Dionee Searcy of the Wall Street Journal law blog reports about a recent 9th Circuit ruling that held that plaintiff lawyers could deduct as ordinary and necessary expenses the costs they advance for their plaintiff clients:
The court “held that attorneys who represent clients in contingency fee cases may treat litigation costs that are paid by the attorneys, such as filing fees and witness expenses as deductible ordinary and necessary business expenses . . . when the attorney and client agree to a specific fee arrangement known as a gross fee contract.”
The IRS issued a memo saying that the ruling applied only to attorneys in the 9th Circuit. But the Tax Court has since recognized the validity of the decision in at least one other case, according to the letter.
Sen. Baucus introduced legislation in 2008 to allow attorneys to take an immediate deduction for attorneys’ fees in contingency cases in order to provide tax fairness. U.S. Sen. Arlen Specter tried to include a similar write-off in a 2009 tax bill. At the time an analysis by defense lawyers Shook Hardy & Bacon estimated the cost of the write-off at $1.6 billion over a 10-year period.
For competing takes on the matter, check out this post from the American Lawyer’s Susan Beck, which advocates for the tax break, and this WSJ opinion piece, which advocates against it.
Wrote Beck:
When a plaintiffs firm pays a client’s expenses, the firm is incurring a business expense that should be deductible – just like Corporate America’s legal fees and expenses.
And from the Journal:
Taxes are going up in January for millions of Americans, but that means it’s even more important to have friends in Washington. And nobody has friends in higher places than the plaintiffs bar.
One of the many reasons conservatives opposed Obamacare is that it did not contain tort reform. Personal injury lawsuits are out of control in America and in dire need of curtailing. But sadly the trial lawyer lobby has so much power over the Democrat party, tort reform is unlikely to happen anytime soon.
Having said that, I think the 9th Circuit made the right ruling here. Lawyers who front costs for their clients do so knowing that those costs may never be recovered. They don’t secure the repayment of those advances with additional collateral as might a typical lender and they don’t have the right to pursue their clients for repayment of the advanced costs should their clients not prevail in their lawsuits.
The lawyer takes all of the risk and, therefore, should be entitled to a real time deduction.
Any subsequent recovery of costs is, of course, includible in the lawyer’s income in the year of the recovery.
1 response so far ↓
1 Vincent Kan // Jul 16, 2010 at 11:44 am
I agree that if the lawyer advances costs and is not repaid that he ought to be entitled to a deduction. I’m curious though as to the timing question and why the immediate deduction plus tax benefit recovery is preferable to waiting until the conclusion of litigation and netting in that tax year. Most other businesses that loan money to their clients, even on a non-recourse basis, can only take a deduction in the year the debt becomes worthless.
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