James T. Sinyard Monique T. Sinyard v. Commissioner of Internal Revenue
268 F.3d 756
9th Cir.
2001
Check Treatment
Docket

*1 record.”), aff'd, 931 F.2d 51 (3d Cir.1991)

(unpublished disposition).

Finally, bankruptcy Beal that the argues finding principles

court erred in that the estoppel precluded

waiver Beal

applying the default interest rate to the Because,

matured loans. like the district

court, plain language we conclude that the precluded contract the default inter- applying

est rate from to the matured

loans, we need not reach the issues of estoppel.

waiver and

AFFIRMED. SINYARD; Monique T.

James Sinyard,

T. Petitioners-

Appellants,

COMMISSIONER OF INTERNAL

REVENUE, Respondent-

Appellee.

No. 99-71369. Appeals,

United States Court of

Ninth Circuit.

Argued and Submitted March Sept.

Filed Boyd,

Thomas H. Winthrop & Wein- stine, P.A., Paul, Minnesota, St. for the petitioners. *2 Employment Equal Farber, April In Richard Junghans, Paula M. EEOC) (the in- Commission Opportunity States Rosenberg, United W.

and Kenneth settled. the suits were In Division, tervened. Justice, Tax of Department full “in and pay million to agreed IDS $35 respondent. D.C., for the Washington, as de- all claims complete settlement and the exhibits Agreement in this scribed be made “to hereto”; was to payment Taylor, Mervyn plaintiffs, 32 individual Weinstine, P.A., at- their- Winthrop & and dis- deducting costs and torneys.” After McKEOWN, NOONAN, and individu- the 32 million Before: of $1.7 bursements LAW, Judges. allocate one-third agreed Circuit to WARD al as amount settlement remaining total NOONAN; Dissent Judge Opinion plain- injuries to the for tort compensation McKEOWN by Judge tiffs, one-third of settlement allocate to wages, for lost compensation as amount NOONAN, Judge: Circuit of the settlement “allocate one-third and to Monique wife and his Sinyard pur- T. attorneys’ fees James amount for judg- (the appeal the 626(b) Sinyards) 29 U.S.C. § T. and 29 U.S.C. suant to defi- determining a Tax Court 216(b).” attor- ment to agreed § IDS the taxable tax for income in their to ciency allocated plus amounts neys’ fees lia- taxpayer’s At issue is the “directly 1992. to Win- year disbursements costs and to pursuant paid attorneys’ bility Weinstine, P.A., for an account or to throp & the settlement approving to with- agreed court order by them.” IDS designated Age brought on the two class actions income taxes and state hold federal Act Employment was allo- Discrimination which settlement one-third Holding seq. § et ADEA), 29 U.S.C. lost wages. for compensation cated as be- taxpayer’s paid that such fees various to undertake agreed also IDS taxpayer, we affirm half are income with the compliance its to ensure measures the Tax Court. judgment of all ADEA, training sessions as such make supervisors,

managers and FACTS any as to the EEOC reports regular retired, resigned, manager who division Sinyard was James In the 1980’s terminated. had been demoted or had been Mobile, Alabama of manager division personnel all IDS to instruct agreed IDS (IDS). Services, Inc. Financial IDS avoiding age dis- importance of about allegedly he was age at the and, to avoid in particular, crimination 1989, Sinyard resign. March forced or “new as blood” code of such words use IDS against action suits two class joined hand, or “over one turks” on the “young other torts. alleging age discrimination times,” on the or “behind the hill” agreement into an Sinyard entered was agreement The settlement other. counsel, Winthrop & Wein- action class court. by the upon approval contingent “In event recov- stine, providing: district the federal August On paid will be Winthrop & Weinstine ery, ap- pending which suits court in you obtain (jé) amount third one order and issued the the settlement proved jury or lawsuit, by settlement whether one-third allocating parties by the drafted award.” “attorneys’ Income, of the settlement to fees recov- Gross leaving a deduction of 626(b) $240,984 erable to 29 U.S.C. attorneys’ for the fees. The full 216(b),” U.S.C. to be directly amount of this deduction could not be tak- taxes, without withholding Winthrop en because the Sinyards’ income was sub- *3 & Weinstine. ject to the Alternative Minimum Tax AMT). The result was the deficiency up- settlement, In accordance by held the Tax Court. proceeds were allocated as follows: Total settlement payment Sinyards appeal. The $35,000,000 Less costs and disbursements 1,500,000 $ Net settlement proceeds $33,500,000 ANALYSIS Allocation of net proceeds: settlement (¡6) Attorneys’ $11,166,666.65 debt, If A B owes a pays and C damages Tort $12,616,666.70 behalf, debt on A’s wages elementary it is Lost that $11,166,666.65 payment C’s A income to as well as to B. a single IDS issued Winthrop check to & Here, James had contracted to $23,783,333.36, Weinstine for the sum of pay Winthrop & Weinstine one-third damages tort attorneys’ and the fees. might what he in receive settlement. His The check deposited was in a trust account obligation to the firm law was satisfied by on behalf of plaintiffs. the class action The payment

