requested no findings of fact with respect to his place of residence at any other time. Not until his post-decision motions did taxpayer assert, notwithstanding the total lack of evidence to support the contention, that he and his wife were residents of Alabama for purposes of determining the effect of the contingent fee agreement. There were accordingly two separate grounds on which taxpayer's motions were properly denied: first, the motions raised a new legal argument, and second, the motions were based on factual assertions that were not supported by the record, but were supported only by an affidavit that was not part of the evidence before the court. See Tax Court Rule 143(b) ("Ex parte affidavits, statements in briefs, and unadmitted allegations in pleadings do not constitute evidence").

[77] In this regard, this case is much like Banker's Pocahontas Coal Co. There, the taxpayer owned property upon which coal operators had the right to mine coal, in exchange for stipulated royalties. The Commissioner treated the royalty payments, after deducting a depletion allowance, as taxable income. The taxpayer contended that the royalties were excludable from income, and, in the alternative, that a larger depletion allowance was permissible than the Commissioner had allowed. The Board of Tax Appeals rejected those arguments. After the Board had filed its findings of fact and opinion, the taxpayer claimed for the first time, in the context of a recomputation of the amount of the deficiency, that the minimum royalty payments had exceeded the amount of the per-ton royalty, and asked that the depletion allowance be computed on the basis of the actual payments made, instead of the number of tons extracted. At a hearing on the recomputation, the taxpayer tendered evidence in support of this claim. The Board refused to consider the evidence and denied the taxpayer's motion for a rehearing. 287 U.S. at 312.

[78] The Supreme Court, in upholding the Board's action, stated as follows (id. at 313):

The purpose of the tendered evidence was to bring the case

 

within the ruling of the Court of Appeals for the Ninth Circuit

 

affirmed in Murphy Oil Co. v. Burnet, [287 U.S. 299 (1932)],

 

that bonus payments to the lessor of a mineral lease are to be

 

treated as advanced payments of royalties and depletion allowed.

 

This was a new issue. . . . It is not shown that the evidence

 

tendered was not available to the petitioner in ample time to

 

present it before the Board had made and filed its findings of

 

fact and opinion. Under the circumstances, we cannot say that

 

the Board abused its discretion in denying a rehearing.

 

 

[79] Similarly, in the present case, taxpayer raised a new argument in his post-decision motions, seeking to have the Tax Court follow a case and a theory that he had not previously advanced, and tendered new evidence in support of that theory. Taxpayer has offered no reason why he could not have raised his Cotnam argument prior to the issuance by the Tax Court of its opinion, at a time when the Commissioner would have had a full opportunity to question the evidence and dispute the legal merits. Under these circumstances, the Tax Court did not abuse its discretion in denying taxpayer's post- decision motions. See also Paccar, Inc. v. Commissioner, 849 F.2d 393, 399-400 (9th Cir. 1988) (Tax Court did not err by precluding consideration of issue at post-trial proceeding because taxpayer had not previously contested matter and it would have required considering new evidence); Barnhart-Morrow Consolidated v. Commissioner, 150 F.2d 285, 289 (9th Cir. 1945) (similarly).

[80] In the event this Court should determine that the Tax Court abused its discretion in denying taxpayer's post-decision motions, the case should be remanded to the Tax Court for consideration by that court of the Cotnam issue in the first instance, including any further fact-finding that may be required. 10

CONCLUSION

[81] For the foregoing reasons, the decision of the Tax Court should be affirmed. Respectfully submitted,

PAULA M. JUNGHANS

 

Acting Assistant Attorney

 

General

 

 

RICHARD FARBER

 

(202) 514-2959

 

 

KENNETH W. ROSENBERG (202) 514-

 

1919

 

Attorneys

 

Tax Division

 

Department of Justice

 

Post Office Box 502

 

Washington, D.C. 20044

 

 

FEBRUARY 2000

 

 

STATEMENT OF RELATED CASES

[82] The following cases, which are pending in this Court, present the issue whether the portion of a settlement or a judgment used to pay the plaintiffs' attorneys' fees pursuant to a contingent fee agreement is includable in the plaintiff's gross income:

Coady v. Commissioner (9th Cir. No. 98-71358)

 

Benci-Woodward, et al. v. Commissioner (9th Cir. Nos. 99-70136,

 

99-70137 & 99-70138)

 

 

ADDENDUM

 

 

Fair Labor Standards Act:

 

 

29 U.S.C. section 216. Penalties.

 

 

. . . . .

