John W. Banks, Ii v. Commissioner of Internal Revenue

*The Honorable David M. Lawson, United States District Judge for
the Eastern D istrict of M ichigan, sitting by designation.
1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2003 FED App. 0347P (6th Cir.)
File Name: 03a0347p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
JOHN W. BANKS, II,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellee.
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Nos. 01-2171/2177
On Appeal from the United States Tax Court.
No. 18097-97—David Laro, Tax Court Judge.
Argued: March 12, 2003
Decided and Filed: September 30, 2003
Before: MOORE and CLAY, Circuit Judges; LAWSON,
District Judge.*
2 Banks v. Comm’r Nos. 01-2171/2177
_________________
COUNSEL
ARGUED: James R. Carty, MECKLER, BULGER &
TILSON, Chicago, Illinois, for Appellant. Kenneth W.
Rosenberg, UNITED STATES DEPARTMENT OF
JUSTICE, APPELLATE SECTION, TAX DIVISION,
Washington, D.C., for Appellee. ON BRIEF: James R.
Carty, MECKLER, BULGER & TILSON, Chicago, Illinois,
Roger J. Jones, Russell R. Young, MAYER, BROWN,
ROWE & MAW, Chicago, Illinois, for Appellant. Richard
Farber, John A. Nolet, UNITED STATES DEPARTMENT
OF JUSTICE, APPELLATE SECTION, TAX DIVISION,
Washington, D.C., for Appellee.
CLAY, J., delivered the opinion of the court, in which
LAWSON, D. J., joined. MOORE, J. (pp. 29-30), delivered
a separate opinion concurring in part and dissenting in part.
_________________
OPINION
_________________
CLAY, Circuit Judge. This is a consolidated appeal from
a decision of the United States Tax Court. In Case Nos. 01-
2171 and 01-2177, Petitioner John W. Banks, II appeals from
the tax court’s decision in favor of the Commissioner of
Internal Revenue finding, inter alia, deficiencies in
Petitioner’s income tax due for the taxable year 1990 in the
amount of $99,068.00. In an accompanying memorandum
opinion, the tax court ruled, inter alia, that (1) Petitioner
could not exclude from gross income money he received
pursuant to an out-of-court settlement, including the portion
thereof his attorney had received as a contingency fee; and
(2) Petitioner was not entitled to an income tax deduction in
the taxable year 1990 for payments made to his former spouse
as part of their divorce settlement. See Banks v. Comm’r, 81

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Nos. 01-2171/2177 Banks v. Comm’r 3
T.C.M. (CCH) 1219, 2001 WL 196751, 2001 Tax Ct. Memo
LEXIS 68 (Feb. 28, 2001). We AFFIRM in part and
REVERSE in part the tax court’s decision.
I. FACTUAL BACKGROUND
A. Petitioner’s California Federal Court Lawsuit and
Settlement
Petitioner worked as an educational consultant with the
California Department of Education (“CDOE”) from 1972 to
1986, when he was terminated. In response to his
termination, Petitioner filed a civil action against the CDOE
(and various past and present employees therein) in the
federal district court for the Eastern District of California.
Petitioner’s second amended complaint alleged six counts.
Counts 1, 2, and 3 alleged employment discrimination in
violation of 42 U.S.C. §§ 1981 and 1983; Title VII of the
Civil Rights Act of 1964, as amended, 42 U.S.C. §§ 2000e to
2000e-17 (2000); and California Government Code § 12965,
respectively. Counts 4, 5, and 6 asserted state law tort claims;
specifically, Count 4 alleged intentional infliction of
emotional distress, and Counts 5 and 6 alleged slander.
Petitioner’s lawsuit sought general damages, future medical
and hospital expenses, punitive and exemplary damages, back
pay and related employee benefits, various injunctions, and
attorney’s fees. In bringing the lawsuit Petitioner retained an
attorney who agreed to represent Petitioner pursuant to a
contingency fee agreement.
Settlement attempts failed, and Petitioner’s case proceeded
toward trial. The district court entered a final pretrial
conference order on September 22, 1989. Under the
“Abandoned Issues” section, the pretrial order stated,
“[Petitioner] has abandoned all claims for damages relative to
state tort claims, including a claim for intentional and
negligent imposition of emotional distress, tortious
interference with business relations, and defamation.” (J.A.
at 148.) Thus, according to the pretrial order, Petitioner
4 Banks v. Comm’r Nos. 01-2171/2177
1The phrasing of this issue fairly represents the language of § 1983,
which provides that “[e]very person who , under color of any statute,
ordinance, regulation, custom, or usage, of any State or Territory or the
District of Columbia, subjects, or causes to be subjected, any citizen of the
United States or other person within the jurisdiction thereof to the
deprivation of any rights, privileges, or immunities secured by the
Constitution and laws, shall be liable to the party injured in an action at
law, suit in equity, or other proper proceeding for redress.” 42 U.S.C.
§ 1983.
abandoned Counts 4, 5, and 6 of the second amended
complaint, leaving the remaining claims (by process of
elimination) as Counts 1, 2, and 3, i.e., the violations of Title
VII, 42 U.S.C. § 1981, and 42 U.S.C. § 1983. The fact that
the §§ 1981 and 1983 claims were still being litigated was
evidenced elsewhere in the order, both in the “Points of Law”
section (where the district court directed the parties to brief
“[t]he elements, standards and burdens of proof relative to”
§§ 1981 and 1983 claims) (J.A. at 147-48), and in the
“Disputed Factual Issues” section (which includes the issue
of “[w]hether the defendants acted under color of state law to
deprive [Petitioner] of his rights, privileges and immunities
secured by the Constitution by engaging in discriminatory
practices”).1 (J.A. at 141-42.) Abandoning counts 4, 5, and
6, in itself, did not eliminate any of the forms of relief
Petitioner originally had requested in his second amended
complaint. However, the “Relief Sought” section of the
pretrial order indicated the following: “[Petitioner] seeks
only reinstatement, back pay, and attorneys’ fees.” (J.A. at
147.) The limitation on relief sought was also confirmed in
the part of the pretrial order calling for a non-jury trial:
“Although plaintiff had heretofore demanded a jury trial, he
concedes that since he now seeks only back pay and equitable
relief, a jury trial is not appropriate.” (J.A. at 132) (emphasis
added).
Petitioner’s trial commenced, and nine days into the trial,
at the court’s urging, the parties held a settlement conference.
Testimony at the tax court trial from Petitioner’s attorney in

