In yet another ruling in United States Tax Court, case expenses advanced by a contingent-fee law firm on behalf of its clients have been found to be “in the nature of loans” rather than tax-deductible expenses for the law firm. (Humphrey, Farrington & McClain, P.C., v. Commissioner of Internal Revenue).
Like many rulings before it, this case upholds Private Letter Ruling 8246013 (6/30/1982, IRC Sec(s). 162) which states that a law firm “…may not deduct as ordinary and necessary business expenses the various litigation costs advanced for a client on a contingent-fee case…”.
If you would like to receive a copy of either the Humphrey ruling or PLR 8246013, please click here. I recommend you consult with your CPA today to make sure that your law firm is in compliance on this important issue.