                      T.C. Memo. 2001-254



                  UNITED STATES TAX COURT


          JACK AND JANET FREEMAN, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13195-99.          Filed September 28, 2001.


     William E. Dannemeyer, for petitioners.

     James J. Posedel, for respondent.



                      MEMORANDUM OPINION

     WHALEN, Judge:   Respondent determined a deficiency

in petitioners' Federal income tax for 1994 of $77,415.

Petitioners filed the instant petition seeking

redetermination of that deficiency.    They resided in Los

Alamitos, California, at the time.    We must decide the

following three substantive issues:    (1) Whether

petitioners are entitled, pursuant to section 104(a)(2),
                            - 2 -

to exclude from the gross income reported on their 1994

return the proceeds of a judgment in a State court action

in the amount of $314,173.91; (2) if not, whether

petitioners may exclude from their gross income for 1994 a

portion of the proceeds of the judgment equal to the amount

of the attorney's fees paid under a retainer agreement to

one of the attorneys who represented them in the State

court action; and (3) whether the alternative minimum tax

imposed by section 55 violates the Constitution of the

United States.   All section references are to the Internal

Revenue Code as in effect during 1994, and all Rule

references are to the Tax Court Rules of Practice and

Procedure.

     The facts have been fully stipulated by the parties

and are so found.   The stipulated facts and the accompany-

ing exhibits are incorporated into this opinion by this

reference.

     Petitioners were husband and wife at the end of 1994,

the taxable year at issue, and they filed a joint return

for that year.   In this opinion, references to petitioner

are to Mr. Jack Freeman.

     In 1991, after 34 years of service, petitioner was

summarily fired by his employer, Thrifty Corp. (Thrifty),

a corporation that operates a large chain of retail stores.
                            - 3 -

At that time, he was vice president/regional manager in

charge of coordinating and directing the activities of 11

district managers, and he was responsible for 130 retail

stores in the Los Angeles area and Nevada with retail sales

of $349 million.

     In June 1991, petitioner filed suit against Thrifty

in the Superior Court of the State of California for the

County of Los Angeles (herein referred to as superior

court).   Petitioner's complaint included counts for:

Breach of contract, breach of the covenant of good faith

and fair dealing, intentional infliction of emotional

distress, fraud and deceit, and specific performance.

Thereafter, petitioner amended his complaint by deleting

his claim for intentional infliction of emotional distress

and adding a claim for age discrimination under the

California Fair Employment and Housing Act, Cal. Govt.

Code secs. 12900-12996 (Deering 1982 & Supp. 1988) (FEHA).

     Initially, petitioner was represented in his suit

against Thrifty by Gregory S. Koffman, Esquire.   On or

about December 15, 1992, petitioner substituted a new

attorney to represent him in the suit.   Petitioner paid

Mr. Koffman a total of $83,411.44 for his services.

     Petitioner entered into a retainer agreement with the

law offices of his new attorney, the Law Offices of Paul A.
                              - 4 -

Greenberg.   The agreement states in pertinent part as

follows:

          2. Client shall pay to Attorney, upon
     execution of this Retainer Agreement, the sum of
     $7,500.00, which shall constitute a nonrefundable
     retainer fee, in exchange for substituting into
     this case.

          3. Client shall pay to Attorney, after
     receipt of the first Trial or Arbitration date
     set, the sum of $7,500.00, payable equally over
     a three month period, $2,500.00 per month.

          4. Client shall     pay to Attorney upon
     receiving or filing a    Notice of Appeal, the sum
     of $5,000.00, payable    equally over a two month
     period, $2,500.00 per    month.

          5. Attorney shall receive as an additional
     fee a contingency fee equal to thirty five
     percent (35%) of the total amount of any sums
     recovered in this matter, after deducting fifty
     percent (50%) of the fees paid pursuant to
     Paragraphs 2, 3 and 4 above. For example, if
     $100,000.00 is received as a settlement or
     award and client has paid $7,500.00 in fees,
     then Attorney will receive 35% of $96,250.00.
     Attorney is hereby given a lien for its fees and
     advances upon any settlement, judgment or award
     made or secured herein. IF NO RECOVERY IS
     OBTAINED, ATTORNEY WILL RECEIVE NO ADDITIONAL
     FEE, other than those specified in Paragraphs 2,
     3 and 4 above. The fee schedule as set forth
     above is not set by law but is negotiable between
     Attorney and client.