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Nos. 01-2171/2177 Banks v. Comm’r 5
the California federal court action, as well as a letter from
Petitioner to an Internal Revenue Service (“IRS”) agent,
indicated that Petitioner had initially requested $850,000
during settlement discussions, and that he and his attorney
had arrived at that proposed settlement figure based on
Petitioner’s salary. The defendants countered with an offer of
$464,000, apparently arguing that Petitioner should take less
money because he could designate the amount as personal
injury damages and render it non-taxable. Petitioner and his
attorney agreed to the $464,000 settlement amount, so long as
it could be characterized in the settlement agreement as
compensation for personal injury damages. However,
Petitioner’s attorney testified at the tax court trial that he
warned Petitioner that although the settlement agreement
could characterize the $464,000 proceeds as personal injury
damages, there was no guarantee that the IRS would
subsequently agree to this characterization.
On May 30, 1990, Petitioner and the CDOE entered into an
agreement that settled all of Petitioner’s outstanding claims
for $464,000. The agreement provided, in part, as follows:
1. The [CDOE] agrees object [sic] to pay to
[Petitioner] of the sum of $464,000.00 in full and
complete satisfaction of his claims. [Petitioner]
characterizes this payment of $464,000.00 as
payment for personal injury damages suffered after
[Petitioner’s] discharge on July 14, 1986.
(J.A. at 159.) Of this $464,000, Petitioner paid $150,000 to
his attorney in fees, pursuant to the contingency fee
arrangement between them. Petitioner did not include any of
the $464,000 settlement proceeds as gross income on his 1990
federal income tax return.
6 Banks v. Comm’r Nos. 01-2171/2177
B. Petitioner’s Alimony Payment to His Former Spouse
and Deduction
On November 1, 1984, the marriage of Petitioner and his
first wife, Verna Banks, was dissolved. In adjudicating the
impending dissolution, the California Superior Court issued
an order, dated January 2, 1984, declaring that Verna Banks
was entitled to 43.95% of Petitioner’s gross monthly military
retirement payments. Pursuant to this order, Petitioner began
making payments to Verna Banks, but the payments did not
start until 1987 and only constituted 43.95% of Petitioner’s
net, rather than gross, retirement payments. Consequently,
arrears immediately began to accrue to Verna Banks. On
April 6, 1988 and December 4, 1989, Verna Banks obtained
orders for the arrearage, plus attorney’s fees, and she later
returned to court to enforce the orders in 1990. On October
30, 1990, the California Superior Court, taking note of
Petitioner’s recent out-of-court settlement with the CDOE,
ordered Petitioner to pay Verna Banks $12,156.81 out of the
$464,000 settlement proceeds from the civil lawsuit Petitioner
had filed in federal district court in California. The court
further ordered Petitioner to place an additional $20,000, plus
$3,850 in attorney’s fees, in an interest-bearing account until
Petitioner began to make timely payments to Verna. The
amounts the court ordered Petitioner to pay totaled
$36,006.81.
In 1990, Petitioner paid $72,013.62 (double the $36,006.81
of the court’s order in lieu of posting an appellate bond) into
California Superior Court and filed several appeals, all of
which ultimately proved unsuccessful. Eventually, Verna
Banks agreed to receive Petitioner’s $72,013 deposit in
satisfaction of all arrears (except for $45,987 in arrears
Petitioner owed Verna from 1979 to 1986). The court
transferred the $72,013.62 to Verna in 1993, and Petitioner
deducted the $72,013.62 in the 1993 tax year as an alimony
payment deduction. However, at the tax court trial Petitioner
argued that he was entitled to claim that deduction for the
1990 tax year.

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Nos. 01-2171/2177 Banks v. Comm’r 7
2The Notice actually determined deficiencies for three tax years:
1988, 1990, and 1991. However, only tax year 19 90 is at issue in this
app eal.
C. The Commissioner’s Notices of Deficiency and the
Tax Court’s Decision
On May 30, 1997, the Commissioner issued a Notice of
Deficiency to Petitioner for the tax year ending December 31,
1990,2 in the amount of $101,168.00. Petitioner filed a
petition in the tax court, requesting a redetermination of the
deficiencies. The cases were consolidated, and the matter
proceeded to trial.
On February 28, 2001, the tax court filed a Memorandum
Findings of Fact and Opinion (“tax court opinion” or
“opinion”). For purposes of this appeal, the tax court opinion
made three relevant rulings. First, it determined that the
entire $464,000 amount Petitioner received in settlement of
his California federal court lawsuit constituted taxable income
because, contrary to Petitioner’s arguments, none of the
settlement amount was attributable to a claim of personal
injury. Second, the tax court determined that the $150,000
Petitioner had paid out of the $464,000 settlement amount to
his lawyer as an attorney contingency fee was not excludable
from income. Third, the tax court agreed with Petitioner that
an alimony payment to Verna Banks could have been
deducted from his gross income for the 1990 tax year, but it
further held that Petitioner was now precluded by the “duty of
consistency” doctrine from taking the deduction.
Consequently, the tax court held Petitioner liable for taxes
on the full $464,000 settlement amount, and it disallowed any
relevant deductions therefrom. A decision embodying these
8 Banks v. Comm’r Nos. 01-2171/2177
3Pursuant to these rulings (and other rulings which neither side
appealed), the tax court ruled that there existed a deficiency for
Petitioner’s 1990 tax year in the amount of $99,068.000.
three rulings was entered on May 21, 2001.3 Petitioner’s
timely appeal followed.
II. STANDARD OF REVIEW
We review the tax court’s legal conclusions de novo and its
factual findings for clear error. Zack v. Comm’r, 291 F.3d
407, 412 (6th Cir. 2002) (citing MTS Int’l, Inc. v. Comm’r,
169 F.3d 1018, 1021 (6th Cir. 1999)). We will conclude that
a factual finding is clearly erroneous only if, upon our review
of the entire record, we are “left with the definite and firm
conviction that a mistake has been committed.” Id. (quoting
Sanford v. Harvard Indus., Inc., 262 F.3d 590, 595 (6th Cir.
2001)) (internal quotation marks omitted).
III. ANALYSIS
A. Whether the Amount Paid in Settlement of
Petitioner’s Lawsuit was Attributable to a Claim of
Personal Injury.
Petitioner challenges on appeal the tax court’s ruling that
the $464,000 he received in settling his California federal
civil action was not excludable from income under Internal
Revenue Code § 104(a), 26 U.S.C. § 104(a). Specifically,
Petitioner argues that the tax court erred in determining that
no portion of the $464,000 settlement amount was attributable
to personal injuries he alleged in that lawsuit. We are not
persuaded by Petitioner’s arguments and therefore affirm the
tax court as to this issue.
Section 61 of the Internal Revenue Code states that
“[e]xcept as otherwise provided in this subtitle, gross income
means all income from whatever source derived.” 26 U.S.C.
§ 61(a). In determining what constitutes gross income, we

