Commissioner of Internal Revenue v. Banks

Summary

Justice Kennedy delivered the opinion for a unanimous participating Court, holding that when a litigation recovery constitutes income, the plaintiff generally must include the portion paid to an attorney under a contingent-fee agreement. The anticipatory assignment doctrine applies because the plaintiff retains control over the cause of action and the attorney acts as the plaintiff’s agent, not a joint owner. State-law protections for an attorney’s fee do not change that result unless they alter the fundamental principal-agent relationship. The Court declined to decide the treatment of court-awarded statutory fees or alternative tax theories not considered below. It reversed both appellate judgments and remanded. There were no separate opinions; Chief Justice Rehnquist did not participate.