Contingent attorneys' fees.

• Jurisdiction: United States
• Date: 01 October 2000
• Author: Moore, Philip E.

A recent decision (Coady, 9th Cir., 6/14/00) is heating up the battle over whether a taxpayer may exclude from gross income the portion of proceeds received from a settlement and retained by his attorney pursuant to a contingent fee arrangement. In Coady, the Ninth Circuit held that the taxpayer could not; siding with the IRS, the court rejected the taxpayer's argument that an effective assignment of income had been made.

In Coady, the taxpayer received a judgment in a wrongful termination suit and paid her attorney a percentage of it pursuant to a contingent fee arrangement. The taxpayers, relying on Cotnam, 263 F2d 119 (5th Cir. 1959), contended they were entitled to exclude the attorneys' fees because that portion of their settlement was assigned to counsel. In Cotnam, the taxpayer entered into a contingent fee arrangement to pay her attorney 40% of any amount recovered on a claim prosecuted on her behalf. The Fifth Circuit excluded the attorneys'...