Boccardo v. Commissioner
United States Court of Appeals for the Ninth Circuit
56 F.3d 1016 (1995)
James Boccardo (plaintiff) was an attorney in a personal injury law firm that deducted its litigation costs from its gross income. As a partner, James Boccardo reported his share of those deductions on his federal income tax returns filed jointly with his wife, Lorraine Boccardo (plaintiff). The firm used two types of client contracts. First, the “gross fee” contract said the firm would pay all litigation costs and earn a fixed percentage of the recovery as its fee only if the client’s case succeeded. If the client lost, the firm recovered nothing, even costs paid. If the client fired the firm, the client had to pay the firm the reasonable value of the services provided, but less than 1 percent of clients had fired the firm before recovery or judgment in 30 years. Second, the “net fee” contract said that the firm paid all costs up front, and the client agreed those costs would be repaid only out of a recovery. The firm’s tax attorney had recommended using the gross-fee contract to ensure litigation costs were deductible, and an earlier decision confirmed that costs under the net-fee contract were nondeductible. The commissioner of internal revenue determined that the Boccardos’ tax returns for 1982 and 1983 were deficient because they deducted a share of the firm’s litigation costs. In those two years, the firm resolved 70 percent of cases in the client’s favor, allowing the firm to recoup 90 percent of its total litigation costs. The Boccardos petitioned the tax court for a redetermination. The tax court sustained the commissioner’s decision under Ninth Circuit precedent that held that conditioning reimbursement of costs on recovery did not prevent the firm from expecting reimbursement. Therefore, the firm had to treat the advanced costs like nondeductible loans. The Boccardos appealed, arguing that the firm had no right to recover its advancement of costs under the gross-fee contract and did not expect reimbursement.
Rule of Law
Holding and Reasoning (Noonan, J.)
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