Structured Settlement Attorney Fees: IRS Scrutiny After the 2022 GLAM

A structured attorney fee is an arrangement that lets a plaintiffs’ lawyer take a contingency fee as a stream of scheduled future payments instead of a lump sum at settlement, deferring income tax on each installment until it actually arrives. The fee is funded by an annuity or investment portfolio the attorney does not own or control. Done correctly, it works like a private pension with no contribution cap. Done carelessly, or paired with the wrong features, it is now a live IRS audit target.

How the Arrangement Works

In an ordinary contingency case, the defendant or its insurer pays the settlement and the attorney takes an agreed percentage in cash. In a structured fee, the attorney elects before settlement to receive that percentage as periodic payments. The defendant, its insurer, or a Qualified Settlement Fund transfers the fee amount to an assignment company, which assumes the obligation to pay the attorney on a set schedule. The assignment company then buys an annuity from a life insurance carrier to fund those payments.¹

The attorney is a payee, not an owner. No control over the annuity, no security interest in the funds, no ability to accelerate or change the schedule once it’s set. That lack of ownership is not a technicality; it is the whole basis for the tax deferral.

Within those limits the schedule is flexible. An attorney can structure all or part of a fee, delay the start of payments for up to 20 years, and shape the payout as monthly income, lump sums timed to a child’s college years, or a lifetime stream. Payments can go to the individual lawyer or to the firm.¹

The Timing Rule That Makes It Work

The election to structure must be documented in writing before the case resolves — before the settlement agreement is signed or the judgment becomes final. Signing paperwork immediately before settlement is fine. Signing it after is not.

The reason is a tax doctrine called constructive receipt. If the money is available for the attorney to take and the attorney simply chooses not to take it, the IRS treats it as received and taxable. Once the settlement is signed and the attorney has an unqualified right to the fee, the window closes. The contingency-fee agreement itself should also expressly contemplate the option of periodic payments.¹

The Case That Made This Legal: Childs v. Commissioner

The entire practice rests on Childs v. Commissioner, 103 T.C. 634 (1994), affirmed without opinion by the Eleventh Circuit in 1996. The Tax Court held that an attorney who arranged to take contingency fees in future installments, funded by an annuity the attorney did not own, did not have to pay tax on the full fee in the settlement year. The court rejected the IRS’s argument that Section 83 of the Internal Revenue Code applied and found no constructive receipt, because the attorney’s interest was unsecured and subject to the claims of the assignment company’s general creditors.¹

The IRS itself cited Childs in a 2001 field service advice memorandum. For nearly three decades, a properly executed Childs-compliant structure was treated as essentially unassailable, and that precedent remains good law today.¹

Why Attorneys Use It

The core appeal is deferral. Because tax is owed only when each payment is received, the entire fee amount grows on a pre-tax basis for years. Tax advisers cite an illustration in which a $500,000 fee structured into deferred payments could generate roughly $200,000 in additional income through tax-deferred growth on the annuity.¹

Compared with a 401(k) or IRA, the differences are stark:

No contribution limit on how much fee income can be deferred.
No age restrictions and no required minimum distributions; payments follow the schedule the attorney chose at setup.
No employer-matching obligation. A single lawyer in a firm can structure fees without requiring anyone else to participate.
Stacking is permitted. An attorney can use a structured fee and a qualified retirement plan at the same time.
The arrangement may be exempt from creditors’ claims, and some practitioners characterize the payments as non-marital assets.¹

The trade-off is illiquidity. Once the schedule is set, it cannot be sped up, slowed down, or changed. The attorney is locked in.¹

Qualified vs. Non-Qualified Assignments

The mechanics depend on the underlying case. Where the client’s recovery is tax-free under IRC Section 104(a)(2) — personal physical injury or workers’ compensation — the defendant’s payment obligation moves through a “qualified assignment” under IRC Section 130. The assignment company uses those funds to buy the annuity, and the attorney receives tax-deferred periodic payments.¹

For non-physical-injury matters (employment discrimination, breach of contract, class actions, construction defects), Section 130 is not available. Attorneys instead use “non-qualified assignments,” in which the defendant assigns the payment obligation to a third-party assignee that purchases the funding annuity. A variant called periodic payment assumption reinsurance operates similarly but requires the defendant to be an insurance company.¹

