Childs v. Commissioner
the case every contingency lawyer should know.

Three Georgia attorneys and structured fee terms fixed before any fee was payable.

In 1986 three Columbus, Georgia attorneys (Richard Childs, John Swearingen and Ben Philips) settled personal-injury and wrongful-death claims arising from a 1984 propane explosion in Alabama. The settlement provided that their contingency fees would be paid not as a lump sum at closing, but as structured periodic payments over a number of years.

The mechanics: the defendants' liability insurers funded the payments by buying annuities and assigned the payment obligation to an assignment company, but the insurers were not released from the obligation. The attorneys held no interest in the annuities.

The attorneys did not report the present value of those future payments as income in the settlement year. Each year, as a payment arrived, that year's payment was reported on the year's return. The IRS disagreed and assessed deficiencies, arguing the lawyers had constructively received the full fee at the moment of settlement.

"They didn't have the money. They didn't have the right to the money."

The IRS's first argument was constructive receipt under §451 and Treas. Reg. §1.451-2. The doctrine says income is taxable when it is credited to your account, set apart for you, or otherwise made available so that you may draw upon it at any time. The IRS said the lawyers could have insisted on a cash payout and chose the structure, therefore they had effective control over the fee at settlement.

The Tax Court rejected this. The court's reasoning on constructive receipt:

• The attorneys had no right to receive any fee until the settlement was concluded, and by then the settlement fixing the structured payment terms was already in place. There was never a moment when a lump sum was theirs to take.
• Once the settlement was in place, the attorneys' only right was to the scheduled payments.
• The defendants’ insurers stayed liable on the obligation after assigning it, and the annuities belonged to the assignee, not the attorneys. The attorneys had only a contractual right to future payments.

Put together: the fee did not exist as a present right at the time the structure was put in place, and the attorneys had no ability to access future payments before their scheduled date. No constructive receipt.

An assignment company's unfunded promise is not "property."

The IRS's backup argument was §83: that the attorneys had received "property" (the assignment company's contractual promise to pay) in connection with services, and therefore had immediate income equal to the fair market value of that promise.

The Tax Court rejected this too. The court reasoned that the assignment company's promise was an unfunded, unsecured contractual obligation that, under Treas. Reg. §1.83-3(e) (an unfunded and unsecured promise to pay money in the future is not “property”), does not constitute "property" within the meaning of §83. The attorneys had no immediate economic benefit, only a future right to payments that would be taxed when received.

The court drew a careful line: the annuity policy that funded the obligation was held by the assignment company, not by the attorneys. The attorneys had no direct interest in the annuity, no right to its cash value, no ability to surrender it, and no ability to designate beneficiaries beyond the structured schedule.

Affirmed without published opinion.

The IRS appealed. In 1996 the Eleventh Circuit affirmed the Tax Court's decision without a published opinion. Childs v. Commissioner, 89 F.3d 856 (11th Cir. 1996).

Know the weight of it. Childs is a regular, precedential Tax Court opinion, which the Tax Court follows. The Eleventh Circuit affirmed without a published opinion, and under 11th Cir. R. 36-2 unpublished opinions are not binding precedent, so the affirmance adds little on its own. The IRS has never issued an acquiescence, and in its 2022 memo (AM 2022-007) Chief Counsel argued Childs does not reach a differently built arrangement. We are not aware of a reported court decision since 1994 that disallowed a structure built on the Childs facts.

The case has limits. Most people don't read them.

Childs is the cornerstone, not the cathedral. A few things the case does not hold:

• It does not bless after-the-fact restructuring. The agreement in Childs was signed before the settlement was finalized. The court repeatedly emphasized the timing. Trying to bolt a deferral onto an already-signed fee agreement is a different case, and a much weaker one.
• It does not address §409A. Section 409A was enacted in 2004, ten years after Childs, and governs non-qualified deferred compensation. Whether a particular contingency-fee structure is inside or outside §409A depends on the relationship between the lawyer, the law firm, and the obligor. Most modern structures are designed to fall outside §409A (the service recipient is the defendant, not the law firm) but this is a fact-specific analysis that Childs simply doesn't reach.
• It does not address the post-Banks attorney-fee inclusion question. Commissioner v. Banks, 543 U.S. 426 (2005), held that contingent fees are generally includible in the client's gross income before the fee is paid to the lawyer. Banks is about the client's tax picture; Childs is about the lawyer's. They don't conflict. They answer different questions.
• It does not insulate a poorly drafted structure. The mechanics matter. Assignment language, carrier independence, timing of signatures and beneficiary designations are all fact issues that can sink a structure even when the broad legal theory is sound.

Thirty years. Still the leading case.

Childs remains the leading authority on deferring contingent attorney fees. The IRS has pushed back (its 2022 memo is covered on the IRS position page), and Congress has not amended §451 or §83 in a way that disturbs the result. Plaintiff firms structure fees every quarter on the strength of this case, and several highly rated life carriers write the annuities that fund the obligations.

The case law is old and stable, but the IRS reads it narrowly. What remains is whether your specific case (your timing, your settlement language, your law-firm entity structure) fits the framework. That's the rest of this cluster.