Tax Law Class Assignment: Tax Treatment of Costs Incurred by a Lawyer in Representing a Client Under Various Fee Arrangements

Advanced Tax Law Assignment:
Note:  This is a law school assignment and NOT legal advice.

Tax Treatment of Costs Incurred by a Lawyer in Representing a Client Under Various Fee Arrangements

Questions Presented

1. What is the tax treatment of costs incurred by a lawyer in representing a client under various fee arrangements?
2. What advice should we give to attorneys with regard to drafting engagement letters?

Brief Answer

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.

Link to full document
https://docs.google.com/document/d/1mp-r53ZU6kwuovChRelx-d1nlYRztd6J87cxQ8isFCM/pub