How Should a $300,000 Fee Collected by John Smith After Two Years of Work on a Personal Injury Case with a $2,000,000 Jury Verdict in His Clients Favor, Be Reported for Tax Purposes.

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1 (A)
The question is how should a $300,000 fee collected by John Smith after two years of work on a personal injury case with a $2,000,000 jury verdict in his clients favor, be reported for tax purposes.

Under Internal Revenue Code (IRC) 61, section (a) subsection (1) gross income is defined as “Compensation for services, including fees, commissions, fringe benefits, and similar items.” This section of the tax code is very comprehensive (with 15 descriptive subsections) to almost all forms of income with very few exceptions. This has also been held up by the supreme court in numerous cases including the land mark Eisner v. Macomber, 1 USTC p32,252 U.S. 189, 40 S.CT 189 (1920).

This $300,000 fee you appear to have collected must be included on your income tax as gross income. As attorney you have to claim this money on your personal income tax form 1040 by attaching a schedule C sole proprietorship profit or loss form. In some states an attorney practicing as a single member LLC would have to report this money as gross income on an LLC tax return.

1 (B)
The question is how should the reimbursement of $25,000 paid up front by John Smith during his two years of work on the mentioned personal injury case, be reported for tax purposes.

The IRS is well aware of the common practice by attorneys to pay litigation expenses on behalf of their clients, especially in “contingency fee” cases. These expenses should be treated as a loan when incurred to be collected by the client at a time in the future according to Herrick v. Commissisioner, 63 T.C. 562, 569 (1975) (discussing Burnett v. Commissioner, 356 F .2d 755 (5th Cir. 1966). . They are defined more specifically in Canelo v. Commissioner, 53 T.C. 217, 219 (1969) aff/d 447 F.2d 484 (9th Cir. 1971) to include: travel expenses, costs of medical records, reports, interpreters’ fees, witness fees, deposition costs, filing fees, investigation costs, photographs, laboratory tests and sheriffs fees for...
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