543 U.S. 426 (2005) (U.S. Supreme Court)
Commissioner v. Banks is a foundational Supreme Court decision at the intersection of federal income tax and civil litigation practice.
When a litigant's recovery constitutes income, must the litigant include in gross income the portion of the recovery that is paid to the litigant's attorney under a contingent-fee agreement?
Gross income under Internal Revenue Code section 61(a) includes all income from whatever source derived. Under the anticipatory assignment-of-income doctrine (e.g., Lucas v. Earl; Helvering v. Horst), a taxpayer cannot exclude income by assigning to another the right to receive it when the taxpayer retains control over, or originates, the income-producing asset. In the litigation context, the cause of action is the income-producing asset, and the attorney, retained by the plaintiff, functions as the plaintiff's agent. Therefore, when a recovery constitutes income, the entire recovery is includible in the plaintiff's gross income, including any contingent attorney's fees paid directly to the attorney. State law characterizations, such as attorney liens or purported property interests in the recovery, do not alter this federal income tax result.
Yes. When a litigant's recovery constitutes income, the litigant's gross income includes the portion paid to the attorney under a contingent-fee agreement.
Banks is a cornerstone case for understanding how the federal income tax reaches litigation recoveries and how the assignment-of-income doctrine operates across substantive areas. For law students, it illustrates the primacy of federal tax principles over state-law labels, the agency rationale in attributing income, and the Code's preference to address litigation costs through deductions rather than exclusions. Practically, the decision affects how plaintiffs and counsel structure engagements and settlements, how they report recoveries, and how they evaluate after-tax outcomes. It also provides doctrinal context for subsequent congressional action granting above-the-line deductions for attorney's fees in certain enumerated claims and underscores that any broader relief must come from statute, not judicial exception.