Tax Legal Services · Primary-source case analysis

Commissioner v. Banks: A Litigation Recovery Includes the Contingent Fee

By Aneeta Mishra and Timothy Chan

Published May 2, 2026 · Updated October 18, 2026

Decision: Comm’r v. Banks, 543 U.S. 426 (2005).

Commissioner v. Banks applies the anticipatory-assignment-of-income principle to contingent attorney’s fees and explains why a lawyer’s contractual share generally does not reduce the client’s gross recovery at the inclusion stage.

The taxpayers excluded the fee portions

Banks settled for $464,000 and paid $150,000 to counsel. In the companion Banaitis matter, defendants paid $4,864,547 to the client and $3,864,012 directly to counsel. The direct payment did not by itself remove the fee from the client’s income. Banks, 543 U.S. at 430–432. The consolidated cases involved taxable litigation recoveries subject to contingent-fee agreements. The taxpayers argued that only the net amounts they retained should enter gross income because counsel owned the assigned portions.

The cause of action remained the client’s asset

The Court treated the attorney-client relationship as an agency arrangement for this purpose. The client controls the underlying claim, and the contingent fee is paid from income generated by that asset. Direct payment to counsel does not by itself prevent attribution to the client.

Gross income includes the full recovery

When the recovery is taxable, the claimant generally must include the lawyer’s contingent share along with the amount personally received. The Court rejected reliance on ordinary state-law attorney liens, even those described as ownership interests, so long as the relationship remained principal and agent. It separately declined to decide newly raised partnership, capital-expense and reimbursement theories, and a relator’s claim on behalf of the United States. Those reservations were not approved exclusions. Banks, 543 U.S. at 437–438.

Deductions require a separate current-law analysis

Congress enacted an above-the-line deduction for attorney’s fees in specified claims while the cases were pending. Whether that or another deduction applies depends on current statutory requirements, the claim type, timing, caps, and allocation; it does not alter Banks’s gross-income rule.

Key takeaways

• Determine first whether the underlying recovery is taxable.
• Include the contingent-fee portion in the gross-income analysis.
• Evaluate any attorney-fee deduction separately.
• Allocate multi-claim recoveries and document the fee arrangement carefully.