## Facts

- James F. Boccardo was a partner in a personal-injury law firm that handled contingent-fee cases and used the cash method of accounting.
- In 1982 and 1983, the partnership deducted litigation costs it paid in connection with client matters (e.g., filing fees, witness fees, travel, medical consultation fees), and Boccardo claimed his distributive share on joint returns with Lorraine V. Boccardo.
- The firm used a “gross-fee” contingent contract under which the firm:
  - Paid all preparation and trial costs.
  - Earned a percentage of the client’s gross recovery (not reduced by costs).
  - Received nothing for services or costs if there was no recovery.
  - Could demand reasonable value for services if the client discharged the firm (a rare occurrence).
- The Commissioner disallowed the partnership deductions on the theory that the litigation-cost outlays were advances/loans to clients, creating income tax deficiencies for 1982 and 1983.
- The Tax Court sustained the deficiencies, treating the costs as nondeductible loans to clients.
- The Boccardos appealed.

## Issues

1. Whether litigation costs paid by a law firm under gross-fee contingent contracts are currently deductible “ordinary and necessary” business expenses under I.R.C. § 162(a).
2. Whether those payments instead create nondeductible loans/advances to clients (to be recovered, if at all, only upon repayment).

## Decision

- The Ninth Circuit reversed the Tax Court and directed entry of judgment for the Boccardos.
- The court held that, under the firm’s gross-fee contingent contracts, the litigation costs were currently deductible ordinary and necessary business expenses under § 162(a).
- The court concluded the costs were not loans because the contract structure generally did not provide the firm a separate right to reimbursement from the client.

## Legal Principles

- A payment is treated as a loan for tax purposes only if the arrangement reflects a bona fide debtor–creditor relationship, including a right to repayment and an expectation of repayment.
- Under I.R.C. § 162(a), a taxpayer may deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business; expenditures can qualify when they are part of the taxpayer’s income-producing business model.
- In contingent-fee representations, characterization of litigation-cost outlays depends on the contract’s economic substance: a gross-fee structure (fee computed on gross recovery and no separate client reimbursement obligation) supports expense treatment, while a net-fee structure (costs expected to be repaid from recovery) supports loan treatment.

## Conclusion

The Ninth Circuit held that a personal-injury firm’s litigation costs paid under gross-fee contingent contracts were the firm’s own business expenses incurred to generate fee income and were therefore currently deductible under § 162(a), rather than nondeductible client loans.


Boccardo v. Comm'r, 56 F.3d 1016 (9th Cir. 1995)