 

 

(b) Damages; right of action; attorney's fees and costs; termination

 

of right of action

 

 

Any employer who violates the provisions of section 206 or

 

section 207 of this title shall be liable to the employee or

 

employees affected in the amount of their unpaid minimum wages, or

 

their unpaid overtime compensation, as the case may be, and in an

 

additional equal amount as liquidated damages. Any employer who

 

violates the provisions of section 215(a)(3) of this title shall be

 

liable for such legal or equitable relief as may be appropriate to

 

effectuate the purposes of section 215(a)(3) of this title, including

 

without limitation employment, reinstatement, promotion, and the

 

payment of wages lost and an additional equal amount as liquidated

 

damages. An action to recover the liability prescribed in either of

 

the preceding sentences may be maintained against any employer

 

(including a public agency) in any Federal or State court of

 

competent jurisdiction by any one or more employees for and in behalf

 

of himself or themselves and other employees similarly situated. No

 

employee shall be a party plaintiff to any such action unless he

 

gives his consent in writing to become such a party and such consent

 

is filed in the court in which such action is brought. The court in

 

such action shall, in addition to any judgment awarded to the

 

plaintiff or plaintiffs, allow a reasonable attorney's fee to be paid

 

by the defendant, and costs of the action. . . .

 

 

Age Discrimination in Employment Act:

 

 

29 U.S.C. section 626. Recordkeeping, investigation, and enforcement

 

 

. . . . .

 

 

b) Enforcement; prohibition of age discrimination under fair

 

labor standards; unpaid minimum wages and unpaid overtime

 

compensation; liquidated damages; judicial relief; conciliation,

 

conference, and persuasion

 

 

The provisions of this chapter shall be enforced in accordance

 

with the powers, remedies, and procedures provided in sections

 

211(b), 216 (except for subsection (a) thereof), and 217 of this

 

title, and subsection (c) of this section. . . .

 

 

Certificate of Compliance Pursuant to Fed. R. App. 32(a)(7)(C) and

 

Circuit Rule 32-1 for Case Number 99-71369

 

 

(see next page) Form Must Be Signed By Attorney or Unrepresented

 

Litigant And Attached to the Back of Each Copy of the

 

Brief

 

 

I certify that: (check appropriate option(s))

 

 

X 1. Pursuant to Fed. R. App. P. 32 (a)(7)(C) and Ninth Circuit Rule

 

32-1, the attached opening/answering/reply/cross-appeal brief is

 

 

X Proportionately spaced, has a typeface of 14 points or more and

 

contains _12,486_ words (opening, answering, and the second and

 

third briefs filed in cross-appeals must not exceed 14,000

 

words; reply briefs must not exceed 7,000 words),

 

 

or is

 

 

__ Monospaced, has 10.5 or fewer characters per inch and contains

 

_______ words or ________ lines of text (opening, answering, and

 

the second and third briefs filed in cross-appeals must not

 

exceed 14,000 words or 1,300 lines of text; reply briefs must

 

not exceed 7,000 words or 650 lines of text).

 

 

__2. The attached brief is not subject to the type-volume limitations

 

of Fed. R. App. P. 32(a)(7)(B) because

 

 

__ This brief complies with Fed. R. App. P. 32(a)(1)-(7) and is a

 

principal brief of no more than 30 pages or a reply brief of no

 

more than 15 pages;

 

 

__ This brief complies with a page or size-volume limitation

 

established by separate court order dated ____________ and is

 

 

__ Proportionately spaced, has a typeface of 14 points or more

 

and contains _______ words,

 

 

or is

 

 

__ Monospaced, has 10.5 or fewer characters per inch and

 

contains ______ pages or_______ words or ________ lines of

 

text.

 

 

__3. Briefs in Capital Cases

 

 

__ This brief is being filed in a capital case pursuant to the

 

type-volume limitations set forth at Circuit Rule 32-4 and is

 

 

__ Proportionately spaced, has a typeface of 14 points or

 

more and contains _________ words (opening, answering, and

 

the second and third briefs filed in cross-appeals must

 

not exceed 21,000 words; reply briefs must not exceed

 

9,800 words)

 

or is

 

 

__ Monospaced, has 10.5 or fewer characters per inch and

 

contains _______ words or ________ lines of text (opening,

 

answering, and the second and third briefs filed in cross-

 

appeals must not exceed 75 pages or 1,950 lines of text;

 

reply briefs must not exceed 35 pages or 910 lines of text).

 

 

__4. Amicus Briefs

 

 

__ Pursuant to Fed. R. App. P. 29(d) and 9th Cir. R. 32-1, the

 

attached amicus brief is proportionally spaced, has a

 

typeface of 14 points or more and contains 7000 words or

 

less,

 

 

or is

 

 

__ Monospaced, has 10.5 or fewer characters per inch and

 

contains not more than either 7000 words or 650 lines of

 

text,

 

 

or is

 

 

__ Not subject to the type-volume limitations because it is an

 

amicus brief of no more than 15 pages and complies with Fed.