                *    *    *      *    *    *    *

          8. As security for the fees and costs that
     will become due to Attorney, Client does hereby
     give to Attorney a lien on all papers, documents
     and records of Client, and judgments and
     settlements concerning the matter. Client
     authorizes Attorney to retain from any recovery
     an amount sufficient to liquidate client's
                              - 5 -

     accrued fees and expenses, on this or any other
     matter.



     Ultimately, petitioner's suit against Thrifty was

tried in superior court before a jury on the following

four causes of action:     Breach of contract, breach of the

covenant of good faith and fair dealing, fraud and deceit,

and age discrimination under FEHA.     The jury returned a

special verdict in petitioner's favor.     The special verdict

states as follows:


          We, the jury in the above entitled action,
     find the following Special Verdict on the
     questions submitted to us:

          Issue No. 1 Was there an implied agreement
     between the parties that the plaintiff, Jack
     Freeman, would not be terminated except for good
     cause?

          Answer "yes" or "no".

          Answer:    Yes

          If you answered Issue No. 1 "yes", then
     answer the next issue. If you answered Issue No.
     1 "no", then answer Issue No. 5.

          Issue No. 2 Did the defendant, Thrifty
     Corp., either actually terminate the plaintiff,
     Jack Freeman, without good cause or construc-
     tively terminate the plaintiff, Jack Freeman,
     without good cause?

          Answer "yes" or "no".

          Answer: No
                              - 6 -

          If you answered Issue No. 2 "yes", then
     answer the next issue. If you answered Issue No.
     2 "no", then answer Issue No. 5.

          Issue No. 5 Did defendant, Thrifty Corp.,
     breach the implied covenant of good faith and
     fair dealing?

          Answer "yes" or "no".

          Answer:   Yes

          If you answered Issue No. 5 "yes" then
     answer the next issue. If you answered issue No.
     5 "no", then sign and return this veridct [sic].

          Issue No. 6 Did such conduct by defendant,
     Thrifty Corp., cause damage to the plaintiff,
     Jack Freeman?

          Answer "yes" or "no".

          Answer:   Yes

          If you answered Issue No. 6 "yes", then
     answer the next issue. If you answered issue No.
     6 "no", the [sic] sign and return this verdict.

          Issue No. 7 What is the total amount of
     damages suffered by plaintiff, Jack Freeman, as
     a result of defendant, Thrifty Corp.'s breach of
     the implied covenant of good faith and fair
     dealing?

          Answer:   $300,000.00


According to the above special verdict, the jury found that

Thrifty had breached an implied covenant of good faith and

fair dealing and that Thrifty's conduct had damaged

petitioner.   The jury further found that the damages

suffered by petitioner by reason of Thrifty's breach

amounted to $300,000.     Petitioner's claim for damages due
                             - 7 -

to Thrifty's breach of the covenant of good faith and fair

dealing was the only cause of action as to which the jury

found for petitioner and awarded damages.    Petitioner's

final award, including interest, totaled $314,173.91.

     Thrifty issued a check dated August 11, 1994, in the

amount of $314,173.91 in full satisfaction of the judgment

against it.   The check was made payable jointly to

petitioner and his attorneys.

     Petitioner's attorney, Mr. Greenberg, received

Thrifty's check.   He deducted his fees of $114,532.39 from

the award, as authorized by the retainer agreement, and

disbursed the remaining proceeds of Thrifty's payment,

$199,641.52, to petitioner by check dated August 26, 1994.

Mr. Greenberg also issued a check to petitioner in the

amount of $62.69 to reimburse him for unused cost advances.

     Petitioners timely filed their 1994 Federal income tax

return, but they did not include any portion of the jury

award in their gross income.    Respondent issued a notice of

deficiency to petitioners.   Among other adjustments,

respondent determined that petitioners should have included

the entire jury award of "$314,174.00" in their gross

income for 1994.   The notice of deficiency states in part

as follows:
                            - 8 -

     It is determined that you received an award in
     the amount of $314,174.00 from Thrifty which
     was not reported on your return for the taxable
     year ended December 31, 1994. This amount is
     determined to be taxable to you because you
     have failed to establish that this amount is
     excludable from gross income under the provi-
     sions of the Internal Revenue Code. Accordingly,
     income is increased in the amount of $314,174.00.


