Week 4 You Decide

John Smith tax issues:

a. How is the $300,000 treated for purposes of Federal tax income?

Under Internal Revenue Code (IRC) 61, section (a) subsection (1) gross income is defined as “Compensation for services, including fees, commissions, fringe benefits, and similar items.” This section of the tax code is very comprehensive to almost all forms of income with very few exceptions. This has also been held up by the supreme court in numerous cases including the land mark Eisner v. Macomber, 1 USTC p32,252 U.S. 189, 40 S.CT 189 (1920).

This $300,000 fee you appear to have collected must be included on your income tax as gross income. As an attorney you have to claim this money on your personal income tax form 1040 by attaching a schedule C sole proprietorship profit or loss form.

b. How is the $25,000 treated for purposes of Federal tax income?

The IRS is well aware of the common practice by attorneys to pay litigation expenses on behalf of their clients, especially in “contingency fee” cases. These expenses should be treated as a loan when incurred to be collected by the client at a time in the future according to Herrick v. Commissisioner, 63 T.C. 562, 569 (1975) (discussing Burnett v. Commissioner, 356 F .2d 755 (5th Cir. 1966). They are defined more specifically in Canelo v. Commissioner, 53 T.C. 217, 219 (1969) aff/d 447 F.2d 484 (9th Cir. 1971) to include: travel expenses, costs of medical records, reports, interpreters’ fees, witness fees, deposition costs, filing fees, investigation costs, photographs, laboratory tests and sheriffs fees for service....

c. c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?

a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes?

The differences only relate to the amount of deductible mortgage interest paid during a year. Since both are deductible and both are the...