Davis v. Comr. of IRS , 210 F.3d 1346 ( 2000 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
APR 27 2000
________________________
THOMAS K. KAHN
CLERK
No. 98-7026
________________________
D. C. Docket No. 4077-96
WILLIE MAE BARLOW DAVIS,
Petitioner-Appellee,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellant.
________________________
Appeal from a Decision of the United States Tax Court
_________________________
(April 27, 2000)
Before ANDERSON, Chief Judge, COX and HULL, Circuit Judges.
PER CURIAM:
This case presents the issue of whether the portion of a judgment paid directly
to the taxpayer’s attorneys pursuant to a contingency fee arrangement is taxable as
income to the taxpayer.
I. FACTS AND PROCEEDINGS BELOW
In 1992, Willie Mae Davis prevailed in a suit against a mortgage company
and won a $6,151,000 judgment, of which six million dollars was punitive
damages. She had entered into a contingency fee arrangement with her attorneys
in 1989 and upon receiving the judgment, they retained $3,111,809 and she
received $3,039,191. Initially, Ms. Davis did not report any of the award as
income in 1992 and upon audit, the Internal Revenue Service (“IRS”) determined
that the entire six million dollar punitive damages award should be included as
income.1 The IRS allowed Ms. Davis a deduction for attorneys’ fees and costs in
the amount of $3,069,250 and determined that Ms. Davis had a deficiency of
$1,441,736.
Ms. Davis petitioned the Tax Court for a redetermination of the deficiency.
The Tax Court found that although the punitive damages were otherwise taxable as
income, the amount paid to her attorneys was not taxable income under Cotnam v.
1
The compensatory damages of $151,000 were excludable because they were damages received
on account of personal injuries. See O’Gilvie v. United States, 519 U.S. 79, 117 S. Ct. 452 (1996).
2
Commissioner, 263 F.2d 119 (5th Cir. 1959).2 Thus the Tax Court determined that
Ms. Davis’s tax deficiency was $919,772.3 The IRS appeals.
II. STANDARD OF REVIEW
We review de novo the tax court’s conclusions of law and findings of fact
for clear error. See Sleiman v. Commissioner, 187 F.3d 1352, 1358 (11th Cir.
1999).
III. DISCUSSION
This Court has previously addressed the issue of whether a taxpayer is taxed
on the portion of a judgment paid to the attorneys under a contingency fee
arrangement in Alabama, and in light of the attorneys’ lien statute in Alabama, Ala.
Code § 34-3-61 (1997). In Cotnam v. Commissioner, the former Fifth Circuit
found that a woman, who obtained a judgment on her oral contract with a man to
care for him in return for a fifth of his estate, was not required to include as income
the portion of the award paid to her attorneys for their work in enforcing that
2
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this Court
adopted as binding precedent all of the decisions of the former Fifth Circuit handed down prior to
the close of business on September 30, 1981.
3
The deduction for attorneys’ fees and costs which the IRS allowed was less favorable to the
taxpayer than the exclusion-from-income approach adopted by the Tax Court because the operation
of technical tax rules such as the alternative minimum tax.
3
contract. Because Cotnam is squarely on point and controlling, as the IRS
acknowledges, we affirm the Tax Court on this issue.4
Next, the IRS argues, in the alternative, that Ms. Davis made a taxable
disposition of her property in 1989 when she entered into the contingency fee
arrangement. Reasoning that the court’s interpretation of the Alabama attorneys’
lien statute in Cotnam gave an ownership interest in the claim to Ms. Davis’s
attorneys, the IRS argues that by entering into the fee arrangement agreement, Ms.
Davis in essence sold part of her cause of action in 1989. Realizing that that
taxable event in 1989 would be time-barred, the IRS suggests that the value of the
cause of action and the value of the attorneys’ services were unascertainable in
1989, and thus that the taxable event should be deferred pursuant to the open
transaction doctrine. The open transaction doctrine, introduced in Burnet v. Logan,
283 U.S. 404, 51 S. Ct. 550 (1931), permits a delay in the assessment of the value
of the property until the sum is made certain. Thus, under this logic, the IRS
argues that Ms. Davis’s taxes should not be assessed until 1992 when she received
her judgment, and the value of the attorneys’ services and her claim became
apparent.
4
The IRS’s primary argument is that Cotnam was wrongly decided and should be overruled.
We need not address this argument because this panel is bound by Cotnam, which can be overruled
only by the en banc court. See United States v. Woodard, 938 F.2d 1255, 1258 (11th Cir.1991).
4
The open transaction doctrine is only applicable when it is not possible to
discern the value of either of the assets exchanged. Under United States v. Davis,
370 U.S. 156, 82 S. Ct. 1190 (1962), when only one of the assets has an
unascertainable value, it is presumed to be of the same worth as the property for
which it was exchanged. The IRS concedes that it bore the burden of showing that
the open transaction doctrine applied and that the values of the properties
exchanged were not ascertainable at the time of the exchange. Because the IRS
provided no proof that the values of either the cause of action or the attorneys’
services were unascertainable, it has failed to establish that the open transaction
doctrine should apply.5
Because we find that Cotnam v. Commissioner is controlling and that the
IRS failed to bear its burden of proof on its open transaction argument, we affirm
the decision of the Tax Court.
AFFIRMED.
5
In light of this disposition, we of course need not decide whether there was a taxable event
in 1989.
5