Your Edison Settlement
Will Blindside You.

I have a client in his mid-eighties. Lost his Altadena home in the Eaton Fire. His attorney negotiated an Edison settlement — not a huge number, but real money, and he needed it. He's in his eighties. He doesn't want to wait years for a bigger number that may never come. He wants to fix his place, live his life, and not die waiting on litigation. That's not fear, that's wisdom. He took the settlement.

Then I sat down with him and showed him what the tax bill looked like.

He didn't believe me. Genuinely — he sat across the table and told me I had to be wrong. So I called his son, who is an attorney. Explained the same math. His son went quiet for a long moment and then said he'd never heard of this. A lawyer. Who had never heard of Commissioner v. Banks.

This happens constantly. Fire survivors celebrate a settlement, spend part of it, and then sit across from me at tax time holding a 1099 they don't understand for an amount that includes money they never received — and a tax bill that can exceed what they actually kept. It is one of the most genuinely unfair corners of the tax code, and I'm going to explain exactly how it works so you don't get blindsided.

Will Edison Send Me a 1099 for My Wildfire Settlement?

Almost certainly yes — and it will be for the full settlement amount, not the amount you received.

Under IRC §6041 and §6045(f), Edison is required to report the payment to the IRS. They will issue a 1099-MISC. What most survivors don't realize is what that 1099 covers:

Here's where most people — including most attorneys — stop understanding the problem. They assume the 1099 is wrong, or that they only owe tax on what they actually received. That assumption is incorrect, and it has been incorrect since 2005.

Do I Owe Tax on the Attorney Fees in My Edison Settlement?

Yes. And this is the part that makes no sense to any rational person — including me, frankly.

In Commissioner v. Banks, 543 U.S. 426 (2005), the Supreme Court applied something called the anticipatory assignment of income doctrine. The logic goes like this: you had a legal claim. That claim had value. When you hired a contingency fee attorney, you effectively assigned a portion of that future income to them in advance. But the income was still yours first — you just agreed to share it. Therefore, under IRC §61, you include the entire settlement in gross income, then separately deal with the attorney fee portion.

The problem is that "separately dealing" with attorney fees used to mean deducting them as a miscellaneous itemized deduction. The 2017 Tax Cuts and Jobs Act permanently eliminated that deduction. So now:

You include 100% of the Edison settlement in your gross income. You pay tax on 100% of it. Your attorney keeps their third. You end up taxed on money you never received, never controlled, and never will see. The tax world calls this "phantom income." I call it one of the most punishing provisions in the code for ordinary people.

Is My Edison Wildfire Settlement Taxable Income?

Under current law, yes — with one potential exception that most survivors won't qualify for yet.

A payment from Edison for property damage is taxable ordinary income under IRC §61. This is not insurance. Insurance proceeds get favorable treatment under §1033. An Edison settlement is a tort payment from a third party — a defendant writing a check because a court or mediator said they caused your loss. That's income. The IRS does not treat it as a return of your property. It treats it as compensation, which is taxable.

The one exception: HR 5863, the Federal Disaster Tax Relief Act. It would exclude qualifying Edison payments from income entirely. But under current law, payments had to be received by December 31, 2025. Most Eaton Fire survivors won't receive Edison money until 2027 or later. Whether Congress extends that deadline determines whether this exception saves you anything. As of this writing, it has not been extended.

The Math That Shocks Every Client

Let me run the numbers on a realistic Eaton Fire scenario. My client is in his eighties on a fixed income — his situation is different — but this is the range I see most often for Altadena homeowners who accepted early settlements:

You settled for $600,000. You keep $98,200. You owe $301,800 in tax — of which $111,800 is tax on money your attorney received, not you.

This is not a hypothetical. This is the math under current law for a California taxpayer in the top bracket who accepts an Edison settlement, has a standard contingency fee agreement, and has no deduction available for the attorney fees. And most fire survivors don't.

Can I Deduct My Attorney Fees From My Edison Settlement?

This is where most advisors give up and say no. In my experience, the answer is more nuanced — but the paths are narrow and some carry real audit risk.

The one strategy that actually works if it's not too late: structured settlement payments spread over multiple years. If you haven't finalized your Edison settlement yet, negotiating installment payments rather than a lump sum can keep you out of the top bracket in any single year. On a $600,000 settlement paid $200,000 per year over three years, the math above changes substantially. This must be arranged before the settlement is signed — once the money is yours, the IRS taxes it in the year of receipt regardless of when you actually take the cash.

What About the "I Didn't Get a 1099" Situation?

Some survivors won't receive a 1099 from Edison — maybe the settlement is structured differently, maybe there's a reporting error, maybe Edison's attorneys handle it through a qualified settlement fund. It doesn't matter. Under IRC §61, your obligation to report income exists regardless of whether you receive a 1099. The form is just a matching mechanism. Not receiving one doesn't make the income disappear — it just means the IRS might not catch it immediately, which is not the same thing as it not being taxable.

The mistakes I see clients make in this situation:

A Note on the Law Itself — and Whether It Will Change

In my reading of the code and the cases, the Banks doctrine is genuinely bad law. It creates a situation where an ordinary fire survivor — not a sophisticated investor, not a wealthy plaintiff — can owe more in taxes than they actually receive. The deduction that used to exist to fix this was eliminated in 2017, not because it was abusive, but because it was a line item in a budget calculation.

Based on my reading of how the Supreme Court has approached tax and property rights in recent terms, I think there is a real argument that a future Court — one willing to revisit settled precedent the way the current Court has shown it will — could take another look at the anticipatory assignment of income doctrine as applied to contingency fee arrangements. If Roe v. Wade could be overturned after fifty years, the Banks doctrine, which is twenty years old and creates genuinely inequitable results for ordinary plaintiffs, is not untouchable. I'm not predicting it. But I'm not ruling it out either. And if it happens, fire survivors who preserved their records carefully will be in a position to benefit.

Until then: plan under the law as it exists, not as it should be.

Frequently Asked Questions