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costs, and the clients were obligated to repay the advances only
in the event of a favorable settlement or judgment. Accordingly,
if nothing was recovered, the client would have no obligation.
In Canelo, prospective clients were screened and were accepted
only if there were good prospects for recovery. In holding that
the advanced costs constituted loans and not deductible expenses,
the Court emphasized that “If expenditures are made with the
expectation of reimbursement, it follows that they are in the
nature of loans, notwithstanding the absence of formal
indebtedness.” Id. at 225.
In this case, we note that the repayment of the advances was
in no way contingent upon the outcome of the underlying
litigation. P&G expected to be and was repaid for all costs
advanced to CSAA’s policyholders. “It has been firmly
established that where a taxpayer makes expenditures under an
agreement that he will be reimbursed therefor, such expenditures
are in the nature of loans or advancements and are not deductible
as business expenses.” Patchen v. Commissioner, 27 T.C. 592, 600
(1956), affd. in part and revd. in part on other grounds 258 F.2d
544 (5th Cir. 1958).
Petitioner relies on Boccardo v. Commissioner, 56 F.3d 1016
(9th Cir. 1995), revg. T.C. Memo. 1993-224, in support of the
contention that its advances on behalf of clients were ordinary
and necessary expenses of the law practice. That case is
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