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Nos. 01-2171/2177 Banks v. Comm’r 9
4Section 104(a)(2) was amende d in 1996 to limit exclusions from
income for personal injuries or sickness to physical injuries or sickness.
See Sma ll Business Job Protection Act of 1996, Pub. L. No. 104-188,
§ 1605 (a), 110 Stat. 17 55, 1 838 . However, because P etitioner’s lawsuit
settlement occu rred prior to the passage of this amendment, this new
limitation on § 104 (a)(2) does not apply here. See G reer, 207 F.3d at 328.
construe § 61 “liberally ‘in recognition of the intention of
Congress to tax all gains except those specifically
exempted.’” Greer v. United States, 207 F.3d 322, 326 (6th
Cir. 2000) (quoting Comm’r v. Glenshaw Glass Co., 348 U.S.
426, 430 (1955)).
Nevertheless, the Internal Revenue Code provides for a
number of exclusions from income. One of these exclusions
is found in § 104(a)(2), which permitted a taxpayer to exclude
from income “the amount of any damages received (whether
by suit or agreement and whether as lump sums or as periodic
payments) on account of personal injuries or sickness.”
26 U.S.C. § 104(a)(2).4 Damages received “on account of
personal injuries” are to be distinguished from those received
on account of back pay damages, for which no exclusion from
income exists. Comm’r v. Schleier, 515 U.S. 323, 329-30
(1995).
The Supreme Court has held that a § 104(a) exclusion is
warranted only where a two-prong test has been satisfied.
First, the taxpayer must have received the damages amount
through the litigation of an action (or a settlement thereof)
based on tort or tort-type rights. Second, the amount must be
paid on account of personal injuries or sickness. Schleier,
515 U.S. at 337. Moreover, regarding the second prong, a
taxpayer must present “concrete evidence demonstrating the
precise causal connection between” the taxpayer’s asserted
personal injuries and the settlement payment he or she
received. Greer, 207 F.3d at 334. More recently, we
“disaggregate[d]” the Schleier two-prong test into “its
disparate elements,” as follows:
10 Banks v. Comm’r Nos. 01-2171/2177
To satisfy Schleier, the taxpayer must show that (1) there
was an underlying claim sounding in tort; (2) the claim
existed at the time of the settlement; (3) the claim
encompassed personal injuries; and (4) the agreement
was executed “in lieu” of the prosecution of the tort
claim and “on account of” the personal injury.
Id. at 327.
Turning our attention to the first prong of the Schleier test,
we observe that the proper inquiry “focus[es] on the origin
and characteristics of the claims settled in determining
whether such damages are excludible under § 104(a)(2).” Id.
(quoting Pipitone v. United States, 180 F.3d 859, 862 (7th
Cir. 1999)). A relevant aspect of this inquiry requires us to
consider whether the claim at issue provides for remedies that
“recompense [a plaintiff] for any of the . . . traditional harms
associated with personal injury, such as pain and suffering,
emotional distress, harm to reputation, or other consequential
damages,” i.e., remedies other than economic damages. See
United States v. Burke, 504 U.S. 229, 239 (1992). Because
Petitioner abandoned the state tort claims prior to trial, the
relevant claims to examine in this case are Counts 1 through
3 of Petitioner’s second amended complaint, which represent
Petitioner’s claims brought under Title VII, 42 U.S.C. § 1981,
and 42 U.S.C. § 1983.
Applying this analysis, we agree with the Commissioner
and the tax court that Petitioner’s Title VII claim does not
constitute “an underlying claim sounding in tort” for purposes
of § 104(a)(2). Greer, 207 F.3d at 327. The Supreme Court
has held that Title VII, at the time of Petitioner’s civil lawsuit,
“focuse[d] on legal injuries of an economic character,” given
that its “sole remedial focus [wa]s the award of back wages,”
and therefore did not “redress[] a tort-like personal injury
within the meaning of § 104(a)(2) and the applicable
regulations.” Burke, 504 U.S. at 239, 241. It is true that
Congress amended Title VII in 1991 to provide Title VII
plaintiffs with additional monetary relief beyond back pay.

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Nos. 01-2171/2177 Banks v. Comm’r 11
5Although Burke’s authority has been questioned since the
amendm ents to Title VII, its authority as to pre-1991 Title VII claims
seems to be intact. See, e.g., Abram s v. Lightolier Inc., 50 F.3d 1204,
1220 (3d Cir. 1995) (“We note that amendments to Title VII made by the
Civil Rights Act of 1991 allow a plaintiff to recover compensatory and
punitive damages and thus throw doubt on the continued validity of the
Burke holding.”) (emphasis added).
6Several other circuits have held that § 1983 actions are tort actions
within the meaning o f § 104 (a)(2). See Wulf v. City of Wichita, 883 F.2d
842, 872 -73 (10th Cir.1989) (holding that the settlement proceeds of the
taxpayer’s § 1983 civil action compensated him for personal injuries and
was excludable under § 104(a)(2)); Metzger v. Com m’r, 88 T.C. 834
(1987), aff’d, 845 F.2d 1013 (3d Cir. 1988) (holding that claims under 42
U.S.C. §§ 1981 and 1983, among others, constituted “personal injury”
claims within the meaning of § 104(a)(2)); Bent v. Com m’r, 835 F.2d 67,
70 (3d Cir. 1987) (holding that the portion of the taxpayer’s damages
award pertaining to his § 1983 claim compensated him for his personal
injuries and could prope rly be excluded under § 104(a)(2)).
See Civil Rights Act of 1991, Pub. L. No. 102-166, § 102,
105 Stat. 1071, 1072-74 (1991) (codified at 42 U.S.C.
§ 1981a). However, Petitioner had sued the CDOE under the
old version of Title VII (“pre-1991 Title VII”), and Burke
directly controls the applicability of § 104(a)(2) to pre-Title
VII damages. Id.5
Petitioner alternatively argues that his §§ 1981 and 1983
claims provide the requisite tort or tort-like claims on which
to base his § 104(a)(2) exclusion. We agree with Petitioner.
The Supreme Court has indicated (albeit in the statute of
limitations, not the § 104(a)(2), context) that § 1983 claims
constitute tort or tort-like actions. See Wilson v. Garcia, 471
U.S. 261, 280 (1985) (holding that § 1983 claims “are best
characterized as personal injury actions”); see also City of
Monterey v. Del Monte Dunes at Monterey, Ltd., 526 U.S.
687, 724-25 (1999) (Scalia, J., concurring in part and
concurring in the judgment) (applying Wilson’s rule to a
Seventh Amendment inquiry).6 Furthermore, although the
Supreme Court has not expressly designated § 1981 as
12 Banks v. Comm’r Nos. 01-2171/2177
constituting a tort or tort-like action, the Court strongly hinted
in its Burke decision that it deemed § 1981 to fit into this
category. See Burke, 504 U.S. at 240 (observing that the
remedies available under pre-1991 Title VII “st[ood] in
marked contrast not only to those available under traditional
tort law, but under other federal antidiscrimination statutes,”
for instance § 1981, which offered as potential remedies “both
equitable and legal relief, including compensatory and, under
certain circumstances, punitive damages”).
The tax court had rejected Petitioner’s alternative argument.
Although the court conceded that § 1981 and 1983 claims
constitute tort or tort-like actions, it found that, based on the
district court’s pretrial order entered in connection with his
lawsuit against the CDOE, Petitioner had abandoned all of his
tort claims, including the §§ 1981 and 1983 claims. The tax
court therefore concluded that Petitioner’s §§ 1981 and 1983
claims could not provide a basis for a § 104 exclusion because
such claims did not exist at the time of settlement, as required
by prong two of the § 104 analysis. Petitioner points to
several places in the pretrial order as proof that, contrary to
any ambiguous abandonment language in the pretrial order,
his §§ 1981 and 1983 claims were pursued at trial and were
in existence at the time of the parties’ settlement in 1990.
We agree with Petitioner that the tax court erred in
determining that Petitioner had abandoned his 42 U.S.C.
§§ 1981 and 1983 actions. Both the “Points of Law” and the
“Disputed Factual Issues” sections of the pretrial order
indicated that issues related to §§ 1981 and 1983 causes of
action were still being litigated. Therefore, Petitioner
satisfied his burden regarding prong one, because he had
litigated a claim sounding in tort, to wit, the §§ 1981 and
1983 claims. Similarly, Petitioner also satisfied prong
number two because his §§ 1981 and 1983 claims existed at
the time he settled his case with the CDOE, and the $464,000
amount he received was in settlement of those claims.

