Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 55-123

1955-1 C.B. 443

IRS Headnote

The right of a decedent's estate to receive payment for legal services performed by the decedent on a contingent fee basis constitutes an interest in property, the value of which is includible in his gross estate for Federal estate tax purposes.

Full Text

Rev. Rul. 55-123

Advice has been requested whether the right of the executor of the decedent's estate to receive payment for legal services performed by the decedent on a contingent fee basis constitutes an interest in property within the meaning of section 811(a) of the Internal Revenue Code of 1939.

The decedent, an attorney, was engaged in the handling of negligence cases in the State of New York on a contingent fee basis. As the result of a disposition of some of the cases in the client's favor after decedent's death, the executor received certain payments during the year following decedent's death. The executor elected to have the property of the estate valued in accordance with section 811(j) of the Internal Revenue Code of 1939.

As a general rule, the executor or administrator of the estate of a deceased attorney is entitled to recover the reasonable value of the services rendered by the deceased on a contingent fee basis upon the subsequent termination of the litigation in the client's favor. The general rule is stated in section 175, American Jurisprudence, Vol. 5, as follows:

In the case of the disability or death of an attorney employed on a contingent basis before final adjudication or settlement has been obtained, he or his estate, as the case may be, will be allowed to recover the reasonable value of the services rendered by him upon the subsequent successful termination of the litigation in the client's favor.

A leading case on the subject is the New York case of Sargent v. N.Y. Central & H.R.R. Co. et al. , 209 N.Y. 360, 103 N.E. 164. In that case an attorney had entered into a contingent fee contract with his client to prosecute the latter's claim for damages against a railroad company. The attorney died before the case was concluded and the railroad company thereafter settled the case. The administrator of the deceased attorney's estate brought suit against the railroad company to enforce the attorney's charging lien which had attached to the client's cause of action at the time it was filed. In New York a decedent attorney's estate not only has the contingent right of quantum meruit to rely on, but there is also a lien upon the cause of action under paragraph 475 of the Judiciary Law of the State of New York. In holding that the attorney's estate was entitled to recover the reasonable value of the decedent's services and that the railroad company was liable therefor under the attorney's charging lien, the court said:

If a lawyer dies, before he has prosecuted to judgment or settlement, litigation which he has undertaken to conduct for a certain compensation, his contract is at an end, because both parties must be supposed to contemplate the continuance of his ability to perform as a condition of the contract, * * * and the compensation agreed upon cannot be recovered by his representative under the agreement, because he did not, and his representative cannot, carry out his agreement.

The extent of the recovery permitted his representative is the full reasonable value of the services rendered under the contract, not exceeding, however, the sum or the rate fixed by it.

See also In re Lake's Estate , 123 N.Y.S.2d 307 (1953), which involved a similar situation where the court in reliance upon the Sargent case said that `* * * under these circumstances, the extent of the recovery permitted to his representative is the full reasonable value of the services rendered under the contract, not exceeding, however, the sum or rate fixed by it.' The case of In re Coleman , 87 Fed.(2d) 753, is considered distinguishable from the instant case as it did not involve recovery for legal services on a quantum meruit basis.

In the Estate of G. Percy McGlue v. Commissioner , 41 B.T.A. 1199, the United States Board of Tax Appeals (now the Tax Court of the United States) said that the term `property' as used in the estate tax statute `embraces all choses in action, including claims for compensation for services performed.' Compare Edward F. McClennen v. Commissioner , 131 Fed.(2d) 165, and Bank of California v. Commissioner , 133 Fed.(2d) 428.

In the instant case, the decedent's right to receive payment for services rendered in case completed in his lifetime was fixed by contract. After the decedent's death, his personal representatives had a right to recover on a quantum meruit basis the reasonable value of the services rendered by him on a contingent fee basis in the cases in which settlements of judgments were obtained after his death. This right of the personal representatives is a chose in action, a species of personal property.

A determination of the fair market value as of the date of decedent's death, or other applicable valuation date, of the right of the personal representatives of a deceased attorney to recover for services rendered on a contingent fee basis in cases remaining unsettled as of such date may present a difficult problem, but it is possible to fairly appraise or estimate the value of such right. Compare Helvering v. Safe Deposit & Trust Company of Baltimore , 316 U.S. 56, Ct. D. 1552, C.B. 1942-1, 246.

In the instant case the executor elected to have the property of the estate valued in accordance with section 811(j) of the Internal Revenue Code of 1939; that is, one year after the date of death or as of the date of sale, exchange, or other disposition in the interim. The amount realized by the estate during the year following the decedent's death for his services constitutes a disposition of the claim for compensation and the amount received therefore represents the fair market value of the property as of the date of such disposition. In view of the foregoing, it is held that the fair market value as of the applicable valuation date of the right of the executor to receive compensation for legal services performed by the decedent on a contingent fee basis is includible in his gross estate as an interest in property within the purview of section 811(a) of the Internal Revenue Code of 1939.

Since the contrary position expressed by the United States Board of Tax Appeals in the case of the Estate of Joe Crail v. Commissioner , B.T.A. Memorandum Opinion entered June 30, 1942, is not considered to be a proper interpretation of the law on this issue, the Internal Revenue Service will not follow that case in the disposition of other cases involving the same issue