- 5 -
claimed deductions that P&G had included in its 1993 fiscal year,
and made a section 481 adjustment that again caused the
reimbursed prior year costs to be included in P&G’s income for
its 1993 fiscal year. The section 481 adjustment had the effect
of reversing respondent’s adjustment backing out petitioner’s
inclusion of the prior year costs that were reimbursed during the
1993 fiscal year.
OPINION
Section 162 permits the deduction of ordinary and necessary
expenses incurred in carrying on a trade or business. P&G
contends that the litigation costs it paid on behalf of clients
were ordinary and necessary expenses of its law practice.
Respondent, on the other hand, contends that, in essence, the
payments were in the nature of loans to P&G’s clients because P&G
paid the litigation costs with the understanding that it would be
reimbursed by CSAA.
We agree with respondent. On the basis of longstanding case
precedents, P&G’s payments or advances of the client’s litigation
costs should be treated like loans. See Canelo v. Commissioner,
53 T.C. 217 (1969), affd. per curiam 447 F.2d 484 (9th Cir.
1971); see also Herrick v. Commissioner, 63 T.C. 562 (1975).
Canelo v. Commissioner, supra, involved a law firm which
primarily engaged in plaintiffs’ personal injury litigation on a
contingent fee basis. The firm advanced the clients’ litigation
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Next
Last modified: May 25, 2011