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the unpaid litigation costs as bad debts. Canelo v.
Commissioner, supra at 225-226.
Petitioners note that the lawyers involved in Canelo
carefully screened their contingent fee clients and had “good
hopes” of recovery, id. at 224, and petitioners argue that the
facts of that and similar cases are distinguishable (namely,
petitioners claim that the law firm’s contingent fee clients were
not screened based on the probability of recovery and that often
any recovery was doubtful).
Even if, as petitioners claim, the law firm’s contingent fee
contracts were not screened with regard to the probability of
obtaining a recovery and even if the probability of a recovery
was often doubtful, we conclude that the litigation costs in
dispute are to be treated, in the year advanced by the firm, as
loans, not as ordinary and necessary business expenses of the
firm.
Section 6651(a)(1) Additions to Tax
For a taxpayer’s failure to timely file Federal income tax
returns, section 6651(a)(1) imposes an addition to tax generally
equal to 5 percent of the tax required to be shown as due on the
return for every month the return is late, up to a maximum of 25
percent, unless such failure is due to reasonable cause and not
to willful neglect.
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