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Nos. 01-2171/2177 Banks v. Comm’r 13
As to the third prong, we find that Petitioner’s §§ 1981 and
1983 claims “potentially involved injuries that were
personal.” Greer, 207 F.3d at 328. As we have previously
observed, §§ 1981 and 1983 claims can encompass such
personal injuries as mental anguish, damage to character, or
damage to a personal or professional reputation, id.
(collecting cases), and these types of tangible and intangible
harms were contemplated by § 104(a)(2) at the time that
Petitioner’s settlement agreement was executed. Petitioner
specifically requested in his second amended complaint,
among other forms of relief, general damages (for harassment,
humiliation, and embarrassment suffered by Plaintiff), and
future medical and hospital expenses. Any relief granted for
these harms Plaintiff suffered could fairly be construed as
compensating personal injuries within the meaning of
§ 104(a)(2). See id.
However, we find that Petitioner failed to meet his burden
to show that the settlement agreement was executed “on
account of personal injuries or sickness.” Greer, 207 F.3d at
334 (quoting Schleier, 515 U.S. at 330) (internal quotation
marks omitted). Our inquiry in this regard requires us to
examine the settlement agreement’s purpose and, absent a
clear purpose, the payor’s intent in settling the claims. Greer,
207 F.3d at 329 (citations omitted). A determination
regarding a payor’s intent requires us to “consider[] the
amount paid, compar[e] the circumstances and amount paid
to other agreements the company has entered into, consider[]
the factual circumstances that led to the agreement, and
weigh[] other facts that may reveal the employer’s intent.”
Greer, 207 F.3d at 329 (citing Pipitone, 180 F.3d at 864-65).
In support of his contention that he satisfied the burdens set
forth under the third and fourth prongs, Petitioner points to
language in the settlement agreement, to wit, “[Petitioner]
characterizes this payment of $464,000.00 as payment for
personal injury damages suffered after [Petitioner’s] discharge
on July 14, 1986.” (J.A. at 159.) The tax court rejected this
language as self-serving and contradicted by other evidence
14 Banks v. Comm’r Nos. 01-2171/2177
in the record. Petitioner argues that the tax court clearly erred
in failing to give appropriate weight to the characterization in
the settlement agreement.
We agree with Petitioner that language in a settlement
agreement can offer some probative evidence of how a
settlement payment should properly be characterized for
purposes of § 104(a)(2). See, e.g., Bent v. Comm’r, 87 T.C.
236, 246 (1986), aff’d, 835 F.2d 67, 70 (3d Cir. 1987).
However, in this case the settlement agreement did not
attempt to assess the damages of the lawsuit and allocate
Petitioner’s recovery accordingly. See Robinson v. Comm’r,
102 T.C. 116, 128-29 (1994) (rejecting a settlement
agreement’s characterization of the settlement amount, which
allocated 95% to mental anguish and 5% to lost profits, as
“uncontested, nonadversarial, and entirely tax-motivated” and
not accurately “reflect[ing] the realities of . . . [the parties’]
settlement”). In the present case, Petitioner can point to no
other evidence in the record that supports his characterization
of the settlement payment. For instance, his second amended
complaint sought general damages for future (presumably,
anticipated) medical and hospital expenses, but at the time of
settlement he offered no receipts or other information
indicating that he had suffered medical expenses or intended
to do so in the near future. Similarly, there is nothing in the
record to reflect a numerical value Petitioner placed on his
mental anguish. Indeed, the settlement agreement does not
even indicate the CDOE’s intent in paying the settlement
amount; the agreement merely indicates that Petitioner
characterizes the $464,000 payment as compensating him for
personal injuries. The only intent on CDOE’s part reflected
in the record is its intent to dispose of the case in an
expeditious manner and a willingness to acquiesce in
Petitioner’s tax-favorable characterization of the settlement
proceeds. Petitioner’s characterization of his own settlement
payment, with no further support in the settlement agreement
or elsewhere record, cannot control the issue.