IDS. was therefore income to PROCEEDINGS him. “The by a discharge person third an equivalent to him is to re The Commissioner Internal Revenue ceipt by person taxed.” Old Colony assessed a deficiency Commissioner, Trust Co. v. 279 U.S. tax return. They petitioned the Tax Court (1929). 73 L.Ed. 918 deny the deficiency. The case was tried on stipulated facts. October 1998 the Sinyards The maintain their case is dif- Tax Court Commissioner, sustained the ferent. It is A one where B owes but C is holding that portion liable to B for the same debt and indeed is legal Winthrop fees to & Weinstine had primarily liable. When C satisfies his obli- satisfied an obligation of Sinyard. James gation B, C’s payment arguably should not be treated as income to A. In the The amount received by settlement present case, IDS became liable to him that is not in dispute now was as attorneys’ fees. It by did so virtue of the follows: order of the court confirming the settle- 273,673 wages $ taxable back 164,144 taxable tort ment and ordering perform IDS to accord- 109,429 personal injury damages nontaxable ing to its terms. IDS primarily became 547,146 $ liable for the debt to Winthrop & Wein- stine. addition, When discharged IDS $63,152 debt it fees and costs of was bound pay, Sinyards say were they allocated to personal the nontaxed received no income. injury damages by agreement with the Commissioner excluded from income. Sinyards The have reports scoured the

