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

Three Florida attorneys and a structured fee agreement before the wire moved.

In 1992, three plaintiff attorneys — Howard Childs, Joseph Davenport, and Larry Hill — were representing a personal-injury claimant in Florida. As the case approached settlement, the lawyers and the two defendant insurance carriers agreed that the attorneys' contingency fees would be paid not as a lump sum at closing, but as a series of structured periodic payments over a number of years.

The mechanics: the defendants' obligation to pay the attorneys' fees was assigned to a third-party assignment company, which used the money to purchase annuity policies from a separate life insurance carrier. That carrier became the obligor, paying the attorneys on the structured schedule.

The attorneys did not report the present value of those future payments as income in 1992. 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. It found three things that defeated constructive receipt:

• The structured-fee agreement was negotiated and signed before the underlying settlement was finalized. At that moment, the attorneys had no unconditional right to any fee — the case wasn't yet settled, and the client hadn't yet received anything.
• Once the agreement was in place, the attorneys could not accelerate, pledge, or transfer the future payments. The contractual right was limited to the schedule.
• The assignment of the obligation to a third-party carrier meant the attorneys were never the creditor of the original defendant. There was a meaningful separation — the new obligor was a regulated insurance carrier paying on its own annuity, not the defendant paying directly.

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 settled tax law going back to Sproull v. Commissioner and Pulsifer v. Commissioner, 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 ultimately 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 further opinion.

The IRS appealed. In 1996 the Eleventh Circuit Court of Appeals affirmed the Tax Court's decision per curiam — meaning the appellate panel agreed with the lower court's analysis and saw no need to add to it. Childs v. Commissioner, 89 F.3d 856 (11th Cir. 1996).

That affirmation matters. A Tax Court opinion is binding on the parties to that case but is only persuasive authority elsewhere. A Circuit Court affirmation lifts the holding into binding precedent within that Circuit (here, the Eleventh) and significantly raises the persuasive weight elsewhere. As of 2026, no other Circuit has split with Childs, and the IRS has never won a contrary courtroom result on the same 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, beneficiary designations — all are fact issues that can sink a structure even when the broad legal theory is sound.

Thirty years. Never overturned. Never even cracked.

Childs remains the controlling authority on deferring contingent attorney fees. The IRS has rumbled (we cover that on the IRS position page) but has not litigated and lost a contrary case, and Congress has not amended §451 or §83 in a way that disturbs the result. Major plaintiff firms structure fees every quarter on the strength of this case. Independent Life, Pacific Life, MetLife ABG, and Liberty/Lincoln all write annuities to fund the obligations.

The legal architecture is settled. 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.