Litigation costs may be currently deductible.

• Author: Hogle, William G.
• Position: Brief Article

The Ninth Circuit has held in Boccardo, 5/26/95, that a cash-basis law firm could currently deduct litigation costs (amounts paid for filing, witnesses, travel, medical consultation, etc.) paid by the law firm, even though recovery of these costs could be obtained only from the firm's fee, which was contingent on the outcome of the case.

Several cases have held that litigation costs advanced under contingent fee arrangements were not currently deductible, because the law firm had the right to be reimbursed from the recovery. Under the typical "net fee contract," the law firm receives a portion of the recovery after first being reimbursed for litigation costs. In Boccardo, the law firm's fee arrangement provided that the firm would receive a percentage of the recovery, but contained no provision for reimbursement of litigation costs. The court distinguished this "gross fee contract" from a "net fee contract," stating that under the former there was no contractual right to reimbursement and that the law firm was no more reimbursed for its expenses than a self-employed commission salesman is reimbursed for travel costs incurred in making a sale when he receives his commission...