The Commissioner maintains to find cases supporting their contention. $252,608in attorneys’ fees should be found, treat- they What have example, are a ed as income Sinyards. corporation’s Com- arrangement pay make missioner held this amount allowable as a preserve franchise, ments to its Tucker v. miscellaneous itemized Commissioner, deduction. This 226 F.2d 177 Cir. trust, deduction was 1955); Adjusted reduced 2% of a in lieu of alimony, Stern v. (2d case, Cir.1943); Sinyards Commissioner, our bound them F.2d 43 pay Winthrop selves to & Weinstine one- suit corporation’s settlement they third of what received. When IDS v. Com- taxpayer, Ruben affecting also (8th Cir.1938). obligation, Sinyards satisfied this missioner, 97 F.2d they so much the richer. That never laid peculiar to them- These cases rest facts money paid lawyers on the hands selves, from very different contexts does not obliterate their constructive re Al- fee-shifting statute. provided by ceipt. Sinyards are therefore liable note, there are Sinyards as the though, deficiency resulting work enacted hundred such statutes several ings AMT. Benci-Woodward present precedent they no Congress, Commissioner, 219 F.3d 941 Cir. *4 obligation to the where the shift denied, 1112, 2000), cert 531 121 S.Ct. U.S. the lawyer’s the client to de- lawyer from 855, (2001); 770 Coady 148 L.Ed.2d v. the client from the fendant has relieved Cir.2000), Commissioner, 213 F.3d 1187 receipt of income when his constructive — denied, -, rt. U.S. 121 obligation lawyer to the satisfied. ce (2001). 1604, 149 S.Ct. L.Ed.2d 470 Indeed, Sinyards’ arguments Sinyards suggest The that the ADEA is prior contrary are case law many fee-shifting different statutes. of the ADEA statute. plain language history The ADEA legislative shows ADEA, attorney’s fees are Under plaintiffs an intent to make the whole. plaintiffs, not prevailing available to remedy The Fair Standards Act Labor 626(b) § 29 plaintiffs counsel. U.S.C. requires incorporated into the ADEA provisions per (expressly incorporating judgment provide for the attorney’s fees the Fair taining to “in attorneys’ damages. addition” to 216(b)); Act, § Labor Standards 29 U.S.C. 216(b). § 29 U.S.C. D., 717, 475 U.S. 730- see Evans Jeff These observations do not alter (1986) 1531, 106 89 L.Ed.2d 747 S.Ct. analysis of the tax law. The ADEA does (holding Congress expected while fee injured plaintiff The at make the whole. shifting competent attract counsel to compensa torneys’ fees are addition to represent deprived citizens their civil impact tax tion for what he lost. The upon fee rights, it did not bestow awards attorneys’ from the Alter fees arises attorneys). Supreme As the held Court Tax. its limita native Minimum Without brought civil under 42 rights case tion, attorneys’ fees would be income party, § “it is the rather U.S.C. Sinyards, and the income would be to the lawyer” eligible than the who is for fees wiped the total re out deduction of Venegas v. fee-shifting under the statute. It The anoma ceived. would be wash. Mitchell, 82, 87, 495 U.S. unintended, result, arises lous no doubt (1990); City 74 109 L.Ed.2d Gilbrook part when of the deduction is blocked Westminster, 177 F.3d 874-75 change think we can the AMT. We do not awards (recognizing that fee be rules tax in order to the basic of income long prevailing party to the under civil Benci-Woodward, this result. See correct statute, 1988); Image rights U.S.C. 219 F.3d at 944. Tech, Co., Serv., Inc. v. Kodak Eastman (hold (9th Cir.1998) fallback ar Sinyards have two The first is that James attorney guments. under the ing that fees awarded when made was a resident of Alabama he Clayton Act should be suc itself). firm. the law Under the contract with party cessful Alabama law a contingent agreement fee court to Sinyards’ attorney under the establishes a lien on lawyer’s recovery, fee-shifting provision Age Discrimi- and the fee has been held to be not income in Employment (ADEA), nation Act taxpayer. Cotnam v. Commission seq., U.S.C. 621 et is taxable to the er, (5th Cir.1959). 263 F.2d We Sinyards as income. This unfortunate re- dispute not do old Fifth Circuit’s state sult appears to be at express odds law, ment of Alabama but we do not see statutory language, provides which how the existence hen favor fee award is “in addition” to taxpayer’s creditor makes the satisfaction plaintiffs recovery, and with the intent any debt less income to the taxpayer statute, which plain- is to make the whose is satisfied. Like the Tax tiff whole. Because majority’s conclu- Court, we decline to follow Cotnam. sion fails to account for the effect of the argument second is the ADEA’s fee-shifting provision, I respect- settlement achieved more than money fully dissent. plaintiffs. from the individual As private attorneys general re- I. The Effect Of The ADEA practice

formed the and culture of IDS. *5 The lion’s share of the lawsuit was work view, In my the issue is by resolved by done the they brought counsel into the interpretation application of the stat- Hence, case. some of the attorneys’ fees analysis ute. The starts and ends with the should not be allocated to the individual language of the ADEA. The ADEA incor- plaintiffs. argument has two weak- porates the fee-shifting provision of the First, nesses. it ignores the part EEOC’s Act, Fair Labor Standards see 29 U.S.C. in the Second, settlement. the contract 626(b), which states “[t]he court ... Sinyard between and the law firm makes shall, in addition to any judgment awarded him liable for one-third of the fees without plaintiff to the plaintiffs, or allow a reason- regard beyond to what monetary else dam- attorney’s able fee to paid by be the defen- ages is achieved. dant,” 216(b). §id. possible It is that where monetary re- case, In this as previously we deter covery is little or nonexistent an ADEA mined, attorney’s “the case, paid fees the settle attorneys’ fee award would leave ment the Sinyards’ of lawsuit taxpayer the were owing more award any- tax than by ed the court thing he received in his ADEA suit. This ADEA.” Commissioner, not is the v. case. The remedy for No. 99-71369 2001) (order). such (Apr. unfairness it when does occur lies That say, is to the Congress with specifically fee exempting arose by operation of the ADEA damages it exempted as has per- itself; fee-shifting statute the fees were sonal injury damages; or the whole issue part settlement, not nor they could be avoided by Congress redesigning simply a percentage a judgment. of computation the permit of the AMT to the respect, this the case before us differs full deduction of attorneys’ fees. from the cases that we previously have cases, decided. reasons,

