The U.S. Treasury has initiated a review of a provision in the tax code that prohibits trail lawyers from deducting expenses for contingency cases in the year they are incurred. The current provision allows the expenses to be deducted only after the case has concluded. Most businesses deduct expenses in the year they are paid, and trial lawyers are asking for the same treatment.
The rationale for the unique treatment is the view that expenses incurred by trial lawyers for contingency cases are considered to be loans that the client will eventually repay. This categorization as loan rather than expense means the law firm can only deduct the expenses after the client “fails” to make good the loan. The American Association for Justice argues it is wrong to assume that these expenses are loans when there is no reasonable expectation that clients will repay them. Therefore, these expenses should be deductible in the year incurred.
Sen. Arlen Specter (D-Pa.) and Rep. Arthur Davis (D-Ala.) both introduced bills last year that would have modified the law to AAJ’s liking, but their measures received a fair amount of pushback and were never enacted due to political posturing. The Treasury would essentially circumvent the gridlock of Congress to modify the law to place the practice of plaintiffs’ advocacy on a level playing field with other business concerns.