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The Trial Lawyer's "Tax Cut" That Isn't

Running a business costs money, and under normal accounting practices, ordinary and necessary business expenses are tax deductible.  If I buy a printer cartridge, for example, I'm able to claim that expense as a tax deduction.  I am also able to claim that business expense immediately.

For years there existed an odd-ball method of tax accounting for trial lawyers.  Unlike every other small businesspersons, trial lawyers were not able to deduct expenses immediately.  Instead, trial lawyers were required to wait until a lawsuit had reached a final outcome before deducting its business expenses.   

Here's an example: Lawyer A files a lawsuit for a wage-and-hour violation in 2010.  Lawyer A has to pay to file fees to file the lawsuit; serve the lawsuit; depose witnesses; and hire experts.  People want paid now.  Imagine lawyer A incurs $10,000 in business expenses in 2010.

The lawyer, unlike every other businessperson, is not able to deduct that $10,000 as a 2010 business expense.  Instead, she'd have to wait until the case settled - 3-to-5 years - before claiming that expense.  

This leads to cash crunches for trial lawyers, which is why the unfair tax treatment exists.  If you run your own small business, this needs no explanation.  For those of you who don't, here's what happens to the lawyer.

If I give you $100,000 but take away $10,000: How much money have you earned?  The logical answer is $90,000.  After all, the $10,000 is not in your hands.  It's in the hands of other small business owners.

Yet under current tax law, the trial lawyer who pays $10,000 in legal expenses in 2010 while earning $100,000 in revenue from other clients, is not going to be taxed for her $90,000 in earnings.  Instead, she'll pay taxes on $100,000 in earnings.  This prevents her from investing money back into her small business.

How is that fair?  How is that logical?  A civil defense lawyer claims:

“They’re trying to get the best of both worlds,” said Christopher Appel, an attorney in the public policy group at the Washington-based law firm Shook, Hardy, and Bacon. “It’s not really a business expense. It’s a loan made to the other person the attorney fully expects to get back.”

This is spin at best - and fraud at worst.  A trial lawyer who takes on a case must immediately pay for experts and other expenses.  If the client wins, then the client will reimburse the lawyer for incurred expenses.  If the client loses, then the client does not reimburse the lawyer.

Does that sound like a loan to you?  

I challenge Christopher Appel to go to his bank with the following proposition: "I need money to start a business.  If the business succeeds, I'll give you your money back.  If the business fails, I owe you nothing.  I won't need to file for bankruptcy to discharge the loan, since you agree not to come after me if my business fails.  We'll just amicably part ways."  Anyone think that bank would call that a loan?   

Thus, Appel's comment - like this entire article - is based on bad faith.  Appel doesn't like trial lawyers.  He wants trial lawyers to hurt.  He wants trial lawyers to have less money to run their businesses.

That's certainly a legitimate viewpoint.  My best friends are all plaintiffs' trial lawyers, and so Appel's viewpoint is not one that I share.  Yet people disagree, and some consider trial lawyers to be bad people.  Fine.  People disagree.

Yet let's at least be honest about our biases.  I don't lie to confuse the public about an important tax issue.  I tell the truth.  Rejecting me is your right as a free person.  If you accept me based on lies, then you are not free - but have instead been enslaved by propaganda.

Money spent litigating a case is a business expense. Money spent litigating is not a loan, because the client is under no legal obligation to reimburse the lawyer for his expenses - unless the case settles in favor of the client.  Thus, the trial lawyers are not going to receive a tax cut.  Instead, they're going to be treated like every other small business owner.