Paul L. Caron

Friday, July 31, 2009

$1.6b Tax Break for Trial Lawyers

A pending bill in Congress would permit plaintiffs' lawyers to immediately deduct loans to clients to cover litigation expenses (rather than at the conclusion of the litigation), at a cost of $1.6 billion

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$1.6 B tax break? That cannot be right. Under current law, lawyers carry costs and deduct them if the case is unsuccessful and they cannot be recovered from the client. If the costs are paid by the client the are no tax consequences to the lawyer (because they are not income.) Under the proposed new law, the costs would be deductible but when recovered from the client the recovery of those costs would be taxable. Thus, the issue is one of timing of deductions / declaration of income and nothing more. Assuming an investment rate of 5% and an average 2 year carrying cost the total case expense outlay would have to be in excess of $30B to have an annual cost of $1.6B. There is no way the case advances are that high.

Posted by: John A. Day | Jul 31, 2009 7:22:21 PM