Sometimes Hoary Cases Are Better Than None
To the Editor:
Since the publication of my recent article "Always Address Tax Issues
in Settlement Agreements," Tax Notes, Apr. 17, 2000, p. 409, I have considered
further the perennial assignment of income doctrine, and a few of the authorities
that I cite. It was brought to my attention that there are some interesting
issues about the hoary assignment of income cases that I don't address,
particularly the distinction between Lucas v. Earl, 281 U.S. 111 (1930),
and some of the cases that follow the classic income tax cases. Of course,
(as I pointed out, and as the Sixth Circuit in Estate of Clarks pointed
out), the assignment of income in Lucas (and in Helvering v. Horst, 311
U.S. 112 (1940), too) came after the taxpayer earned the right to receive
the income.
I agree that maybe these aren't the best cases for the government
to be citing. Specifically, instead of comparing the facts in Estate of
Clarks with the Lucas and Horst assignment of income cases, maybe the partnership
authorities -- specifically the Campbell case -- would be more appropriate
for the government to argue.
The theory that many plaintiff's lawyers espouse (whether after filing
a tax lien, drafting a belated amendment, drafting a particularly aggressive
fee agreement, drafting a settlement agreement that purports to shift the
burden of the payment for the plaintiff's attorneys' fees to the defendant
directly, and any number of other devices, all boils down to "we're in
this together." The income is not earned, the Sixth Circuit in Estate of
Clarks ruled, until the case is resolved.
The Lucas and Horst cases may indeed not be the best vehicle for
analyzing this particular situation. Still, taxpayer victories like Estate
of Clarks have to be nurtured, watered frequently, given fertilizer, and
allowed to flourish.
As a mere tax practitioner (and not an academic), I have seen way
too many taxpayers receive a settlement that they find largely eviscerated
by attorneys' fees and taxes. Sometimes the taxes, especially because of
the taxes on attorneys' fees, are larger than they need or ought to be.
When added to the taxes they pay on the underlying settlement they receive,
it is possible for a client to receive a tax bill that is larger than the
total amount of the net settlement they receive. Under anyone's tax system,
this should not be possible ("How can I be taxed on two dollars, when I
got only one?"). Yet there it is.
In short, there may be some inconsistencies in the application of
the assignment of income doctrine in the Estate of Clarks case, and probably
in my most recent article, too. Yet I still think it is laudable that several
circuit courts now have stepped up to the plate, even if some argue they
did it ineffectually, to try to stop what I believe is an egregious situation.
Very truly yours,
Robert W. Wood
Sometimes Hoary Cases Are Better Than None, Vol. 87, No. 5,
Tax Notes (May 1, 2000), p. 711.
Robert W. Wood, P.C.
San Francisco
April 21, 2000