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Washington's attorneys' lien law.

In Banaitis, 340 F3d 1074 (9th Cir. 2003), petition for cert. granted, 3/29/04, the Ninth Circuit found that contingent attorneys' fees paid directly to a taxpayer's lawyers were not gross income to the taxpayer; see Wood and Daher, "Attorneys' Fee Saga Continues: Maverick Circuit Says, 'Oregon Good, California Bad,'" 2003 TNT 189-35 (9/30/03). Relying on Cotnam, 263 F2d 119 (5th Cir. 1959), the court held that the taxpayer could exclude such fees. Given the strength of the Alabama lien, the Cotnam court found that there had been a transfer of port of the taxpayer's claim, so any recovery by the lawyers was simply gross income to them, not their client. In Banaitis, the Ninth Circuit found that Oregon's attorneys' lien law mirrored Alabama's.

Apparently, the Washington Legislature has been following the attorneys' fee issue fairly closely; on June 10, 2004, a new attorneys' lien law want into effect;, see the Notes to Wash. Rev. Code Ann. [section] 60.40.010, citing 2004 Wash. Laws, chapter 73, [section] 1. The law's stated purpose is to:
 [E]nd double taxation of attorneys' fees obtained through judgments
 and settlements, whether paid by the client from the recovery or by
 the defendant pursuant to a statute or a contact. Through this
 legislation, Washington low clearly recognizes that attorneys have
 a property interest in their clients' cases so that the attorney's
 fee portion of an award or settlement may be taxed only once and
 against the attorney who actually receives the fee. This statute
 should he liberally construed to effectuate its purpose. This act is
 curative and remedial, and intended to ensure that Washington
 residents do not incur double taxation on attorneys' fees received
 in litigation and owed to their attorneys.

This lien law was designed to replicate those discussed in Cotnam and Banaitis. Washington's new law not only mirrors Alabama's and Oregon's laws (in that it provides attorneys with generous property interests in settlements and judgments), but actually surpasses them, by providing that attorneys' liens in Washington are now superior to all other liens (including tax liens); see Wash. Ray. Code Ann. [section] 60.40.010(3). Thus, it appears that Washington's new law may provide the strongest protection yet under the Cotnam line of reasoning.

Robert W. Wood, J.D., Robert W Wood, P.C., San Francisco, CA
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Author:Wood, Robert W.
Publication:The Tax Adviser
Date:Dec 1, 2004
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