     Respondent also adjusted the miscellaneous itemized

deductions claimed on Schedule A of petitioners' return,

$610, by adding $194,595 to arrive at total miscellaneous

itemized deductions of $195,205, before taking into account

the 2-percent floor as required by section 67(a).    It

appears that the additional miscellaneous itemized

deductions allowed in the notice of deficiency relate to

the attorney's fees that petitioner paid with respect to

his suit against Thrifty, but the record does not readily

disclose how respondent computed the amount of the

adjustment.   The parties agree that that amount is not

correct and the correct amount of the additional

miscellaneous itemized deductions is $129,698.70, computed

as follows:
                              - 9 -

     Attorney's fees paid                  $114,532.39
       to Paul Greenberg, Esq.

          Less: reimbursement for                62.69
            unused cost advance

          Plus: attorney's fees paid         15,229.00
            in 1994 before trial

          Total additional miscellaneous    129,698.70
            itemized deductions


     Respondent also determined that for 1994 petitioners

are liable for alternative minimum tax of $52,303.       The

notice of deficiency states as follows:


     It is determined that you are subject to the
     alternative minimum tax imposed by the Internal
     Revenue Code on items of tax preference for the
     taxable year ended December 31, 1994. We have
     attached an an [sic] alternative minimum tax
     worksheet to explain how we computed the
     alternative minimum tax.


Whether the Court Properly Granted Respondent's Motion To
Quash Subpoenas To Compel the Testimony of a Revenue Agent
and an Appeals Officer

     Petitioners ask the Court to reconsider the granting

of respondent's motion to quash the subpoenas issued to a

revenue agent and to a manager in respondent's Appeals

Office.    According to petitioners' posttrial brief, the

agent would have testified that he advised petitioners'

accountant that petitioners' "return should be accepted as

filed", and the Appeals officer would have testified that

he informed petitioners' accountant that "the return was
                           - 10 -

correct when filed and [he] removed the penalties but * * *

that Petitioner still owed the tax."

     The proffered testimony would be immaterial to the

issues in this case.   As we have often observed, a trial

before this Court is a proceeding de novo in which our

determination as to a taxpayer's tax liability must be

based on the merits of the case and not any record

developed at the administrative level.    See, e.g.,

Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324,

328 (1974).   Accordingly, we properly quashed the subject

subpoenas.


Whether Petitioners May Exclude From Gross Income the
Entire Amount of the Jury Award Under Section 104(a)(2)

     The first substantive issue in this case is whether

petitioners are entitled to exclude from their gross income

for 1994 the amount of the judgment awarded in petitioner's

suit against Thrifty, $314,173.91.     Petitioners argue that

their gross income does not include any part of that amount

by reason of section 104(a)(2).     During 1994, that

provision stated:   "gross income does not include * * *

the amount of any damages received (whether by suit or

agreement and whether as lump sums or as periodic payments)

on account of personal injuries or sickness".     The

regulations promulgated under section 104(a)(2) make clear
                           - 11 -

that the scope of excludable damages is limited to those

received through prosecution of an action based upon tort

or tortlike rights:


     The term "damages received (whether by suit or
     agreement)" means an amount received (other than
     workmen's compensation) through prosecution of a
     legal suit or action based upon tort or tort type
     rights, or through a settlement agreement entered
     into in lieu of such prosecution. [Sec. 1.104-
     1(c), Income Tax Regs.]


After reviewing section 104(a)(2) and the above regulation,

the U.S. Supreme Court stated that a taxpayer must meet the

following two independent requirements before a recovery

may be excluded under section 104(a)(2):


     First, the taxpayer must demonstrate that the
     underlying cause of action giving rise to the
     recovery is "based upon tort or tort type
     rights"; and second, the taxpayer must show that
     the damages were received "on account of personal
     injuries or sickness." * * * [Commissioner v.
     Schleier, 515 U.S. 323, 337 (1995).]


