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Tax Law

Car-racing costs can’t be deducted by lawyer as marketing expense, 10th Circuit rules

By Debra Cassens Weiss

December 11, 2024, 8:48 am CST

A solo personal injury lawyer can’t count the costs of car racing as a marketing activity, a federal appeals court ruled Monday.

The 10th U.S. Circuit Court of Appeals at Denver ruled against lawyer James William Avery, who sought to deduct more than $300,000 in expenses incurred in car racing, Law360 reports.

Avery moved to Indiana from Colorado in 2003. He continued to practice law in Colorado, but he hoped to boost his practice in his new state, as well, the 10th Circuit said in its Dec. 9 order and judgment.

To market his practice, Avery began to participate in car shows in Indiana and then tried his hand at car racing. Avery’s Dodge Viper, bought for more than $100,000, had a decal for his law firm on the back, he said in his appellate brief. The webpage for his “Viper racing team” was linked to his firm’s Facebook page.

He raced in at least seven states, including Indiana and Colorado.

But the costs of car racing were not an ordinary and necessary business expense for attorneys that can be deducted, the U.S. Tax Court ruled in February 2023. The 10th Circuit upheld the conclusion.

The Tax Court had found that Avery “greatly enjoyed car racing, which he found more exciting than his previous hobby of acquiring collector cars and participating in car shows. But we find that both activities were hobbies. No deduction is allowed for personal expenses of this kind.”

Avery had argued that the Tax Court should not have considered enjoyment of his marketing activity in its ordinary-and-necessary analysis. Doing so, he argued, could lead to a situation in which expenses incurred for a work vehicle would be deemed to be personal expenses simply because a taxpayer enjoys driving the vehicle.

The 10th Circuit said it isn’t obvious that the Tax Court actually considered Avery’s enjoyment of car racing as a factor in its analysis.

“But even if we read the Tax Court’s decision as Mr. Avery does, we see no error in considering personal enjoyment as one factor among others,” the 10th Circuit said.

Avery did not immediately respond to an ABA Journal request for comment sent to an email address listed on his appellate brief. Nor did he respond to a voicemail left at a number listed on the brief.

The case is Avery v. Commissioner of Internal Revenue.

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3. New nonequity partners are sometimes stuck…

Law Firms

New nonequity partners are sometimes stuck paying more health and tax costs

By Debra Cassens Weiss

November 12, 2024, 3:40 pm CST

Take-home pay is only slightly higher for some newly promoted nonequity partners because their law firms treat them as equity partners for tax purposes.

Many nonequity partners are stuck paying thousands of dollars in health and tax costs that they didn’t have to pay as associates because they are classified as self-employed, Bloomberg Law reports.

These nonequity partners receive the same IRS K-1 schedule as partners do, which means that they have to pay full Social Security and Medicare taxes, Bloomberg Law explains. As associates, these lawyers paid only half those costs. In addition, some of these nonequity partners pay all the premiums for health insurance—a cost that is often subsidized for associates.

“Some nonequity partners get extra compensation in recognition of the costs, while others persuade firms to change their tax classification because of the expenses,” Bloomberg Law reports. “Still others get used to the change, enjoying the status of being called ‘partner’ and realizing there are other tax deductions they can take” for unreimbursed business expenses.

The percentage of partners in the nonequity tier is increasing, Bloomberg Law reports, citing American Lawyer data. Almost half of the partners in the nation’s top 200 grossing firms had nonequity status in 2023, compared to 40% in 2013.

One firm that changed its treatment of nonequity partners is McDermott Will & Emery, Ira Coleman, the firm’s chair, told Bloomberg Law.

“We talked to our income partners and our income partner committee, and they said there’s got to be a better way to do this,” Coleman said.

McDermott switched back to W-2s for nonequity partners in 2020, he said.

Lawsuits filed against Duane Morris and Thompson Hine take issue with the treatment of nonequity partners, the article says.

The plaintiff in the Thompson Hine suit said her status as an income partner was “a meaningless title more akin to an albatross.”

The plaintiff in the Duane Morris suit said after her promotion to nonequity partner, her effective pay decreased. The suit alleged that Duane Morris withheld part of her compensation for a capital contribution and firm operating expenses and also required her to pay a share of partnership taxes owed to states in which the firm practices.

Neither Duane Morris nor Thompson Hine commented specifically on the allegations concerning nonequity partners when the suits were filed, although Duane Morris previously said it strongly disagreed with the plaintiff’s allegations.

The Duane Morris case has been transferred to the U.S. District Court for the Southern District of California. Duane Morris filed a motion to dismiss several claims in the case in August.

“In time,” the motion said, Duane Morris will demonstrate that the plaintiff “is a genuine partner whom the firm has always compensated and otherwise treated fairly and well within the bounds of the law.”

Thompson Hine filed a motion to dismiss in July. When the plaintiff’s 668-paragraph amended complaint is “stripped of all conclusory, argumentative and nonfactual allegations,” it fails to state plausible claims, the motion said.