Fascinating, Robert. Please keep us updated.
----- Original Message -----
Sent: Tuesday, November 02, 2004 7:20 AM
Subject: [Maury_and_Baty] The real news of the day!
During November 1 oral arguments of the Banks and Banaitis cases, the
Supreme Court justices searched for a legal theory to resolve the
inequity of including in income the contingent attorney fee portion
of a prevailing plaintiff's discrimination settlement.
But the taxpayer and government lawyers were not prepared to discuss
the one theory that several of the justices were most interested in:
the one espoused by law professor Charles Davenport in an amicus
curiae brief that suggested that contingent attorney fees should be
treated as transaction costs.
The Supreme Court granted certiorari in two contingent attorney fee
cases, Commissioner v. John W. Banks II, 345 F.3d 373 (6th Cir. 2003)
(No. 03-892), and Commissioner v. Sigitas J. Banaitis, 345 F.3d 1074
(9th Cir. 2003) (No. 03-907). Both taxpayers, Banks and Banaitis,
settled employment discrimination suits, and both lost in the Tax
Court their cases to exclude part or all of the amounts recovered.
Both cases were reversed on appeal concerning the contingent attorney
fee portions of their recoveries. In so doing, the appeals courts'
decisions took a position that is at odds with all the other circuits
except the Fifth and Eleventh circuits.
The issue has received attention from a variety of sources, including
Congress, because the alternative minimum tax can apply and cause a
prevailing plaintiff's tax liability to exceed the amount recovered.
When it gets to the point where the government is charging more in
tax than a taxpayer is actually receiving, "it is an appalling
situation," declared Justice Ruth Bader Ginsburg.
Justice Ginsburg was the first to raise the theory set forth in
Davenport's amicus brief.
A professor at Rutgers Law School in Newark, Davenport argued on
brief that the legal fees in the Banks and Banaitis cases are
transaction costs, not expenses. Transaction costs are expenditures
that facilitate the transaction, in his view. The legal fees at issue
were incurred to value the rights taken from taxpayers and then to
dispose of the taxpayers' causes of action arising from tortious
behavior, explains Davenport.
Salmons said the government believes its assignment of income theory
is the better approach to these cases.
But Justice Scalia pressed the government to explain why the present
cases are different from the treatment of lawyers' fees attendant to
a real property sale. Why not treat them as "a conversion of a chose
in action to a real money payment," he asked. In that event, all
costs become part of the transaction, he said.
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