For the those foregoing we were the faced judgment with Tax settlement agreement Court a is AFFIRMED. or a judg ment in favor plaintiff, portion a McKEOWN, Circuit Judge, dissenting: which plaintiff paid then to the attor The majority concludes that statutory ney pursuant to a contingent-fee agree fee, attorney’s by See, awarded the district e.g., ment. Benci-Woodward v. Com- separately Cir.2000) are treated attorney’s fees (9th missioner, F.3d 941 is approach This itself.2 contingency judgment award (punitive Commissioner, to en- design ADEA’s v. Coady consistent agreement); fee Cir.2000) ter- (9th (wrongful “made party prevailing F.3d sure trial following bench FLSA, in- judgment “Congress mination Under whole.” also see agreement); fee contingency should employee wronged that the tended Commissioner, 259 F.3d Kenseth penalty plus wages full his receive (settlement age 882-83 expense incurring any without fee contingency suit and discrimination Dize, Maddrix or costs.” fees circumstances Under the agreement). Cir.1946). in- received cases, has plaintiff these mandatory settlement), Moreover, are fees those or judgment come (“[t]he ... ... including shall id. court obligation, entire amount which— taxable attorney added)), the stat- which paid to portion (emphasis allow” —-is defen- plaintiff. upon directly imposed has ute must itself defendant dant. pur- attorney’s fees In contrast any fees, regardless fee, have plaintiffs we which contingent suant to a to his may plaintiff state have governed obligation that to be held previously the defendant’s Consequently, text law,1 here guided attorney. we are sepa- statutory, two provides discharges statute ADEA. The First, is the there recovery. contractual, rate forms burden. anot or awarded “judgment aas mistaken this Thus, describe it is 216(b). Separate, 29 U.S.C. plaintiffs.” B owes plaintiff] “A [the in which situation recov- to” “in *6 and addition debt, defen- [the and C attorney] a [her allow a ... ... shall court ery, “[t]he Ma- behalf.” 'A’s the debt on pays dant] by the paid be fee to attorney’s reasonable an accu- were that 13741. If statute, Op. at jority the the under Id. So defendant.” they as cause of action in the ership disagree. interest majority and I point, the this 1. On ” (emphasis Michigan .... and that state in Alabama conclude do appears to majority added)). taxability a contrac the law is irrelevant Majority attorney’s fee. tually-determined clearly rely on precedents Our Op. at 13743. ex language, I statutory relying this on 2. tax the to determine state operation law lax treat appropriate opinion on the press no judgment portion of the that treatment under attorney’s fees awarded ment Benci- attorney. See paid to the ultimately Rights language of the Civil slightly different ("The question Woodward, at 942 219 F.3d Act, U.S.C. 42 Attorney’s Awards Fees may taxpayers ex is whether before us specifies 1988(b). Although that statute portion of gross income clude from "the awarded attorney's are to be fees that at by their retained award punitive con although in other party,” and prevailing agree contingent fee pursuant to a torney it suggested that has Supreme Court texts and is no dictated answer is ment. The control who retains party prevailing is Although Coa- Coady .... case our recent 1988, see pursuant fees awarded over under attorney lien analysis anof dy involved 87-88, 82, Mitchell, 110 U.S. 495 Venegas v. law, Cali same is the the result Alaska (1990); 1679, Evans 74 L.Ed.2d 109 S.Ct. ("In light law.”); 943 id. at see also fornia 1531, 730-31, 106 S.Ct. U.S. Jeff D., 475 law....”); at Coady, F.3d 213 California (1986), is not statute that 747 89 L.Ed.2d Com ("This [v. Cotnam is case unlike 1190 Indeed, address cases those us here. before Cir.1959)] (5th missioner, and F.2d 119 263 con in a different decided ing § 1988 States, 202 Clarks United [Estate of resolu over law, namely, client control under Alaska ] because text— tion of case. own- superior or lien have attorneys do not description, suits) rate the majority is of course discrimination did not receive con- correct that the in exchange sideration paying defendant the Sin- yards’ attorneys. so, C to Had it attorney would done then the plain B be taxable to might situation different: be would Earl, tiff A We as Lucas v. income. 281 U.S. (that interpret is, the contract the settle- (1930). 74 L.Ed. 781 agreement) ment Sinyards between Here, defendant satisfy C does not a debt IDS; determine whether the A; rather, plaintiff behalf of C satisfies attorneys already had a stake the funds its own statutory obligation, imposed IDS; paid by consider effect of the the ADEA. law, relevant state supra see note 1. But Indeed, the FLSA-based award is the that is not the case us. before After the exclusive basis fees and supercedes Sinyards lawsuit, IDS their settled arrangements. alternative fee See United district court taxed attorney’s against fees State, Tile & Composition Roofers, Damp paid IDS. When IDS those fees to the Waterproof & Workers Ass’n. Local No. Sinyards’ attorneys, satisfied IDS its own 307 v. G & M Roofing Co., & Sheet Metal statutory obligation. Old Colony inap- Cir.1984) (“The 732 F.2d fact posite. that the plaintiff has entered into an Thus, I conclude that agreement with the lawyers prosecuting awarded to the ADEA’s fee-shift- the case impact does not on the statutory ing provision are not taxable as income to ”). burden of employer.... In this Sinyards. sense, then, Sinyards quite are right that their Equities distinguishable case is from Old II. Colony Trust Commissioner, Co. v. resolved, With analysis I

