In their article entitled “Attorney Fees and Private Annuity Rules” TAX NOTES, January 22, 2007, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=958185 Messrs. Raby and Raby embark on an intriguing discussion on this topic and argue that deferred attorney fees fit under the private annuity rules.
On page 311, item 4. they state that, “We believe that, looking at the economic reality of what has occurred, section 72 is broad enough to treat as annuity contracts obligations calling for payments in periodic installments at regular intervals, especially when the obligor has arranged for actual annuity contracts issued by insurance companies to be used to fund the payments. That is all that a private annuity is – an unsecured promise to make periodic payments over a period of time or for the lifetime of one or more annuitants. Since the attorney has traded his inchoate claim against the client for a third party obligation, with the trade being effective when the settlement takes place, the attorney has received an annuity contract.”
One should note that the proposed Treasury regulations
are concerned with Section 1001 of the Internal Revenue Code, which provides rules for determining the amount of gain or loss reported from the sale or other disposition of property and not deferred compensation.