Pelton & Gunther, Professional Corporation - Page 6




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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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