## Facts

- Richard W. Kochansky, an attorney, represented clients in a medical-malpractice case under a contingent-fee agreement.
- After the suit was filed but before settlement, Kochansky and his wife divorced.
- The divorce settlement required that a portion of any contingent fee Kochansky earned from the malpractice matter be paid to his ex-wife.
- When the malpractice case settled, the contingent fee was paid, with a portion paid directly to Kochansky and a portion to his ex-wife; each reported the amount received.
- The IRS determined Kochansky had to include the entire contingent fee in gross income and assessed an addition to tax for negligence based on underreporting.
- The Tax Court upheld both the deficiency and the negligence addition, and Kochansky appealed.

## Issues

1. Whether the entire contingent fee from legal services was includible in Kochansky’s gross income despite a divorce agreement assigning part of the fee to his ex-wife.
2. Whether Kochansky was liable for a negligence addition to tax for reporting only the portion of the fee he retained.

## Decision

- The Ninth Circuit affirmed the Tax Court’s determination that Kochansky was taxable on the entire contingent fee.
- The Ninth Circuit reversed the negligence addition to tax, holding the Tax Court clearly erred in finding negligence.
- The judgment was affirmed in part and reversed in part.

## Legal Principles

- Under the assignment-of-income doctrine, income from personal services is taxed to the person who earns it and generally cannot be shifted by assigning the right to receive it to another.
- A contractual allocation of future earned income in a divorce settlement does not change who earned the income for federal tax purposes.
- A negligence addition to tax is improper where the taxpayer’s reporting position, though incorrect, reflects a reasonable attempt to comply with the law, including reliance on arguably supportive but distinguishable authority.

## Conclusion

The court held that an attorney who earned a contingent fee remained taxable on the full fee even though a divorce settlement directed that part be paid to an ex-spouse, but it removed the negligence penalty because the taxpayer’s contrary reporting position was not unreasonable.


Kochansky v. Comm’r, 92 F.3d 957 (9th Cir. 1996)