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Nos. 01-2171/2177 Banks v. Comm’r 15
Not only does Petitioner fail to point to any evidence in the
record to support his characterization of the $464,000
settlement payment, the record contains several indicia
tending to contradict Petitioner’s characterization. In
particular, the pretrial order pertaining to Petitioner’s
California federal court lawsuit stated that the only “[r]elief
[s]ought” at trial was “reinstatement, back pay, and attorneys’
fees.” (J.A. at 147.) This would suggest that the claim, at
least at the time of settlement, no longer encompassed
personal injuries, and that the settlement agreement was
executed on account of non-personal injuries, to wit,
economic injuries. Moreover, testimony from Petitioner’s
lawyer, as well as a letter from Petitioner to an IRS agent,
indicated that Petitioner offered to settle for $850,000, a
figure he computed based on salary, which represents
economic damages as opposed to personal injuries. Petitioner
nevertheless agreed to the defendants’ counteroffer of
$464,000, so long as he could characterize the payment
amount in the settlement agreement as covering personal
injuries. Based on the evidence favoring the Commissioner,
the tax court’s finding on this point was not clearly erroneous,
and we decline to overturn it.
We agree with the Commissioner that the 1990 settlement
of Petitioner’s California federal court action against the
CDOE and other defendants for $464,000 does not fall under
the § 104(a)(2) exclusion from income. Although some of
Petitioner’s claims, at the time of the settlement, were “based
upon tort or tort type rights,” Schleier, 515 U.S. at 337,
Petitioner failed to meet his burden of showing that his
§§ 1981 and 1983 claims were settled on account of his
personal injuries. Specifically, Petitioner has not met his
burden of establishing a causal connection between his
$464,000 settlement payment and any personal injuries he
may have suffered. Because the settlement amount could not
be excluded under § 104(a)(2), it was properly included as
income under 26 U.S.C. § 61(a). We therefore affirm the tax
court’s determination on this issue.
16 Banks v. Comm’r Nos. 01-2171/2177
7The Fifth, Sixth, and E leventh Circuits have held that contingency
fees are exclud able. See Foster v. U nited States, 249 F.3d 1275 (11th Cir.
2001); Srivastava v. Com m’r, 220 F.3d 353 (5th C ir. 200 0); Estate of
Clarks v. United States, 202 F.3d 8 54 (6th Cir. 2000). T he Third, Fourth,
Seventh, Ninth, Tenth, and Federal Circuits have taken the opposite view.
See Cam pbell v. Co mm ’r, 274 F.3d 1312 (10th Cir. 200 1); Kenseth v.
Com m’r, 259 F.3d 881 (7th Cir. 2001); Young v. Com m’r, 240 F.3d 369
(4th Cir. 200 1); Benci-Woo dwa rd v. Comm ’r, 219 F.3d 9 41 (9th Cir.
2000); Coa dy v. Co mm ’r, 213 F.3d 118 7 (9th Cir. 2000 ); Baylin v. United
States, 43 F.3d 1451 (Fed . Cir. 19 95); O’B rien v. Com m’r, 38 T.C. 707
(1962), aff’d, 319 F.2d 5 32 (3d C ir. 1963) (per curiam).
B. Whether the Portion of Petitioner’s Lawsuit
Settlement Paid to His Attorney Under a Contingency
Fee Arrangement was Excludable from Income.
Next, Petitioner argues that the tax court erred in holding
that the $150,000 in contingency fees he paid to his attorney
as part of the California federal court settlement was not
excludable from his gross income. Petitioner specifically
contends that the tax court’s ruling in this regard contravened
our precedent. The Commissioner argues that the tax court
acknowledged our precedent but properly distinguished it
based on differing facts. We agree with Petitioner and reverse
the tax court’s determination as to this issue.
There is a circuit split on the issue of whether contingency
fees must be included in gross income.7 The Commissioner
has always taken the position that contingency fees must be
included, based on the anticipatory assignment of income
doctrine. This theory is most typically exemplified in two
Supreme Court cases: Lucas v. Earl, 281 U.S. 111 (1930),
and Helvering v. Horst, 311 U.S. 112 (1940). In Lucas, the
taxpayer assigned one-half of his future salary to his wife to
avoid paying taxes on the entire salary, and argued in
litigation that because he had never actually received the
income before distributing it to his wife, it was not income to
him. The Supreme Court disagreed, reasoning that because
the taxpayer had earned and created the right to receive and
enjoy the benefit of the income before assigning it, he was

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subject to taxation on the entire salary. 281 U.S. at 114-15.
The Court further emphasized that the fundamental purpose
of the tax code–to tax income to those who create, earn and
enjoy it– “could not be escaped by anticipatory arrangements
and contracts however skilfully devised to prevent the salary
when paid from vesting even for a second in the man who
earned it.” Id. at 115. Thus, the Court declined to honor
attempts to attribute fruits “to a different tree from that on
which they grew” and held the entire salary, not just half,
constituted taxable income to the taxpayer. Id.
Similarly, in Horst, the taxpayer owned negotiable bonds.
Shortly before their maturity date, he removed the interest
coupons from the bonds and gave them to his son, who
subsequently collected interest on them. 311 U.S. at 114.
During litigation, the taxpayer argued that the interest
payments were not taxable to him because he never received
the interest payments. Again, the Supreme Court disagreed.
Observing that “[t]he dominant purpose of the revenue laws
is the taxation of income to those who earn or otherwise
create the right to receive it and enjoy the benefit of it when
paid,” it concluded that the tax established by the 1934
Revenue Act could not “fairly be interpreted as not applying
to income derived from interest or compensation when he
who is entitled to receive it makes use of his power to dispose
of it in procuring satisfactions which he would otherwise
procure only by the use of the money when received.” Id. at
119 (alterations in original). Therefore, the Court reasoned,
because the taxpayer had earned and created the right to
receive and enjoy the benefit of the income by virtue of the
fact that he owned the bonds and the interest generated
therefrom was guaranteed to him when he transferred the
coupons, the income could fairly be attributed to him for
taxation purposes. Id. at 117-20. Again reasoning that “the
fruit is not to be attributed to a different tree from that on
which it grew,” id. at 120 (citing Lucas, 281 U.S. 115), the
Court held that the transferred coupons constituted taxable
income to the taxpayer. Id.
18 Banks v. Comm’r Nos. 01-2171/2177
Nevertheless, the first case to address the tax treatment of
contingency fee arrangements declined to apply the
assignment of income doctrine to contingency fee payments.
In Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959),
following a successful Alabama court lawsuit to enforce a
contract, the taxpayer paid her legal counsel a portion of the
judgment award, pursuant to a contingency fee arrangement
between them. The Commissioner subsequently treated the
taxpayer’s entire judgment award, including the contingency
fee portion, as taxable income and assessed tax deficiencies
accordingly. The court held that the contingency fee portion
of the judgment award was not income to the taxpayer. In
concluding that the anticipatory assignment of income
doctrine did not apply to the contingency fee the taxpayer
paid to her legal counsel, the Cotnam court looked to
Alabama’s attorney’s lien statute, which at the time provided
that
[u]pon suits, judgments, and decrees for money,
[attorneys] shall have a lien superior to all liens but tax
liens, and no person shall be at liberty to satisfy said suit,
judgment or decree, until the lien or claim of the attorney
for his fees is fully satisfied; and attorneys at law shall
have the same right and power over said suits, judgments
and decrees, to enforce their liens, as their clients had or
may have for the amount due thereon to them.
Id. at 125 n.5 (citing Ala. Code § 64 (1940)). In other words,
the Cotnam court reasoned, the statute provided an attorney
with an equitable lien that effectively transferred part of the
taxpayer’s claim to the attorney. The practical consequence
of Alabama’s attorney’s lien law was that an attorney in
Alabama held an equity interest in both the cause of action
and the judgment, and the taxpayer, as the client, was
precluded from ever realizing income on that percentage of
the judgment representing the contingency fee.
The Cotnam court declined to apply the anticipatory
assignment of income doctrine, noting that, unlike the

