Take your $1M / $5M / $20M contingency fee as a lump → ordinary income, all in one year → 37% federal + 13.3% California + 3.8% NIIT + 1% MHST = ~55% effective. Structure it instead → IRC §451 + Childs v. Commissioner → spread across 5–30 years → each year sits in the 22–32% bracket → effective rate drops to 35–40%. Permanent savings, not deferral.
A once-in-a-career fee taxed in a single year gets destroyed. Spread it — Childs lets you, and each year sits in a lower bracket. Same fee, far less tax. The rule is the same one the rich live by: keep each income year small.
This is for you if:
Deferring a contingency fee is settled law, not a gray area. Here’s the exact basis, print it or send it to your accountant.
The case, Childs v. Commissioner
The U.S. Tax Court held that an attorney who arranges to receive contingency fees in future installments — before the fees are payable, is not in constructive receipt, and is taxed only as each payment is actually received.Childs v. Commissioner, 103 T.C. 634 (1994), aff’d 89 F.3d 856 (11th Cir. 1996).
The rule underneath it, constructive receipt
“Income… is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.”Treas. Reg. §1.451-2(a). You’re taxed when the fee is yours to take, not before.
The one rule you cannot break
The deferral agreement must be signed before the case settles (before the fee is earned and payable). The payment obligation is then assigned to a third party and funded by an annuity; you hold only an unsecured, non-assignable right to future payments. Set it up after settlement and it’s too late, constructive receipt applies and the whole fee is taxed now.Structure before you settle, not after.
The Tax Court (and 11th Circuit) confirmed that an attorney can structure their contingency fee through a single-premium fixed annuity arranged before the fee is earned, and is taxed on each payment only as it’s received. No constructive receipt. No 409A. Reaffirmed by IRS in Rev. Rul. 79-220 and PLRs since. This is settled law. Used by personal-injury firms, mass-tort lead counsel, and class-action plaintiffs’ firms nationwide for 30+ years.
Six inputs. Fee + your other income drive everything.
| Yr | Payment (gross) | Top marginal | Tax | Net |
|---|
Note:Marginal rate is the top bracket your fee payment touches each year, given $400,000 in other ordinary income stacked beneath it. Tax includes federal ordinary + state ordinary + NIIT on the fee portion (if applicable). IRMAA included if age 63+.
Constructive receipt rules mean the structuring agreement has to be in place BEFORE the contingency fee is earned/agreed. If the case is days from settling, time is short, call Hans now.
Pure ordinary-income bracket-stacking math. No GPR, no §453, no basis. Each year’s structured payment is treated as ordinary income, stacked on top of your other income for that year. The savings come from not getting bracket-stacked at 37% all in one year.
