Were litigation costs advanced by a contingency-fee law firm taxable accounts receivable before a client recovered money?

Subject

Property Subject to Tax - Accounts Receivable -Valuation

Plain-English summary

The law firm's advanced client costs were not taxable accounts receivable while the related contingency cases remained unresolved. The firm paid litigation-preparation costs and recorded them as other assets, but its contracts allowed reimbursement only from a later recovery.

Until a verdict, mediation, or settlement produced a recovery, the client had no current obligation to pay and the firm could not submit a bill. The Department therefore found no taxable receivable for those unresolved cases.

What this means for you

The accounting label did not control. The Department looked at whether the client had a present, enforceable payment obligation on the valuation date.

Common questions

Q: Were all advanced costs excluded from tax forever? The ruling addressed costs in cases where no settlement or recovery had yet occurred.

Q: Why were those costs not accounts receivable? The client owed nothing until a recovery and could not be billed earlier.

Q: Did recording the advances as an asset make them taxable? No, not without a current client obligation to pay.

Citations and references

• Fla. Stat. § 199.103(5) — accounts-receivable valuation
• Fla. Admin. Code r. 12C-2.010(1)(h) — accounts receivable
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93C2-025

Original ruling text

Sep 17, 1993

Re: Technical Assistance Advisement 93(C)2-025
Intangible Tax - Valuation of Accounts Receivable
Section 199.103, F.S. and Rule 12C-2.010, F.A.C.
XXX (Taxpayer)

Dear :

Your letter requesting a Technical Assistance Advisement
has been referred to this office for response. The specific
request deals with the taxability of advanced client costs due
from a contingency fee contract between attorney and client.

The following information was presented for consideration
by this office:

Taxpayer is a law firm specializing only in contingency fee
cases. The Taxpayer advances monies on behalf of clients
to pay the cost of preparation of their cases, initially
and through trial or settlement. These advanced costs are
currently reflected on the Taxpayer's records as Other
Assets, Client Advanced Cost. If a favorable recovery is
received, either by jury verdict, mediation or settlement,
the Taxpayer recovers the advanced cost from the client's
recovery.

Pursuant to the Taxpayer's standard contract with their
clients, any monies advanced on behalf of the client shall
be recoverable only upon the conclusion of their case. The
Taxpayer does not, and cannot at anytime throughout the
claim for damages, submit a bill to the client representing
the advanced costs paid on behalf of the client by the
Taxpayer.

Provisions of Law

Section 199.103(5), F.S., requires that all accounts
receivable be valued at their outstanding balance as of the

close of business on the last business day of the previous
calendar year less a reasonable allowance for uncollectible
accounts. [also see Rule 12C-2.010(1)(h), F.A.C.]

Discussion of Law

Based upon the contract provisions examined by this office
any monies advanced by Taxpayer can not be collected until such
time as the legal action is concluded. Both the client and the
Taxpayer contractually agree that no monies are due to Taxpayer
until a recovery is made and that advances made will be taken
from the recovery. It is, therefore, the opinion of this office
that until a recovery is made the client has no current
obligation to pay Taxpayer. Based upon this opinion the amounts
which are included in the Taxpayer's account titled, Other
Assets, Client Advanced Costs, which are being accrued in cases
for which no settlement has been reached, are not subject to the
intangible tax.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request
are public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect the confidentiality
of such information, we request you notify the undersigned in
writing within 15 days of any deletions you wish made to the
request or the response.

Sincerely,

J.V. Parramore, Jr.
Tax Law Specialist
Technical Assistance

JVP/mh