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

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

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 left open specialized arrangements in which applicable law might transfer more than a mere fee interest, but found no such basis in the cases before it.

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.