     Petitioners acknowledge that the damages of $300,000

awarded by the jury were based entirely on petitioner's

claim for breach of a covenant of good faith and fair

dealing and that the amount paid by Thrifty included

interest of $14,173.91.   Petitioners' brief states:


     On May 23, 1994, the jury returned a verdict for
     Petitioner on the Second Cause of Action, Breach
     of the Covenant of Good Faith and Fair Dealing in
                           - 12 -

     the amount of $300,000, and with interest,
     totaling $314,173.91.


Petitioners also acknowledge that their claim against

Thrifty for breach of the covenant of good faith and fair

dealing is a contract claim and not a claim based upon tort

or tortlike rights.   Petitioners' brief states:


     Petitioner went to trial on four causes of
     action:

     1 -   Breach of Contract, contract

     2 -   Breach of Covenant of Good Faith and Fair
           Dealing, contract

     3 -   Fraud and Deceit, tort

     4 -   Violation of Fair Employment and Housing
           Act, tort-like


Petitioners' brief also states:


          The jury in Petitioner's case may have given
     him an award on the second cause of action for
     breach of the covenant of good faith and fair
     dealing, but the allegations of the complaint
     clearly involved a tort and tort like claim.


Nevertheless, petitioners contend that the entire award is

excludable from gross income under section 104(a)(2) as

damages from personal injuries.     To restate petitioners'

position more succinctly, petitioners contend that even

though the amount awarded in the superior court action

consists of damages for the breach of a contractual
                           - 13 -

obligation owed to petitioner and of interest, and does not

involve damages received through prosecution of tort or

tort-type rights, the entire award is excluded from gross

income under section 104(a)(2).

     Petitioners ask us to reach the same conclusion, i.e.,

that the entire jury award is excluded from gross income

under section 104(a)(2), on the basis of a reading of

Threlkeld v. Commissioner, 87 T.C. 1294 (1986), affd. 848

F.2d 81 (6th Cir. 1988).   Petitioners' posttrial brief

makes the following argument:


          [In Threlkeld v. Commissioner, supra,] The
     court noted at page 1307 that even though the
     settlement agreement allocated the sum of $75,000
     for damages to petitioners [sic] professional
     reputation, (the taxability of $21,500 [of]
     which was the issue in the case), the settle-
     ment agreement does not necessarily control in
     deciding whether the claim being settled arises
     from a personal injury. The court said:

               "We therefore, look to the
          petitioners [sic] allegations in his
          complaint in the State court."

          The relevance of this last statement to
     Petitioner is most important to note. Namely,
     the jury may have given an award on the second
     cause of action for breach of the covenant of
     good faith and fair dealing, but the meaning of
     the language from Threlkeld is that to answer
     the question of whether the award represents
     compensation for personal injuries, the court
     said the allegations in the complaint must be
     examined.
                              - 14 -

Petitioners do not adequately explain how an examination

of the complaint in the superior court action supports the

conclusion that the entire award is excludable from income

under section 104(a)(2).

       We disagree with petitioners' reading of Threlkeld

v. Commissioner, supra, and with their conclusion that the

entire award in the superior court action is excludable

from income under section 104(a)(2).     In our view, none of

the award is excludable.

        In Threlkeld v. Commissioner, supra at 1298, the Court

held that in deciding in a particular case whether the

damages were received on account of "personal injuries",

the nature of the claim as defined under State law, and

the concept of personal injury thereby embodied, are the

appropriate criteria in a case in which "damages are

clearly allocated to an identifiable claim".      Id. at 1305-

1306.    The Court pointed out that State law may be of

limited assistance in certain cases, such as in a

settlement where it is unclear what claim is settled or

where there are several claims not all of which involve

personal injuries.     Id.   In such cases, the Court pointed

out:    "We must look to various factors, including the

allegations in the State court pleadings, the evidence
                           - 15 -

adduced at trial, a written settlement agreement, and the

intent of the payer."   Id. at 1306.

     In this case, unlike Threlkeld v. Commissioner, supra,

the award to petitioner in the superior court action is set

forth in the jury's special verdict.   The award was based

entirely on petitioner's claim that Thrifty breached an

implied covenant of good faith and fair dealing.   Thus, in

this case, in determining the basis for the damages awarded

to petitioner in the superior court action, the jury's

special verdict takes precedence over any of the other

factors mentioned by the Court in Threlkeld v.

