Take a $1M, $5M or $20M contingency fee as a lump and it is all ordinary income in one year: 37% federal, 13.3% California (including the 1% mental health surcharge) and up to 3.8% in Medicare taxes, a top combined rate near 55%. Structured under IRC §451 and Childs v. Commissioner and paid over 5 to 30 years, each year’s share can land in lower brackets, often 22 to 32% federal. Spreading the fee across years can lower the total tax by keeping more of it out of the top brackets. Your result depends on your other income, your state and future tax law; the calculator below runs your numbers.
By Hans Goldstein, EA, Tax & Exit Planning · Updated
Admitted to practice before the IRS.
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Take a once-in-a-career fee in a single year and most of it lands in the top bracket. Childs lets you spread it, so each year sits in a lower bracket. Same fee, far less tax. Keep each income year small.
This is for you if:
Deferring a contingency fee rests on a Tax Court holding and the constructive-receipt regulation. The exact basis is below. 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 without published opinion, 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 held that attorneys who agreed before settlement to take their contingency fees as periodic payments funded by annuities the obligors bought and owned were taxed on each payment only as it was received, not on the lump sum up front. The Eleventh Circuit affirmed without a published opinion. The IRS has never acquiesced, and its 2022 Chief Counsel memo (AM 2022-007) argues Childs does not cover arrangements built differently, so the design has to track the Childs facts. Plaintiffs’ firms have used this structure 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 structured payment terms have to be fixed before the settlement is final and the fee becomes payable. If the case is days from settling, 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.
A plain-English guide for sellers on how a structured installment sale defers the tax when you sell a business, practice, or property. It covers the math, the alternatives, and how to tell if your deal fits.
Leave your details and the PDF downloads right away. Within one business day Hans will email a preliminary read on which structure fits your deal. No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
📞 Hans Goldstein · 213-414-2808 · CA Insurance License #4273294 · Independent §453 specialist · Goldstein & Co. LLC
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
It is set by the fee agreement. Contingency fees are commonly about a third of the recovery, often rising to around 40% if the case goes to trial, plus case costs. For the attorney, that fee is ordinary income in the year it is paid unless a deferral was agreed before settlement, which is why one large verdict can push a whole career fee into the top bracket.
It can be when the fee is large, you do not need all of it now, and the agreement is signed before the case settles. Spreading the fee lowers the bracket each year sits in. The trade-offs: the payments are an unsecured, non-assignable right, you cannot accelerate them later, and the IRS contests Childs in AM 2022-007, so the structure has to be drafted carefully.
Generally no. Fees earned in the active practice of law are earned income, not net investment income under §1411. They carry Medicare tax instead: 2.9% on self-employment earnings plus the 0.9% Additional Medicare Tax above $250,000 joint or $200,000 single, which also reaches 3.8% at the top. Deferring the fee spreads that Medicare tax across the payment years too.
Yes, if the deferral is agreed in writing before the fee is earned and payable, which in practice means before the settlement agreement is final. The defendant or its insurer assigns the payment obligation to a third party that funds it with an annuity. Agree after settlement and constructive receipt applies, so the whole fee is taxed now.
Sources: Treas. Reg. §1.451-2; IRS Chief Counsel AM 2022-007; IRS Topic 560, Additional Medicare Tax. Checked October 3, 2026.
