I. Introduction
As the IRS’s attorney fee deferral enforcement campaign gathers national attention, legal and tax professionals are revisiting the foundations of fee deferral jurisprudence. At the heart of this discussion stands Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F.3d 856 (11th Cir. 1996), the seminal Tax Court case that validated the deferral of contingent legal fees when properly structured. This article serves as a companion to the June 9, 2025 Tax Notes article, “To Fee or Not to Fee? The IRS Attorney Fee Deferral Campaign,” by George A. Luecke and Patrick J. Hindert. While that article places Childs within a broader regulatory and policy context, this article focuses more deeply on the Childs decision itself: its facts, legal reasoning, historical impact, and enduring relevance.
II. Historical and Legal Context Prior to Childs
Before Childs, attorneys seeking to defer their contingent legal fees were faced with uncertainty due to lack of precise definition around the applicability of Internal Revenue Code section 83 and tax doctrines such as constructive receipt and economic benefit to structured attorney fee deferrals. Without formal IRS regulations or court decisions addressing attorney fee deferrals in a structured settlement context, most tax practitioners approached the issue cautiously, often relying on differentiating from executive compensation or analogizing to traditional installment sale treatment.
The lack of definitive precedent left open a gray area, particularly where attorneys sought to defer fees in tort cases through assignment companies and annuities. These arrangements, although commercially practical and conceptually sound, lacked judicial interpretation and validation—until Childs.
III. The Childs Case: Factual Background and Procedural History
The Childs case arose from personal injury litigation in which the attorneys, having negotiated contingency fees, agreed – prior to the finalization of the settlement – to receive their fees as periodic payments rather than lump sums. Importantly, the defendants agreed to fund the periodic payments by transferring their payment obligations to a third-party assignment company. That company, in turn, purchased annuities to make the scheduled payments.
The key structural features included:
· The deferral agreements were executed before the attorneys had an unconditional right to the fees.
· A third-party assignment company assumed the payment obligation and purchased the annuity.
· The attorneys were general unsecured creditors of the assignment company with no ownership, control, or acceleration rights over the annuity.
The IRS challenged the arrangement, asserting that the attorneys had constructively received income in the year of the settlement and should recognize the present value of the annuity as taxable income.
IV. Legal Analysis of the Tax Court Opinion
The Tax Court disagreed with the IRS, analyzing the facts under the doctrines of constructive receipt and IRC section 83. It concluded that the attorneys had not received current income because:
· The fee arrangement was made before the attorneys had an unconditional right to payment.
· The attorneys lacked control over the funds and could not pledge, transfer, or accelerate the payments.
· The third-party assignment created a meaningful separation between the attorneys and the payment source.
Under IRC section 83, the court held that the attorneys had not received “property” because the assignment company’s unfunded promise to pay did not confer a present economic benefit.
The Eleventh Circuit affirmed the Tax Court without a published opinion, leaving the lower court’s reasoning undisturbed and effectively establishing a “safe harbor” for similarly structured arrangements.
V. Subsequent Treatment and Enduring Impact of Childs
Over the past three decades, Childs has been cited favorably by the IRS in multiple interpretive documents, including:
· FSA 200151003 (constructive receipt guidance).
· The 2004 Coordinated Issue Paper (distinguishing executive compensation arrangements).
· PLR 200836019 (application to nonphysical injury settlements).
More recently, in United States v. Johnson (Brook Hollow), the IRS reaffirmed that Childs-compliant arrangements remain legally permissible and are not the focus of its enforcement campaign. During oral argument, IRS counsel acknowledged that if income is truly deferred in a Childs-like manner, it is not taxable in the year of settlement.
The practical impact of Childs has been profound. It legitimized structured attorney fee deferrals and spurred the growth of an entire market segment. Attorneys have relied on it for retirement planning, business continuity, and income smoothing. The case’s principles have also been applied outside of tort law, including in employment-related and commercial disputes, as well as in mass tort cases.
Additionally, the statutory exclusion for independent contractors under IRC section 409A has further strengthened the legal foundation for attorney fee deferrals. Because most contingent fee plaintiff attorneys qualify as independent contractors serving multiple clients, they fall outside the scope of 409A’s deferred compensation rules. This exclusion has helped preserve the flexibility and viability of properly structured fee deferrals, particularly those modeled on Childs.
VI. The IRS Enforcement Campaign and the Protective Scope of Childs
Based on tying the late 2024 IRS announcements back through historical precedent and connecting dots to new developments since, the “To Fee or Not to Fee?” Tax Notes article posits that the IRS’s current campaign is not directed at Childs-compliant arrangements. Instead, the IRS appears focused on fee deferrals that introduce risk factors such as:
· Loans or similar monetization elements (such as control over funding vehicles, accelerated access or overly favorable returns in excess of the basic unfunded promise to pay).
· Assignment entities lacking independence or economic substance.
· The involvement of aggressive promoters.
The Brook Hollow investigation revealed that the IRS is targeting arrangements that functionally allow attorneys current access to income while purporting to defer it. These structures depart meaningfully from the Childs framework. By contrast, Childs-compliant deferrals remain legally sound.
The Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo, which overturned the Chevron deference, further reinforces the durability of Childs. Federal agencies, including the IRS, now face greater hurdles in any attempt to reinterpret the tax code in ways that conflict with established judicial precedent.
VII. Practical Takeaways for Practitioners
To fall within the protective scope of Childs, attorney fee deferrals funded with annuities should adhere to the following:
· The deferral agreement must be executed before the attorney has an unconditional right to the fee.
· A third-party assignment company must assume the payment obligation.
· The attorney must lack ownership or control over the annuity or payment source.
· There must be no loans or similar monetization features that create constructive receipt.
The best practice is to mirror the Childs facts as closely as possible. Successful fee deferrals require precise legal documentation, proper timing before income rights vest, and a structure that reflects genuine economic substance.
VIII. Conclusion
More than thirty years after it was decided, Childs remains the cornerstone of tax-permissible attorney fee deferrals. It has been repeatedly cited, implicitly affirmed by the IRS, and never overturned. Amid renewed IRS scrutiny of attorney fee deferrals, Childs offers a clear, judicially sanctioned pathway for attorneys to structure their contingency fees without triggering immediate or accelerated taxation.
The answer to the rhetorical question posed in the June 2025 Tax Notes article “To fee or not to fee?” remains: Fee, but fee carefully. And, to be most careful, fee within the enduring framework of Childs.
Independent Life Insurance Company does not provide tax, legal, or financial advice. The information contained herein is for general informational and educational purposes only and is not intended to serve as a substitute for personalized advice from qualified professionals. Attorneys considering deferring their fees must rely on their own independent legal, tax, and financial advisors to evaluate the potential benefits, risks, and consequences of any transaction.
