Thursday, December 5, 2013

Commissioner v. Banks case brief

Commissioner v. Banks case brief summary
543 U.S. 426 (2005)

On writ of certiorari to the United States Court of Appeals for the Sixth Circuit in two consolidated cases filed by petitioner Internal Revenue Service, the Court considered whether the portion of a money judgment or settlement paid to respondent taxpayer/clients' attorneys on contingent-fee agreements was income to the clients under the Internal Revenue Code,26 U.S.C.S. § 1 et seq.

The clients were awarded judgments for civil rights violations but did not report as income the payments made to their attorneys on contingency. Although for the tax years in question the legal expenses could have been taken as miscellaneous itemized deductions subject to ordinary requirements, 26 U.S.C.S. §§ 67-68, doing so would have been of no help to the clients because of the operation of the Alternative Minimum Tax (AMT). In addition, after these cases arose Congress enacted the American Jobs Creation Act of 2004 (Act), 118 Stat 1418, which allowed a taxpayer, in computing adjusted gross income, to deduct attorney fees and court costs paid in connection with any action involving a claim of unlawful discrimination. However, the Act was not retroactive, so it did not pertain here.


  • The Court looked to the fact that the attorney-client relationship was one of agency rather than of joint ventures. 
  • The clients retained dominion over the income generating assets and thus controlled disposition of the income. 
  • Therefore, contingent attorney fees were anticipatory assignment to the attorney of a portion of the client's income from any litigation recovery.

The Court reversed the decisions of the United States Courts of Appeals for the Sixth and Ninth Circuits and remanded the cases for further proceedings consistent with this opinion.

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