National Law Journal, Equal Tax Treatment, by Brian Kabateck & Karen Liao (both of Kabateck Brown Kellner, Los Angeles):
Why are plaintiffs’ contingent-fee lawyers treated differently than other businesses in America when it comes to tax deduction of ordinary business expenses? … [T]he IRS currently considers the litigation costs incurred by plaintiffs’ contingent-fee lawyers to be “loans” that clients eventually repay. The tax code as it now stands provides that litigation expenses are not immediately deductible until the case is resolved. When the case settles — sometimes many years after the costs were incurred — the recovery is treated as income and costs are deducted in the year of recovery.
When plaintiffs’ lawyers agree to take cases on a contingent-fee basis, there is never a guarantee of recovery. Plaintiffs’ lawyers take risks by investing their money and time in cases. Clients typically never repay the costs unless there is a recovery. In reality, the costs incurred by plaintiffs’ lawyers in contingent-fee cases are legitimate business expenses and should be treated no differently than the expenses of any other business. …
This looks like a simple quirk in the tax code that could easily be corrected. Yet certain business interests that are typically opposed to plaintiffs’ lawyers (and their clients) are similarly opposed to this change. … Not surprisingly, the big corporate businesses that we sue seem to be the biggest advocates against reform. How about changing the tax code to make it uniform? Maybe it would be fair for all businesses to be treated equally and then all businesses could not deduct expenses until the services or products are delivered and are paid for? The way the IRS currently treats plaintiffs’ lawyers’ litigation costs would be the way big (and little) business would be treated for all expenses.
The real issue here is tax fairness and equal treatment to all businesses. Law firms, like any other business, should be able to deduct their business expenses — at the time that they are made. Plaintiffs’ lawyers are not asking for special treatment or a “break.” Nor are we trying to get out of paying taxes. But every other business in America enjoys the benefit of deducting their business expenses at the time that they are incurred. Why should plaintiffs’ law firms be treated any differently?