The tax logic is the same on both sides: the attorney avoids constructive receipt by having no ownership of or security interest in the annuity. But no ruling or court decision addresses non-qualified assignments with the clarity Childs brought to qualified ones, and practitioners acknowledge the ground is less settled.¹

How the Payments Are Funded

Traditionally, structured attorney fees were funded entirely by fixed annuities from life insurance carriers, producing guaranteed payments at a set rate. Major carriers in the market include Pacific Life, MetLife, Independent Life Insurance Company, and Allstate Life. American National Insurance Company (A.M. Best A) and Athene Annuity and Life Company (A.M. Best A+) began writing fixed structured settlement annuities as of 2025.¹

Some products layer index-linked features on top of the fixed base. Pacific Life’s Index-Linked Annuity Payment Adjustment rider can raise annual payments by up to five percent based on S&P 500 performance, while its Payout Plus option offers higher growth potential with payments that can also decrease, though never below a guaranteed floor. Independent Life offers iStructure, an uncapped index-linked annuity tied to a global equity index.¹

Over the past 15 years, market-based structured settlement products have emerged, using portfolios of stocks and bonds rather than fixed annuities. They offer higher growth potential without guaranteed returns, and some let the attorney or their financial adviser select the investment strategy. Fixed and market-based products can be combined.¹

The guarantees on the fixed side depend on the claims-paying ability of the issuing insurer. There is no government backstop and no FDIC insurance. Carrier creditworthiness matters, and ratings can change.¹

Qualified Settlement Funds as a Timing Tool

A Qualified Settlement Fund under IRC Section 468B is a court-supervised trust that holds settlement proceeds temporarily. In the fee context, a QSF buys time. The defendant deposits the settlement into the fund, no party is in constructive receipt, and the attorney arranges the fee structure while the money sits in the QSF. This helps when an insurer will not cooperate with the structure or when more time is needed to finalize terms.¹

A QSF must be established by court order, remain under the court’s continuing jurisdiction, and exist to resolve claims from a tort or related event. It has its own tax ID and pays tax on investment income at rates up to 35 percent, but distributions to claimants and attorneys are generally not taxed until made.¹

The IRS Turns: The 2022 GLAM

In December 2022, the IRS Office of Chief Counsel released Generic Legal Advice Memorandum AM 2022-007. A GLAM is not binding on taxpayers and carries less weight than a revenue ruling or regulation, but it serves as an internal roadmap for IRS auditors. This one laid out four theories for challenging structured attorney fees:¹

Anticipatory assignment of income. When a firm directs earned fees to a third party, the IRS argues it is diverting income it has already earned and should be taxed in the transfer year.
Economic benefit doctrine. Placing funds irrevocably with a third party for the attorney’s benefit is a current taxable benefit, per the IRS, even if the attorney cannot yet touch the money.
Section 83. The same argument the Tax Court rejected in Childs, revived: that the arrangement is a transfer of property for services.
Section 409A. Perhaps the most surprising theory. The IRS asserted the arrangement is a nonqualified deferred compensation plan that fails Section 409A, triggering immediate income inclusion plus a 20 percent penalty. This surprised practitioners because Treasury Regulations issued in 2007 have been widely read to exempt independent contractors with two or more clients, a description that fits nearly every practicing attorney.¹

Writing in Tax Notes, Robert W. Wood and Alex Z. Brown called the GLAM one of the most contentious IRS memos in recent memory. Critics noted the GLAM’s hypothetical was deliberately different from the Childs facts: it described an attorney unilaterally sending a lump-sum fee to a third party, not a defendant assigning a periodic payment obligation to an assignee. The IRS, they argued, was building a scenario Childs did not cover rather than confronting the precedent. One commentator said the IRS would face “a very heavy lift” to overturn 40 years of its own established positions on structured fees and the economic benefit doctrine.¹

There was no industry consensus to stop structuring fees after the GLAM. Some brokers reported an uptick, with attorneys motivated to lock in structures before any potential future changes.¹

The 2024 Enforcement Campaign and Brook-Hollow

On December 2, 2024, the IRS Large Business and International Division announced a formal compliance campaign targeting “deferred legal fees.” It focuses on cash-method attorneys or firms that direct contingent or court-awarded fees to a third party instead of receiving them directly. The IRS flagged three concerns: failing to report fees as income when paid to the third party, failing to issue required 1099 forms, and gaining access to deferred fees through “purported loans” from the third party or a related party.¹