U.S. (1929). 73 L.Ed. S.Ct. pause to note inequitable result case, that venerable Supreme Court befalls in certain of these cases. considered the plight tax of the estate of The taxation to a of attorney’s Wood, William president fees, combined operation Ameri with the can Company. (AMT), Woolen Alternative Minimum part As Tax some- Wood’s times leaves a compensation, victorious rights plain- civil Company had *7 tiff awith net after-tax loss. For instance: income tax due on Wood’s salary. Id. at If the ratio of attorney’s fees to question presented 499. The entire recovery is high enough, a before- was whether these income payments tax tax gain may metamorphose into an af- also constituted income to Wood. The ter-tax loss. In Alexander v. Commis- Court held that they were taxable income. sioner, (1st F.3d Cir.1995),] [72 938 Reasoning that “[t]he of the tax example, plaintiff settled a state law by employers was in consideration of employment $250,000 claim for but in- the services by rendered employee,” $245,000 fees, curred in attorney’s for a the Court therefore held it to be “immate pre-tax $5,000. profit of Under rial that the directly taxes were paid over AMT, $250,000 the entire recovery was to government” and famously conclud $245,000 taxable but none of the in at- ed that discharge by “[t]he person third torney’s fees was deductible. If we as- an to him equivalent is sume the taxpayer jointly files and receipt by the person taxed.” at Id. income, has no other liability his AMT 49 S.Ct. 499. $53,900. be would assump- Under these Here, by contrast, IDS Financial Ser- tions, the nondeductibility of the employ- vices defendant the Sinyards’ age ee’s fees under the AMT gain $5,000 before-tax convert .would in interest KENNEDY, as successor Joe $48,900 loss. after-tax into representative personal and a Cohen, How Stephen & Sager Laura Kennedy; Marie Ellen Estate Rights Civil Tax Undermines Income Kennedy; Kennedy; Eric Shawn (2000) 1075, 1078 L.Rev. Law, 73 S. Cal. through her Kennedy, by and Shannon omitted). (footnotes Kennedy; guardian Joe parent the Tax result Draconian This through Kennedy, and Chad rights civil our undermine only can Code Kennedy, guardian Joe parent and his fee-shifting all, purpose After laws. Plaintiffs-Appellants, ADEA, is in the one like the provisions, re without permit only not encourage but to claims pursue sources by de litigation rights civil

meritorious EDISON CALIFORNIA SOUTHERN example like But in an its cost. fraying Engineer COMPANY; Combustion above, the “victorious” posited one Defendants-Appellees. Inc., ing, with off better have been would indeed, No. 98-56157. fee-shifting provision and, out the — her ulti filed had never if off she better Appeals, Court of States United result is sur suit. This victorious mately Ninth Circuit. Alexander least. See say the prising, (“We (1st IRS, 10, 2000 Feb. Argued Submitted in that, the amounts recognize because thus, and, Taxpay AMT trigger volved July Filed Opinion in smacks of deficiency, the outcome er’s Sept. Withdrawn Opinion effectively Taxpayer is because justice Fee’s Legal any benefit robbed Submitted Rehearing and Argued treatment.”). I Although line below 26, 2001 April anomaly must this believe continue Ben Congress, ultimately be resolved 26, 2001 Sept. Filed out ci-Woodward, it cries F.3d at resolution, view particularly speedy my course Of position. majority’s statu not await case need that this

view were award the fees because

tory reform ADEA, under state not

ed law.

contract

III. Conclusion reasons, I conclude foregoing

For attorney’s fees awarded tax- properly attorneys were not There- Sinyards. income

able as

fore, would reverse. I