Discussion:Attorney Advancing Client Expenses
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Discussion Forum Index --> Tax Questions --> Attorney Advancing Client Expenses
| 31 July 2006 | |
| The attorney pays client's expenses before trial. These expenses are only recoverable from a successful judgment/pre-trial settlement. When are these expenses deductible? In the year paid or in the year the judgment is final? | |
| 31 July 2006 | |
| I have an attorney client. I have written off all of HIS clients' expenses (whether case closed or not) against income COLLECTED each year (cash basis). He does not keep good books, and I have explained to him in audit he is going to have a timing problem.
He understands, and we plan to tell the IRS in audit that the books have been handled this way for 2 decades. Or in other words, handled in a consistent way every year. I don't like it, but what are you going to do? He would have to - and certainly doesn't want to - pay me an arm and a leg to post expenses to each client's trust account accurately and do it right. He is willing to suffer the consequences in an audit. My problem is, he is an attorney. So I keep my fingers crossed. | |
| 31 July 2006 | |
| The Tax Court ruled in a California case that this arrangement results in no deduction in the year of payment by the law firm under the theories that law firms that sign these types of agreements have a strong track record of recovering these costs, the entire settlement or judgment amount is property of the plaintiff, the costs are responsibility of the plaintiff (under California Rules of Conduct), and that the costs recovered at the time of settlement or judgment are really payments from the plaintiff to the law firm. See Boccardo v. Commr.
However, the Ninth Circuit reversed the Boccardo decision, taking the opposite view, and held that the deduction should be claimed in the year of payment by the firm under the theory that the Rules of Conduct do not have the force of law and the costs are really an ordinary and necessary business expense of the firm. Note that in California, an attorney can lose his bar card for 2 years for a violation of a Rule of Conduct), so I am not sure how the Ninth Circuit decided that the Rules of Conduct do not have the force of law. | |
| 31 July 2006 | |
| Actually the ninth circuit didn't consider the California prohibition a particularly big deal. Be that as it may, there is a distinction where states allow a "gross" fee. Boccardo v Commissioner
Also of note, IRS MSSP 3149-102 | |
