Revenue – primary goal
What is a loan? –
what if recipient has no intention of repaying? what if funds are embezzled? Incentive to disguise income as a loan.
James v. U.S.
– are embezzled funds gross income in the year in which they are appropriated? Yes. Indictment dismissed though b/c statute requires “willful” evasion.
express or implied
, of an obligation to repay.”
Subsequent repayment by embezzler will qualify for loss deduction under §165(a) and (c)(2) in the taxable year of repayment.
Contingent advances –
– P is a lawyer who uses gross free contract (if you win, we get 33 1/3%,
we pay court costs
if you terminate
, must pay reasonable cost of services) Tax Court
said costs paid are advances
, not deductible.
Appeals Court says
, not so. These are ordinary expenses for a firm trying to make a profit like anyone else.
Net fee contract –
, costs are not deductible– where firm explicitly agrees to pay all costs and client agrees that costs are to be repaid out of recovery.
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