Commissioner, supra.

     The jury award in the instant case was based upon a

single identifiable cause of action, breach of an implied

covenant of good faith and fair dealing.   Under California

law, that cause of action is not a tort.   Mundy v.

Household Fin. Corp., 885 F.2d 542, 544 (9th Cir. 1989)

("the California Supreme Court has spoken decisively,

holding in Foley [v. Interactive Data Corp., infra] that an

allegation of breach of the implied covenant is a purely

contractual claim"); Foley v. Interactive Data Corp., 765

P.2d 373 (Cal. 1988); see Cade v. Commissioner, T.C. Memo.

1999-394.   Accordingly, in the instant case, no part of the

recovery in the superior court action can be excluded from
                             - 16 -

gross income under section 104(a)(2) because the underlying

cause of action giving rise to the recovery was based

entirely upon a contract cause of action and not upon tort

or tortlike rights as required by section 1.104-1(c),

Income Tax Regs.    See Commissioner v. Schleier, 515 U.S.

323 (1995).

Whether Petitioners May Exclude From Gross Income a Portion
of the Recovery Equal to the Amount Paid to Their Attorneys
Under the Contingent Fee Agreement

     Petitioners argue that if we hold that section

104(a)(2) does not apply, with the result that the judgment

proceeds are includable in their 1994 gross income, then

the portion of the judgment paid directly to their

attorneys under the retainer agreement is excludable from

gross income.    Petitioners ask us to follow Cotnam v.

Commissioner, 263 F.2d 119 (5th Cir. 1959), revg. in part

and affg. on another issue 28 T.C. 947 (1957), and Estate

of Clarks v. United States, 202 F.3d 854 (6th Cir. 2000).

In Cotnam v. Commissioner, supra, the Court of Appeals for

the Fifth Circuit held that the amount of a contingent fee

paid to the taxpayer's attorneys out of a judgment was not

income to the taxpayer because under Alabama law a

contingent fee contract operates as a lien on the recovery

that, in effect, transfers part of a plaintiff's claim to

the attorneys.     See also Srivastava v. Commissioner, 220
                             - 17 -

F.3d 353, 365 (5th Cir. 2000), revg. and remanding in part,

and affg. on another issue T.C. Memo. 1998-362; Davis v.

Commissioner, 210 F.3d 1346 (11th Cir. 2000) ("this panel

[of the Court of Appeals for the 11th Circuit] is bound by

Cotnam, which can be overruled only by the en banc Court"),

affg. T.C. Memo. 1998-248.    In Estate of Clarks v. United

States, supra, the Court of Appeals for the Sixth Circuit

followed Cotnam v. Commissioner, supra, and held that the

interest portion of a judgment in an action for personal

injuries could be offset by the contingent legal fees paid

to the taxpayer's attorney because an attorney's lien under

Michigan law was similar to an attorney's lien under

Alabama law.

     Petitioners acknowledge that we recently reconsidered

the same issue and reached the opposite conclusion in

Kenseth v. Commissioner, 114 T.C. 399 (2000), affd. 259

F.3d 881 (7th Cir. 2001).    In that case, the taxpayer was

one of a class of persons who had entered into an agreement

with their former employer in settlement of a class action

for age discrimination.   The taxpayer's share of the gross

settlement amount was $229,501.37, of which the taxpayer

received $126,470.42, after the former employer had

withheld employment taxes of $11,230.41 and the taxpayer's

attorneys had withheld attorneys' fees of $91,800.54.    The
                          - 18 -

issue in that case was whether the taxpayer could offset

his recovery in the age discrimination suit by the

attorney's fees withheld by his attorney, $91,800.54.