The tools are issue-based examinations and educational “soft letters.” As of May 2026, tax attorneys report that widespread audits under the campaign have not yet materialized, though more than 200 IRS agents recently completed two days of training on deferred legal fee structures.¹

Writing in Tax Notes in June 2025, George A. Luecke and Patrick J. Hindert observed that the campaign does not appear to target properly structured, Childs-compliant deferrals. The IRS is focused on arrangements involving aggressive promoters, attorney-taxpayer loans, or structural elements that give attorneys risk-free access to their money without triggering current tax.¹

The most visible investigation targets Brook-Hollow Capital LLC and Brook-Hollow Financial LLC. In August 2023, the IRS issued information document requests to the companies as part of an inquiry into potential civil penalties under IRC Section 6700 for promoting abusive tax shelters. According to an IRS revenue agent’s declaration, Brook-Hollow Financial structured deferred legal fee arrangements for law firms and charged one to three percent of the deferred amounts, while Brook-Hollow Capital provided loans to law firms for up to 97 percent of the deferred fees.¹

Brook-Hollow has defended itself in court filings, describing its services as assisting attorneys in deferring fees “in a manner similar to that laid out by Childs v. Commissioner.” Counsel for Brook-Hollow stated as of May 2026 that the Section 6700 examination remains in its “early stages” and no determinations have been made.¹

On December 11, 2025, a federal magistrate judge in the Southern District of Ohio granted the government’s petition to enforce IRS summonses against Brook-Hollow’s president, Tate Johnson, ordering production of non-privileged documents within 90 days. The IRS had deemed the company’s earlier production of 1,287 pages insufficient because it contained no client-specific or transactional data. Anecdotal reports suggest IRS Criminal Investigation agents have also asked about deferred fee arrangements during client meetings in recent months, though criminal referrals in this area remain rare.¹

Why the Loan Feature Is the Real Fault Line

The loan feature sits at the center of the IRS’s current posture. In the arrangement described in the GLAM and reflected in the Brook-Hollow filings, a firm defers its entire fee to a third party, which invests the funds and promises a future payout. The firm then borrows most of the money back from the same third party, secured by a promissory note. If the firm defaults, the third party offsets the unpaid balance against the deferred payment. Economically, the attorney gets immediate cash while claiming not to have received taxable income.¹

Under the GLAM’s logic, combining deferral with immediate loan access collapses the distinction between receiving income and deferring it. Practitioners take a more nuanced view. John Kirbo of Wiggam Law has said loan arrangements “should be OK” if they are genuine, arm’s-length loans taken for bona fide purposes, but loans that are part of a single integrated transaction designed to give the attorney immediate access to deferred funds are far more vulnerable. Attorneys who borrow against their structures immediately and routinely stand on thinner ice than those who borrow years later for an unexpected need.¹

What Compliant Execution Looks Like Now

The foundational precedent in Childs remains good law, and industry participants maintain that a properly documented, Childs-compliant structure is legally sound. But the IRS has made clear it will examine arrangements that push beyond that framework, and execution matters more than it used to.¹

Key requirements:

The deferral election is made and documented in writing before the settlement agreement is signed.
The contingency fee agreement expressly contemplates the option of periodic payments.
The attorney does not own or control the annuity funding the payments.
The attorney’s rights to the deferred funds are no greater than those of a general unsecured creditor.¹

Firms need to address whether the firm itself or an individual partner is party to the arrangement, and confirm the setup aligns with the firm’s entity type — professional corporation, partnership, or LLP. Whether an individual lawyer may receive an annuity payment directly when the firm holds the client relationship and right to the fee requires case-by-case analysis. There is no one-size-fits-all answer, and setting up a firm-level structure demands extra care.¹

State tax treatment can also diverge from federal rules. California, for example, does not conform to all federal provisions regarding attorney fee deductions, making consultation with a tax adviser familiar with the attorney’s home state important.¹

The structured attorney fee is still a powerful planning tool. The gap between a well-executed deferral and an aggressive one has never mattered more to the IRS.

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