Note: This is a law school assignment and NOT legal advice.
- What is the tax treatment of costs incurred by a lawyer in representing a client under various fee arrangements?
- What advice should we give to attorneys with regard to drafting engagement letters?
Courts have generally held that that litigation costs incurred by an attorney under a contingency fee arrangement are nondeductible loans, or “advances,” to the client rather than deductible business expenses of the attorney. However the Ninth Circuit held that under a gross-fee arrangement that makes no reference to reimbursement of litigation costs, the attorney can immediately deduct the litigation costs under § 162 as a business expense.
Attorneys should use gross-fee contingent arrangements rather than net-fee contingent arrangements for a greater likelihood of deductibility of litigation costs under § 162. Further, attorneys drafting engagement letters for gross-fee contingent engagements should ensure that the engagement letter stipulates that clients have no responsibility for litigation costs.
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