 

R. App. P. 32(a)(1)(5).

 

 

___________________________

 

Date Signature of Attorney or

 

Unrepresented Litigant

 

 

CERTIFICATE OF SERVICE

 

 

I certify that service of this brief has been made on counsel

 

for the appellants, counsel for the AARP Foundation, and counsel for

 

the National Employment Lawyers Association, on this 16th day of

 

February, 2000, by mailing two copies thereof to each of them,

 

properly addressed as follows:

 

 

Thomas H. Boyd, Esquire

 

Winthrop & Weinstine, P.A.

 

3200 Minnesota World Trade Center

 

30 East Seventh Street

 

St. Paul, Minnesota 55101

 

 

Laurie McCann, Esquire

 

AARP Foundation Litigation

 

601 E Street, N.W.

 

Washington, D.C. 20049

 

 

Paula A. Brantner, Esquire

 

National Employment Lawyers Association

 

600 Harrison Street, Suite 535

 

San Francisco, California 94107

 

 

_____________________________

 

KENNETH W. ROSENBERG

 

Attorney

 

FOOTNOTES

 

 

1 "ER" references are to the excerpts of record. "SER" references are to the supplemental excerpts of record we are submitting with this brief.

2 Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1986 (26 U.S.C.), as amended and in effect during the year in suit.

3 References herein to "taxpayer" in the singular are to James T. Sinyard; his wife, Monique Sinyard, is a party to this case solely because she filed a joint tax return with him for the year in issue.

4 The quoted language is contained in Exhibit 67-BO, which was subject to a protective order entered by the Tax Court on August 6, 1997. (SER 1-2.) The protective order placed certain exhibits under seal and prohibited reproduction of those exhibits.

5 The quoted language is contained in Exhibit 71-BS, which was also subject to the Tax Court's protective order of August 6, 1997.

6 No explanation appears in the record as to why the amounts allocated to tort damages and lost wages did not equal exactly 1/3 of the net settlement proceeds.

7 An itemized deduction is allowable for the attorneys' fees at issue, subject to the two percent floor on itemized deductions, see sections 63(d), 67, 212(1), and subject to the alternative minimum tax, see sections 55(b)(2), 56(b)(1)(A)(i). The decision entered by the Tax Court takes these provisions into account.

8 Taxpayer's only reference to Cotnam prior to the Tax Court's decision was in a footnote on page 12 of his reply brief (SER 3), where he cited Cotnam to support the proposition that "[s]everal courts have held that contingent attorneys' fees do not constitute income to the taxpayer."

9 Taxpayer also contends (Br. 55 n.3), in the alternative, that he and his wife were residents of Georgia at the relevant times, and that the result in Cotnam applies equally under Georgia law. Taxpayer did not raise this argument in the Tax Court, even in his post-decision motions.

10 The National Employment Lawyers Association (NELA) and the AARP Foundation have filed a motion for leave to file a brief as amici curiae in this case. On January 18, 2000, this Court ordered that the proposed brief "shall be referred for disposition to the panel that considers the merits of the case." In their proposed brief, the NELA and the AARP argue that including the attorneys' fees in gross income would defeat the purpose of the ADEA fee-shifting statute, by imposing an undue tax burden on successful plaintiffs and discouraging settlements. Because the fees here were paid under the contingent fee agreement, not under the ADEA fee-shifting statute, that argument is not in point. To the extent the NELA and the AARP embrace the broader argument that attorneys' fees paid under contingent fee agreements are also excludable from gross income (see Br. 17), they fail to reconcile their position with the broad statutory definition of gross income; hence, their policy-based argument is properly addressed to Congress. We would further note that there is nothing anomalous in the fact that taxpayers' attorneys will have to pay tax on the portion of the settlement proceeds paid to them and that taxpayers, as the result of the AMT, may lose most of the benefit of their deduction for their attorneys' fees and, therefore, have to pay tax on the same item of income. The portion of corporate earnings distributed to shareholders is taxed both to the corporation and to the shareholders, because dividends are not deductible. Indeed, any time a taxpayer uses taxable income to pay a nondeductible expense (e.g., a wage earner uses a part of his wages to pay his rent), the same item of income is subject to tax twice- once in the hands of the original recipient and again in the hands of the subsequent payee.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    JAMES T. SINYARD; MONIQUE T. SINYARD Petitioners-Appellants v. COMMISSIONER OF INTERNAL REVENUE Respondent-Appellee
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 99-71369
  • Institutional Authors
    Department of Justice
  • Cross-Reference
    Sinyard v. Commissioner, T.C. Memo 1998-364 (For the full text see

    Doc. 98-29997 (14 pages) or 98 TNT 195-10 Database 'Tax Notes Today 1998', View '(Number'.)
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    gross income
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2000-5482 (75 original pages)
  • Tax Analysts Electronic Citation
    2000 TNT 48-25
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