We held that the taxpayer's gross income included all the

proceeds of the settlement, including the portion used to

pay his attorneys under the contingent fee agreement.    We

explained our position regarding this issue as follows:


          This Court has, for an extended period of
     time, held the view that taxable recoveries in
     lawsuits are gross income in their entirety to
     the party-client and that associated legal fees–-
     contingent or otherwise-–are to be treated
     as deductions.5 See Bagley v. Commissioner,
     105 T.C. 396, 418-419 (1995), affd. 121 F.3d 393,
     395-396 (8th Cir. 1997); O'Brien v. Commissioner,
     38 T.C. 707, 712 (1962), affd. per curiam 319
     F.2d 532 (3d Cir. 1963); Benci-Woodward v.
     Commissioner, T.C. Memo. 1998-395, on appeal
     (9th Cir. Feb. 2, 1999). In O'Brien, we held
     that "even if the taxpayer had made an irrevoc-
     able assignment of a portion of his future
     recovery to his attorney to such an extent that
     he never thereafter became entitled thereto
     even for a split second, it would still be gross
     income to him under" assignment of income
     principles. O'Brien v. Commissioner, supra at
     712. "Although there may be considerable equity
     to the taxpayer's position, that is not the way
     the statute is written." Id. at 710. * * *

     _______________________
          5
            This view is based on the well-established
     assignment of income doctrine that was originated
     by the Supreme Court in Lucas v. Earl, 281 U.S. 111
     (1930). Lucas v. Earl, supra, has been relied on by
     this Court for assignments of income involving both
     related and unrelated taxpayers. [Id. at 411.]
                           - 19 -

     In Kenseth v. Commissioner, supra, we reviewed and

declined to follow the cases relied upon by petitioners,

Cotnam v. Commissioner, supra, and Estate of Clarks v.

United States, supra.   We stated as follows:



          After further reflection on Cotnam and now
     Estate of Clarks v. United States, supra, we
     continue to adhere to our holding in O'Brien
     that contingent fee agreements, such as the one
     we consider here, come within the ambit of the
     assignment of income doctrine and do not serve,
     for purposes of Federal taxation, to exclude the
     fee from the assignor's gross income. We also
     decline to decide this case based on the possible
     effect of various States' attorney's lien
     statutes. [Kenseth v. Commissioner, supra at
     412; fn. ref. omitted.]


     In Kenseth v. Commissioner, supra, we noted that

there is a disagreement about this issue among the Courts

of Appeals.   We reviewed and agreed with Baylin v. United

States, 43 F.3d 1451 (Fed. Cir. 1995), and Alexander v.

Commissioner, 72 F.3d 938 (1st Cir. 1995), affg. T.C. Memo.

1995-51, cases in which the courts had rejected arguments

similar to the argument made by petitioners in the instant

case; see also Young v. Commissioner, 240 F.3d 369 (4th

Cir. 2001), affg. 113 T.C. 152 (1999).

     Petitioners acknowledge that the court to which an

appeal of this case lies, the Court of Appeals for the

Ninth Circuit, has rejected their position in Benci-
                             - 20 -

Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000),

affg. T.C. Memo. 1998-395.    In that case, the court held

that an award of punitive damages was fully includable in

the taxpayers' gross income, notwithstanding the fact that

a portion of the award was retained by the taxpayers'

attorney, pursuant to a contingent fee agreement.     Id.

The Court of Appeals noted that under California law, the

law applicable in that case and in the instant case, "an

attorney lien does not confer any ownership interest upon

attorneys or grant attorneys any right and power over the

suits, judgments, or decrees of their clients."     Id. at

943; see also Brewer v. Commissioner, T.C. Memo. 1997-542

(attorney's fees paid with respect to action for statewide

discrimination in California), affd. without published

opinion 172 F.3d 875 (9th Cir. 1999).    Accordingly, the

Court of Appeals found no reason to distinguish the payment

to the taxpayers' attorney under the contingent fee

agreement in that case from the attorneys' fees at issue in

Coady v. Commissioner, 213 F.3d 1187 (9th Cir. 2000), affg.

T.C. Memo. 1998-291.

     In Coady v. Commissioner, supra, the Court of Appeals

for the Ninth Circuit rejected a taxpayer's argument that a

judgment for lost wages and benefits arising out of her

wrongful termination should be reduced by contingent legal
                           - 21 -

fees and litigation costs on the ground that the taxpayer

had "assigned" those amounts to her attorneys.     Id.     The

court reasoned that the judgment in the wrongful

termination action was fully includable in the taxpayer's

gross income under the broad sweep of section 61, which

defines gross income as "all income from whatever source

derived" and the taxpayers had "simply used a portion of

the award subsequently to discharge their personal

liability to their attorneys."   Id. at 1190-1191.    The

Court of Appeals noted that, under longstanding authority

of the U.S. Supreme Court, income must be taxed to the

person who earns it, and a taxpayer cannot escape such

taxation by procuring payment directly to creditors or by

making an anticipatory assignment of the income.     See

United States v. Basye, 410 U.S. 441, 449 (1973); Helvering

v. Eubank, 311 U.S. 122, 124-125 (1940); Helvering v.

