Litigation costs deductible under 'gross fee' setup

Article Abstract:

The IRS and courts used to disallow the deduction of expert witness fees, court filing costs and other litigation costs paid on behalf of law firms' clients although cash-method principles provide support for such deduction. However, the Ninth Circuit reversed the decision of the Tax Court in the 'Boccardo' case and concluded that advances made by a law firm in particular instances can be categorized as ordinary deductions. As a result, the payment of costs related to client matters can now be deducted as ordinary and necessary business expenses, rather than loans or advances, on the condition that the payment is structured properly. Law firms entering into contingent fee contracts would therefore do well to assess its engagements to find out if it can comply with the Ninth Circuit decision in 'Boccardo.' For those not entering into contingent fee practices, changing the billing structure to avoid billing for fees and expenses is an option.

Legal services, Offices of Lawyers, Cases, Accounting and auditing, Law firms, Costs (Law), Legal fees

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Debt cancellation not deductible as deferred comp

Article Abstract:

The Tax Court ruled in 'Avis Industrial Corp.' that the cancellation of debts amounting to $1.35 million made to corporate executives over five years was an afterthought and thus could not be considered as deferred compensation. It also concluded that the cancellation was not reasonable compensation for the current year. The taxpayer was not able to prove that the build-up in cash values had been planned as a portion of a deferred compensation plan. Moreover, it failed to establish that the cancellation was prearranged as compensation for prior years or that the officers had been insufficiently compensated. In defending itself, the taxpayer contended that the later compensation was actually adjusted for inflation over the earlier compensation. However, the court did not accept this argument.

Extinguishment of debts, Taxation, Debt cancellation, Deferred compensation

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