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When a client wins a damage award in court, the portion of the awardthat goes to the lawyer as a contingent fee is taxable income for thelawyer. But a long-simmering issue, now before the Supreme Court in a trio ofcases, is whether the client should also pay taxes on that contingentfee money. At the Court’s private conference today, the justices willconsider Freeman v. Commissioner of Internal Revenue, No. 03-660; Commissioner of Internal Revenue v. Banks, No. 03-892; and Commissionerof Internal Revenue v. Banaitis, No. 03-907, among dozens of othercases. The Court is expected to announce as soon as Monday whether itwill add these or other cases to its docket for review next fall. In nearly a dozen instances in recent years, the high court has deniedreview in cases raising the issue of a client’s tax liability forcontingent fees. But in those cases, the taxpayer lost in the courtsbelow, and the Supreme Court heeded the solicitor general’s advice notto review the taxpayers’ appeals, as it usually does. What makes this batch of cases different — and possibly more attractive tothe Court — is that the government has begun losing on this issue below.Now it is the government that is urging the high court to step in. “Thatalways increases the chances of the Court granting review,” says RussellYoung, a Chicago tax partner in Mayer, Brown, Rowe & Maw who representsJoseph Banks II in the lead case before the Court. Banks, an education consultant for the state of California, sued thestate after being terminated in 1986. He claimed discrimination andstate law torts of slander and infliction of emotional distress. Soonafter his trial began, the state settled his claims for $464,000, ofwhich $150,000 went to his lawyer as part of a contingency feearrangement. Banks did not report any of the settlement money as income.When the IRS issued a notice of deficiency, Banks appealed to the TaxCourt, which sided with the government. But Banks, after moving to Michigan, appealed to the 6th U.S. Circuit Court of Appeals. The 6th Circuit reversed, determining thatwhen the contingency fee arrangement was signed, the money was an”intangible, contingent expectancy” and that taxing the client for itwould result in “double taxation.” Judge Eric Clay wrote the opinion. In his petition, Solicitor General Theodore Olson asks the high court toreverse the 6th Circuit, which he says goes against rulings in the 4th,7th, 9th, and 10th circuits: “Resolution by this Court of the widespreadand irreconcilable conflict among the courts of appeals is needed toeliminate the disparate treatment of similarly situated taxpayers thatnow exists.” The government contends that the award money a client gets should betaxable no matter where some of it goes later. “The taxpayer cannotavoid tax on the income he has earned by the simple artifice of havingit paid, for his benefit, to someone else,” the brief states. Olson alsonoted that contingent fee arrangements are common, so the issue islikely to arise frequently. Mayer Brown’s Young says the tax issue comes up most often inemployment cases, but not in personal injury lawsuits, because damageawards resulting from “personal injury or sickness” are specificallyexcluded from taxation. Young also says that while in some instancesclients can claim the contingent fee portion of their awards as adeduction, they cannot do so at all if they are subject to thealternative minimum tax. Bills pending before Congress aimed atbenefiting the victims of employment discrimination would end theirobligation to pay taxes on the portion of their damage awards that gotoward lawyer fees. The other two contingent fee cases before the Court also involveemployment claims. In the Banaitis case, the 9th Circuit ruled thatbecause of Oregon law giving lawyers a property interest in theircontingent fees, plaintiff Sigitas Banaitis did not have to report astaxable income the $3.8 million contingent fee that he paid his lawyerout of an $8.7 million damage award against Mitsubishi Bank. In the Freeman case, petitioner Jack Freeman challenges another 9thCircuit ruling, this one unpublished, that sided with the government andordered him to pay taxes on the $199,642 paid to his lawyer out of a$300,000 award he won for wrongful discharge. The government asks theCourt to delay ruling on both the Freeman and Banaitis cases pending itsdecision in the Banks case. OTHER CASES UP FOR REVIEW March 26:EUR Small v. United States, No. 03-750. Whether a criminal conviction ina foreign court can be used as the predicate for U.S. prosecution undera law that bars firearm use by felons. � EUR Smith v. Jackson, Miss., No. 03-1160. Whether disparate impactclaims are valid under the Age Discrimination in Employment Act. April 2:EUR Newdunn Associates LLP v. Army Corps of Engineers, No. 03-637 (and03-701). Whether Clean Water Act jurisdiction over “navigable waters”extends to wetlands that are not adjacent to open waters, but whoserainwater runoff sometimes reaches distant navigable waters. � EUR Halliburton Energy Services Inc. v. BJ Services Co., No. 03-1025.Whether a jury determination of patent indefiniteness deserves deferencein patent claim interpretations. � EUR Owner-Operator Independent Drivers Association Inc. v. New PrimeInc., No. 03-1044. Standards for class certification in class actions. � EUR St. Vincent Medical Center v. Service Employees International Union,No. 03-1083. Whether a labor union may require private arbitration ofobjections to a National Labor Relations Board-conducted representationelection when the outcome has already been certified by the NLRB. This column seeks to identify cases on the Supreme Court’s conferenceagenda that are leading candidates for review or that raise significantnational issues. Thomas Goldstein of D.C.’s Goldstein & Howe selectscases from petitions filed based on several factors, including whetherlower courts have split on the issues presented. He does not otherwiseparticipate in the preparation of this column. Goldstein & Howe iscounsel for petitioners in Smith v. Jackson, Miss. , No. 03-1160.

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