00-3705 Kenseth v. Commissioner of Internal Revenue

Listen to this article

“He concedes as he must that had he paid the law firm on an hourly basis, the fee would have been an expense. It would have been a deduction from, not a reduction of, his gross income, as held in the Alexander case. We cannot see what difference it makes that the expense happened to be contingent rather than fixed. If a firm pays a salesman on a commission basis, the sales income he generates is income to the firm and his commissions are a deductible expense, even though they were contingent on his making sales. Of course there is a sense in which contingent compensation constitutes the recipient a kind of joint venturer of the payor. But the plaintiff concedes, as again he must, that Wisconsin law does not make the contingent-fee lawyer a joint owner of his client’s claim in the legal sense any more than the commission salesman is a joint owner of his employer’s accounts receivable. The lawyer has a lien, that is, a security interest. Wis. Stat. sec. 757.36. But the ownership of a security interest is not ownership of the security. A firm whose assets are secured by a mortgage can deduct the interest from its income, but it is not allowed to reduce its income by the amount of the interest. Interest on a secured obligation is just another expense. And, though this is just the icing on the cake, Wisconsin now (the rule may once have been different, see Mohr v. Harris, 348 N.W.2d 599, 600-02 (Wis. App. 1984); Wallach v. Rabinowitz, 200 N.W. 646, 647 (Wis. 1924)) prohibits lawyers from acquiring ‘a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client.’ Wisconsin State Rules of Professional Conduct, Supreme Court Rule 20:1.8(j). The rule allows the lawyer to acquire a lien and to make a contingent- fee contract, but neither a lien nor a contractual right is ‘proprietary.'”

Affirmed.

Appeal from the United States Tax Court, Posner, J.