Horst, 311 U.S. 112 (1940); Lucas v. Earl, 281 U.S. 111,

114-115 (1930).

     Most recently, the Court of Appeals for the Ninth

Circuit again declined to follow Cotnam in Sinyard v.

Commissioner, ___ F.3d ___ (9th Cir. 2001), affg T.C. Memo.

1998-364.   That case involved attorney's fees paid in

connection with the settlement of two class actions brought

under the Age Discrimination in Employment Act, Pub. L. 90-
                            - 22 -

202, 81 Stat. 602, currently codified at 29 U.S.C. secs.

621-634 (1994).

     Arguments similar to petitioners' in the instant case

were fully considered and rejected by this Court in Kenseth

v. Commissioner, 114 T.C. 399 (2000), and by the Court of

Appeals for the Ninth Circuit in Sinyard v. Commissioner,

supra, Benci-Woodward v. Commissioner, supra, and Coady v.

Commissioner, supra.    We have no reason to reconsider the

issue in this case.    Accordingly, we sustain respondent's

determination that the judgment is fully includable in

petitioners' gross income and cannot be reduced by the

amount retained by petitioner's attorney under the retainer

agreement.


Whether the Alternative Minimum Tax Is Unconstitutional

     In the notice of deficiency, respondent treated the

attorneys' fees that petitioner paid in connection with

his superior court action as a "miscellaneous itemized

deduction", as defined by section 67(b).    In the case of

an individual, a miscellaneous itemized deduction is not

deductible in computing alternative minimum taxable income.

See sec. 56(b)(1)(A)(i).    In petitioners' case, this has

the effect of causing the tentative minimum tax computed

under section 55(b) to exceed petitioners' regular tax and,

thus, causes petitioners to be liable for the alternative
                             - 23 -

minimum tax in the amount of the excess.    See sec. 55(a).

See generally Benci-Woodward v. Commissioner, supra at 994

(holding that legal expenses are classified as

miscellaneous itemized deductions and, as such, are not

allowed as deductions for purposes of computing alternative

minimum tax liability).

     In the notice of deficiency, respondent determined

that petitioners are liable for alternative minimum tax of

$52,303.   This was based upon the treatment of attorneys'

fees of $194,595 as an additional miscellaneous itemized

deduction.    As mentioned above, the parties agree that

the attorneys' fees, to be treated as an additional

miscellaneous itemized deduction, are $129,698.70, rather

than $194,595.

     Petitioners do not take issue with respondent's

computation of the amount of alternative minimum tax in

this case.    They argue:


             THE FAILURE OF THE ALTERNATIVE MINIMUM
             TAX TO ALLOW A DEDUCTION FOR ATTORNEYS
             FEES AND COSTS, WHICH RESULTS IN A
             DOUBLE TAXATION OF THE SAME INCOME TO
             PETITIONER AND HIS ATTORNEYS, [IS] A
             VIOLATION OF THE CONSTITUTIONAL RIGHTS
             OF PETITIONER IN THAT IT IS A TAKING
             WITHOUT DUE PROCESS OF LAW AND A DENIAL
             OF THE EQUAL PROTECTION OF THE LAW IN
             VIOLATION OF THE 5TH AND 14TH AMENDMENT
             [sic] TO THE FEDERAL CONSTITUTION.
                             - 24 -

Petitioners acknowledge that the constitutionality of the

alternative minimum tax was upheld in Okin v. Commissioner,

T.C. Memo. 1985-199, affd. 808 F.2d 1338 (9th Cir. 1987),

but they argue that their case "is totally different" from

Okin.   We disagree.

     In Okin v. Commissioner, supra, the taxpayer's

principal argument was that under a prior version of the

alternative minimum tax, viz the Revenue Act of 1978, Pub.