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circumstances in Lucas and Horst, the attorneys’ claim to
payment lacked fair market value and that it was uncertain as
to when or whether the attorneys’ claim would attain value
(given that contingency fees are only paid in the event of a
successful outcome of the taxpayer’s lawsuit). Indeed, the
court noted, the claim was “worthless without the aid of
skillful attorneys.” Id. at 125. Therefore, the Cotnam court
concluded, because (1) the contingency fee never passed
through the taxpayer’s hands or was controlled by the
taxpayer, and (2) only the attorney’s services resulted in
converting the uncertain claim into an item of value, the
taxpayer properly excluded the contingency fee portion of his
judgment from his income. Id. at 127.
We adopted the Cotnam doctrine in Estate of Clarks v.
United States, 202 F.3d 854 (6th Cir. 2000). In that case, the
taxpayer received a jury award in a Michigan state court
personal injury suit, and the attorney received one-third of the
judgment award and interest as a contingency fee. The
taxpayer soon thereafter died, and the estate, when filing the
taxpayer’s income tax return, properly included in gross
income the interest portion of the judgment, but excluded the
portion of the amount contingency fee attributable to interest.
Id. at 855. In holding that the exclusion was proper, we
rejected the Commissioner’s position for reasons similar to
those articulated in Cotnam. First, we pointed out that
Michigan’s attorney lien law operates in essentially the same
way as the Alabama statutory lien examined in Cotnam, and
essentially amounted to an assignment of a portion of the
potential judgment. The record had indicated that the client
originally owned the underlying claim but then relinquished
his right to receive payment for the lawyer’s contingency fee
portion of any judgment upon signing the contingency fee
contract.
Like the Cotnam court, we then proceeded to reject the
anticipatory assignment of income doctrine as applied to
contingency fees. In distinguishing the Earl and Horst
decisions, we reasoned that a contingency fee, as part of a
20 Banks v. Comm’r Nos. 01-2171/2177
litigation claim, was not already earned, vested, or even
relatively certain to be paid to the assignor, but instead was
merely “an intangible, contingent expectancy,” dependent
upon the attorney’s skills to realize any value from it. Id. at
857. We then compared the contingency fee arrangement to
a division of property:
Here the client as assignor has transferred some of the
trees in his orchard, not merely the fruit from the trees.
The lawyer has become a tenant in common of the
orchard owner and must cultivate and care for and
harvest the fruit of the entire tract. Here the lawyer’s
income is the result of his own personal skill and
judgment, not the skill or largess of a family member
who wants to split his income to avoid taxation. The
income should be charged to the one who earned it and
received it, not . . . to one who neither received it nor
earned it.
Id. at 858.
We then distinguished Earl and Horst on three additional
grounds. First, unlike the true income assignments in Earl
and Horst, no tax avoidance purpose motivated the
contingency fee arrangement; rather a business purpose
motivated it. Id. at 858. Second, unlike the Earl and Horst
assignees who performed no services to earn their income, the
attorney earned his income because the income resulted from
his own skill and judgment. We also were motivated by the
fact that applying the assignment of income doctrine to
contingency fees would result in double taxation, whereas in
Earl and Horst, the assignees could exclude what they
received as gifts. Id. at 857, 858.
In the instant case, the tax court acknowledged the Estate
of Clarks decision but distinguished it on the grounds that
Petitioner’s underlying lawsuit, from which his attorney’s
contingency fee was generated, took place in California.
California’s law on attorneys’ contingency fees, unlike

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Nos. 01-2171/2177 Banks v. Comm’r 21
Alabama’s law, does not operate under a lien theory. Rather,
California’s lien statute confers no ownership interest on
attorneys, and “[c]ontingent fee contracts ‘do not operate to
transfer a part of the cause of action to the attorney but only
give him a lien upon his client's recovery.’” Benci-
Woodward, 219 F.3d at 943 (citations omitted). Thus, in
California an attorney who is entitled to a contingency fee
“acquires no more than a professional interest,”id., and is no
different from an ordinary creditor who, if “stiffed” on his
payment, would have to enforce the contract judicially. On
appeal, Petitioner urges this Court not to draw distinctions
based on the lien theory of the particular state in which an
action arises. We agree with Petitioner.
We find persuasive the reasoning of the Fifth Circuit, which
recently faced similar factual circumstances. In Srivastava v.
Comm’r, 220 F.3d 353, 363-64 (5th Cir. 2000), the
Commissioner argued that Cotnam was not controlling
because the taxpayer’s contingency fee agreement was
controlled by Texas law, and Texas’ attorney’s lien statute did
not provide attorneys with a superior claim lien against their
clients’ judgments or any ownership interests. The Srivastava
court declined to distinguish Cotnam based on the differing
state attorney’s lien laws, instead determining that “the
answer [as to whether to apply Cotnam] does not depend on
the intricacies of an attorney’s bundle of rights against the
opposing party under the law of the governing state.” Id. at
364. We likewise are not inclined to draw distinctions
between contingency fees based on the attorney’s lien law of
the state in which the fee originated. Given the various
distinctions among attorney’s lien laws among the fifty states,
such a “state-by-state” approach would not provide reliable
precedent regarding our adherence to the Cotnam doctrine or
provide sufficient notice to taxpayers as to our tax treatment
of contingency-based attorneys fees paid from their respective
jury awards. Cf. O’Brien v. Comm’r, 38 T.C. 707, 712
(1962), aff’d, 319 F.2d 532 (3d Cir. 1963) (per curiam)
(rejecting distinctions in applying the Cotnam doctrine, based
upon differing state attorney’s lien laws because it doubted
22 Banks v. Comm’r Nos. 01-2171/2177
“that the Internal Revenue Code was intended to turn upon
such refinements”).
More importantly, the reasoning in Estate of Clarks case
seems to have been based on more than the nature of
Michigan’s lien law. To be sure, the similarity between
Michigan’s attorney’s lien statute in Estate of Clarks and
Alabama’s attorney’s lien statute in Cotnam played a role in
the outcome. Estate of Clarks, 202 F.3d at 856. However,
we found other factors persuasive in distinguishing
contingency fees from Lucas and Horst, including the
following: (1) the fact that the claim, at the time the
contingency fee agreement was signed, was “an intangible,
contingent expectancy,” (2) taxpayer’s claim was like a
partnership or joint venture in which the taxpayer assigned
away one-third in hope of recovering two-thirds; (3) no tax-
avoidance purpose was at work with the contingency fee
arrangement, as there ostensibly was in Lucas and Horst; and
(4) double taxation would otherwise result by including the
contingency fee in taxpayer’s income. Id. at 857-58.
The Estate of Clarks holding does not primarily rest on the
rationale that separate state lien laws governing attorneys’
rights determine the correct characterization of an attorney
contingency fee. We therefore hold that Estate of Clarks is
controlling in the present case, notwithstanding the difference
in Michigan’s and California’s respective attorney’s lien laws.
In so holding, we will follow our precedent without protracted
inquiries into “the intricacies of an attorney’s bundle of
rights.” Srivastava, 220 F.3d at 364. The nature of
Petitioner’s attorney’s rights notwithstanding, the facts of this
case are within the scope Estate of Clarks contemplated: By
signing the contingency fee agreement, Petitioner transferred
some of the trees from the orchard, rather than simply
transferring some of the orchard’s fruit. Estate of Clarks, 202
F.3d at 858.
We therefore hold that Estate of Clarks is not
distinguishable based on the distinctions between California’s

