Commissioner v. Banks, 543 U.S. 426 (2005)

In the case of **Commissioner v. Banks**, John W. Banks, II was terminated from his position as an educational consultant with the California Department of Education in 1986. Following his dismissal, he engaged an attorney under a contingent-fee arrangement to pursue a civil lawsuit against his employer, claiming employment discrimination under various federal and state statutes. The case was eventually settled for $464,000 after trial proceedings began in 1990, with Banks paying $150,000 to his attorney as per their agreement. Notably, Banks did not report any of the settlement amount as gross income on his federal tax return for the year 1990. The procedural history leading to the Supreme Court involved the differing interpretations of tax law regarding contingent-fee arrangements across various circuit courts. The Court of Appeals for the Sixth Circuit ruled in favor of Banks, concluding that the portion of the settlement paid to his attorney should not be included in his gross income. Conversely, the Ninth Circuit, in the case of Sigitai J. Banaitis, held that such payments could be excluded from income if state law conferred a special property interest to the attorney. These conflicting decisions among the circuits prompted the Supreme Court to grant certiorari to resolve the issue. The broader context of this case revolves around the interpretation of the Internal Revenue Code concerning what constitutes taxable income, particularly in the context of legal settlements and contingent-fee agreements. The case highlights a significant divide in judicial opinion on whether the entire amount received in a settlement, including attorney fees, should be considered income for the plaintiff, thereby impacting how such settlements are reported for tax purposes.

Whether the portion of a money judgment or settlement paid to a plaintiff’s attorney under a contingent-fee agreement is considered income to the plaintiff under the Internal Revenue Code.

The judgments of the Courts of Appeals for the Sixth and Ninth Circuits are reversed, and the cases are remanded for further proceedings consistent with this opinion.