L. 95-600, sec. 421, 92 Stat. 2763, 2871, alternative

minimum taxable income should be computed using "average

annual adjusted gross income", a concept taken from the

income averaging provisions of sections 1301-1305.     We

rejected the taxpayer's argument and pointed out that, in

defining alternative minimum taxable income, the statute

used the words "gross income" and did not refer to the

income averaging provisions or to any adjusted figure.

Okin v. Commissioner, supra.     After trial, the taxpayer

made a general argument, "not supported by any specific

references to the Constitution or citations to precedent",

that section 55 is unconstitutional.     Id.   We rejected

that argument on the basis of cases upholding the con-

stitutionality of the so-called add-on minimum tax under

former section 56.     See Wyly v. United States, 662 F.2d

397, 403-406 (5th Cir. 1981); Graff v. Commissioner, 74
                           - 25 -

T.C. 743, 765-767 (1980), affd. per curiam 673 F.2d 784

(5th Cir. 1982).

     On appeal, the Court of Appeals for the Ninth

Circuit also rejected the taxpayer's challenge to the

constitutionality of the alternative minimum tax imposed by

section 55.   Okin v. Commissioner, 808 F.2d at 1341-1342.

The Court of Appeals rejected the taxpayer's argument that,

as applied in his case, the alternative minimum tax

constitutes a "taking of property without due process of

law and without adequate compensation."   Id.   The court

agreed that the effect of the alternative minimum tax was

to virtually nullify the taxpayer's tax savings under the

income averaging provisions but pointed out that that

effect was consistent with congressional intent.     Id. at

1341.   The court noted that "the due process clause

ordinarily places no limits upon the congressional taxing

power."   Id. at 1341-1342; see A. Magnano Co. v. Hamilton,

292 U.S. 40, 44 (1934).   The court further rejected the

taxpayer's contention that taking away the benefits of

averaging through the application of the alternative

minimum tax is discriminatory.   According to the court, in

enacting the alternative minimum tax, Congress intended "to

remedy general taxpayer distrust of the system growing from

large numbers of taxpayers with large incomes who were yet
                           - 26 -

paying no taxes."   Okin v. Commissioner, 808 F.2d at 1342.

The court stated that that intent is a legitimate

governmental end as to which reducing the benefits of

averaging bore a reasonable relation.    Id.

     The instant case involves the benefits of a

miscellaneous itemized deduction, rather than the benefits

of income averaging.   Nevertheless, the reasoning of the

Court of Appeals in Okin v. Commissioner, supra, applies.

Congress provided that, in computing alternative minimum

taxable income, no deduction shall be allowed for

miscellaneous itemized deductions as defined by section

67(b).   Sec. 56(b)(1)(A)(i).   Congress thereby restricted

the benefits from miscellaneous itemized deductions through

the application of the alternative minimum tax.     Cf. Weiser

v. United States, 959 F.2d 146 (9th Cir. 1992).     The

alternative minimum tax no more violates the due process

or equal protection requirements of the U.S. Constitution

in this case, involving miscellaneous deductions, than in

Okin, which involved the benefits of income averaging.

See Lickiss v. Commissioner, T.C. Memo. 1994-103.     See

generally Wallach v. United States, 800 F.2d 1121 (Fed.

Cir. 1986); Gajewski v. Commissioner, 84 T.C. 980, 984-985

(1985); Klaassen v. Commissioner, T.C. Memo. 1998-241,

affd. without published opinion, 182 F.3d 932 (10th Cir.
                           - 27 -

1999); Keese v. Commissioner, T.C. Memo. 1995-417;

Christine v. Commissioner, T.C. Memo. 1993-473; Ross v.

Commissioner, T.C. Memo. 1987-500.

     Finally, even if we agreed with petitioners that the

application of the alternative minimum tax produces an

inequitable result in this case, it is not for us to change

that result.   It is well established that such an equitable

argument cannot overcome the plain meaning of the statute.

See, Sinyard v. Commissioner, ___ F.3d ___; Benci-Woodward

v. Commissioner, 219 F.3d at 944; Alexander v.

Commissioner, 72 F.3d at 946-947; Weiser v. United States,

supra at 148-149; Okin v. Commissioner, 808 F.2d at 1342.

     Based upon the foregoing, and concessions of the

parties,

                                Decision will be entered

                          under Rule 155.