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Nos. 01-2171/2177 Banks v. Comm’r 23
8Section 461 provides a deduction for p ayment of alimony.
Specifically, § 461 (f) provides that where the alimony pa yment is a
“contested liability,” then a transfer o f such co ntested funds is deductible
if the following four criteria are me t: (1) taxpayer contests an asserted
liability, (2) he transfers money or other property to provide for the
satisfaction of such liability, (3) the contested nature of the liability still
exists after the transfer has been completed, and (4) but for the fact that
the asserted liability is contes ted, a deduction would be allowed in the
taxable year of the transfer. 26 U.S.C. § 46 1(f).
attorney’s lien law and Michigan’s lien law. Thus, consistent
with our prior precedent in Estate of Clarks, we hold that the
$150,000 Petitioner paid in contingency fees to his attorney
is excludable from his gross income. Because the tax court
erred in determining that the $150,000 was not excludable, we
reverse the tax court as to this issue.
C. Whether the Tax Court Properly Denied Petitioner’s
1990 Alimony Deduction Pursuant to the “Duty of
Consistency” Doctrine.
Finally, Petitioner appeals the tax court’s ruling regarding
the deductibility of his alimony payments. At trial, Petitioner
had sought to claim as a deduction for the 1990 tax year the
$72,013.62 alimony payment he made to Verna Banks. He
had argued that although he took the deduction in 1993 (when
the California Superior Court had transferred the funds to
Verna), because he had paid the funds into court in 1990 he
should have taken the deduction then, pursuant to § 461(f) of
the Internal Revenue Code, 26 U.S.C. § 461(f).8 In denying
Petitioner the deduction, the tax court had agreed with
Petitioner that an alimony deduction would properly have
been taken in 1990. However, the tax court continued,
because the Commissioner was now precluded by the § 6501
statute of limitations from adjusting Petitioner’s 1993 tax
year, the duty of consistency doctrine prevented Petitioner
from “taking one position on one tax return and a contrary
position on another return for which the limitation period has
run.” 81 T.C.M. (CCH) 1219, 2001 Tax Ct. Memo LEXIS
24 Banks v. Comm’r Nos. 01-2171/2177
68, at *29. On appeal, Petitioner asserts that this ruling was
erroneous as a matter of law. Because the tax court failed to
follow our precedent as to the “duty of consistency” rule, we
reverse the tax court’s ruling with respect to this issue and
remand for further consideration.
The “‘duty of consistency’ rule prevents a taxpayer who has
already had the advantage of a past misrepresentation–in a
year now closed to review by the government–from changing
his position and, by claiming he should have paid more tax
before, avoiding the present tax.” Lewis v. Comm’r, 18 F.3d
20, 26 (1st Cir. 1994) (citing Beltzer v. United States, 495
F.2d 211, 212-13 (8th Cir. 1974)). When this situation arises,
“the Commissioner may act as if the previous representation,
on which he relied, continued to be true, even if it is not. The
taxpayer is estopped to assert the contrary.” Eagan v. United
States, 80 F.3d 13, 17 (1st Cir. 1996). The rule’s purpose is
to “preclude[] parties from ‘playing fast and loose with the
courts’” by taking a position in a given tax year, then taking
a contrary position once the statute of limitations has run on
that taxable year. Estate of Ashman v. Comm’r, 231 F.3d 541,
543 (9th Cir. 2000) (quoting Russell v. Rolfs, 893 F.2d 1033,
1037 (9th Cir. 1990)).
The controlling case on this doctrine is Crosley Corp. v.
United States, 229 F.2d 376 (6th Cir. 1956), which instructs
that for the “duty of consistency” doctrine to apply,
the taxpayer by his conduct must knowingly make a
representation or conceal a material fact which he intends
or expects will be acted upon by taxing officials in
determining his tax, and the true or concealed material
facts are unknown to the taxing officials or they lack
equal means of knowledge with the taxpayer, and act on
his representation or concealment, and to retrace their
steps on a different state of facts would cause loss of
taxes to the Government. A material factor is the
availability of the necessary facts to the parties involved.

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Nos. 01-2171/2177 Banks v. Comm’r 25
9Other circuits similarly have required that evidence of a
misrepresentation be presented in order for the duty of consistency
doctrine to apply. See, e.g., Ea gan , 80 F.3d at 17 (“The duty of
consistency arises when the following elements are present: ‘(1) a
representation or report by the taxpayer; (2) on which the Commissioner
has relied; a nd (3) an attempt by the taxpayer after the statute of
limitations has run to change the previous representation or to
recharacterize the situation in such a way as to harm the Commissioner.’”)
(quoting Herring ton v. Co mm ’r, 854 F.2d 755 , 758 (5th Cir. 198 8)).
Id. at 380-81. Additionally, “[e]stoppel is an affirmative
defense and the burden of proof is on the person asserting it.”
Id. at 381 (citing Helvering v. Brooklyn City R.R. Co., 72 F.2d
274, 275 (2d Cir. 1934)). In Crosley, the taxpayer had
erroneously deducted certain expenses over one year, instead
of capitalizing them over two years. He therefore filed a
claim for refund with respect to the lost year. Id. at 378. The
district court granted summary judgment in favor of the
government based on the duty of consistency doctrine. We
reversed, noting that “[t]here was no misrepresentation of any
fact by the taxpayer,” id. at 381, and that, “[u]nder the facts
which were known to the Commissioner, or were readily
available to him, it was a question of law whether the
deduction was properly taken in 1939 or should have been
treated as a capital expenditure. A mutual mistake of law on
the part of the taxpayer and the Commissioner in treating it as
a cost of manufacturing does not create an estoppel.” Id. We
therefore reversed the judgment and remanded for further
proceedings. Id. 9
The Crosley case controls the present matter and mandates
a reversal of the tax court’s finding on this issue. We note
that the tax court made no finding that Petitioner engaged in
a misrepresentation, as Crosley requires. Moreover, as
Petitioner correctly asserts, his mistake in taking the alimony
deduction in 1993 instead of 1990 was a mistake of law, not
of fact. Finally, there is an open issue as to whether the
Commissioner had the same facts on hand as did Petitioner
when he took the § 461 deduction in 1993. The tax court
26 Banks v. Comm’r Nos. 01-2171/2177
made no findings as to these issues. Instead, it declared that
because 1993 was a closed tax year and the circumstances
satisfied all the elements of the “duty of consistency” rule,
Petitioner was precluded from arguing the deductibility of the
alimony payment as to the 1990 tax year. However, aside
from noting that 1993 was a closed tax year, the court did not
address the other elements of the “duty of consistency” rule
as articulated in Crosley, most particularly our requirement
that Petitioner seeks to make a contrary factual representation,
as opposed to correcting an earlier erroneous interpretation of
the law. Thus, it appears that the tax court was applying a
standard other than the standard established by Crosley.
Application of a rule contrary to our own is erroneous,
because the tax court is bound to follow Sixth Circuit
precedent. See Golsen v. Comm’r, 54 T.C. 742, 756-57
(1970), aff’d, 445 F.2d 985 (10th Cir. 1971). We therefore
hold that the tax court must reconsider this issue in light of
our precedent in Crosley.
The Commissioner invites us to affirm the tax court’s
denial of a § 461 deduction to Petitioner on the alternative
ground that Petitioner failed to establish on the record that his
$72,013 payment constituted alimony within the meaning of
§ 71(b). The Commissioner argues that Petitioner failed to
meet the § 71 standard because the record indicates that
Petitioner’s payments were for Verna’s divisible community
property share of Petitioner’s military retirement benefits, and
that this really was “a non-deductible division of community
property between the divorced spouses.” (Commissioner’s
Br. at 45.) The Commissioner adds that the $72,013
represented security for satisfaction of the arrears on Verna’s
payments, but also attorney’s fees, which are not deductible.
We decline the Commissioner’s invitation. First of all, it
does not appear that the Commissioner contested at the tax
court trial the issue of whether Petitioner’s $72,013 payment
to his former spouse constituted alimony within the meaning
of § 71. Moreover, although the tax court indicated that
Petitioner should have taken the § 461 deduction in 1990 as

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Nos. 01-2171/2177 Banks v. Comm’r 27
opposed to 1993, the tax court did not elaborate on the
analysis, and in particular the tax court offered no detailed
discussion as to whether the $72,013 payment constituted
alimony within the meaning of § 71, as required by § 461.
Therefore, while the Commissioner may be correct as to the
proper characterization of the $72,013 payment, it is not clear
on the present record whether the tax court made a specific
factual finding as to whether Petitioner’s $72,013 payment
constituted § 71 alimony, or whether the court was assuming
arguendo that the $72,013 payment constituted alimony for
purposes of rejecting Petitioner’s argument based on the
“duty of consistency” doctrine. Further, it is not clear on this
record whether such a finding was erroneous, if indeed the tax
court made such a finding. We are not inclined, on this
limited record, to determine the character of the $72,013
payment or the propriety of a § 461 deduction
(notwithstanding the “duty of consistency” doctrine) in
reviewing the tax court’s ultimate resolution of the issue.
Because the tax court did not follow our precedent in
Crosley in determining that the doctrine of consistency
applies, we reverse the tax court’s denial of the § 461
deduction Petitioner seeks. However, on remand, the tax
court, if it deems appropriate, may revisit the issue of whether
the $72,013 payment constituted alimony within the meaning
of § 71. In making this determination, the court may consider
any new evidence the Commissioner or Petitioner wishes to
present on the issue.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM the tax court’s
decision that Petitioner’s California federal court suit
settlement proceeds were not excludable from gross income
under 26 U.S.C. § 104. However, we REVERSE the tax
court’s determination that the contingency fees Petitioner paid
to his attorney constituted taxable income, and we
REVERSE the tax court’s ruling that Petitioner could not
deduct his alimony payments for the 1990 taxable year based
28 Banks v. Comm’r Nos. 01-2171/2177
on the “duty of consistency” doctrine. We REMAND this
case to the tax court for further consideration consistent with
this opinion.

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Nos. 01-2171/2177 Banks v. Comm’r 29
______________________________________________
CONCURRING IN PART, DISSENTING IN PART
______________________________________________
KAREN NELSON MOORE, Circuit Judge, concurring in
part and dissenting in part. Although I agree with much of
the majority’s thoughtful opinion, I write separately to
express my disagreement regarding the contingency-fee issue.
As the majority holds, we are bound by our circuit’s recent
decision in Estate of Clarks v. United States, 202 F.3d 854
(6th Cir. 2000), which held that the lawyer’s contingency fee
operated as a lien on the client’s recovery that under
Michigan law transferred part of the ownership of the client’s
claim to the attorney, such that the client never realized
income on the contingency-fee part of the judgment. We are
dealing here, however, not with Michigan law but with
California law regarding the characterization of the lawyer’s
contingency-fee interest in taxpayer Banks’s employment-
related claim. California’s law has been authoritatively and
persuasively construed by a panel of the Ninth Circuit in
Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir.
2000), which held that, “[u]nder California law, an attorney
lien does not confer any ownership interest upon attorneys or
grant attorneys any right and power over the suits, judgments,
or decrees of their clients.” Id. at 943 (relying on Isrin v.
Superior Court, 403 P.2d 728, 732, 733 (Cal. 1965)).
California law, as explained by the California Supreme Court
and the Ninth Circuit, clearly treats the attorney’s
contingency-fee contract as simply a security interest and not
as an ownership interest. Thus I would affirm the Tax
Court’s ruling here that the proceeds the taxpayer paid to his
attorney as a contingency fee should be included in the
taxpayer’s income. See also Srivastava v. Commissioner, 220
F.3d 353, 367-69 (5th Cir. 2000) (Dennis, J., dissenting).
Regarding the issue of the deductibility of the taxpayer’s
payments to his ex-wife and the duty of consistency, I do not
30 Banks v. Comm’r Nos. 01-2171/2177
disagree with the majority’s assessment that the Tax Court
did not appear to apply our half-century-old case, Crosley
Corp. v. United States, 229 F.2d 376 (6th Cir. 1956), and that
the Tax Court did not appear to make any relevant factual
findings. Therefore I do not disagree with remanding this
issue to the Tax Court for further proceedings. I note that this
case seems to me to be one where the duty of consistency
applies, because the taxpayer has unique knowledge regarding
the nature and timing of his payments for his ex-wife, such
that he should not be able to take one position on one tax
return and a diametrically opposite position on another return
on which the statute of limitations has run against the
government. I suggest that in revisiting this issue, the Tax
Court is free to determine whether there was a representation
by the taxpayer as well as to evaluate the other requirements
that comprise our version of the duty of consistency. I agree
with the majority that on remand the Tax Court also may
address the underlying question whether the payment even
constituted § 71 alimony at all.
Finally, I concur fully in the majority’s determinations that
the taxpayer’s characterization of the settlement proceeds as
payment for personal injuries is worth no weight and that the
Tax Court properly determined that no portion of the
settlement amount was attributable to personal injuries.

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