Robert W. Wood, of Wood LLP, has made available for download his article, “When IRS Taxes “Loans” As Income,” published in Forbes Magazine. The abstract is as follows:
When your uncle loans you $5,000 to tide you over, is it taxable as income? Of course not, you have to repay it. What about when the bank loans you $100,000? Again no. When you receive a loan, the money isn’t taxable because you must pay it back. Can lawyers borrow too, just like anyone else? Yes, and for that reason, some lawyers and litigation funders worry about Novoselsky v. Commissioner, T.C. Memo. 2020-68 (2020), where a lawyer was taxed on loans. The case is full of tax lessons. David Novoselsky, a solo lawyer, raised $1.4 million with loan agreements he drafted himself. The IRS said they were not loans and instead were taxable as income. The Tax Court agreed with the IRS the $1.4 million “loans” was income. Novoselsky was a do-it-yourselfer and an entrepreneurial litigator, so in 2009 and 2011, he signed up “litigation support agreements” with eight doctors and lawyers around Chicago. They fell into three groups, each with a pre-existing stake in the litigation: (i) doctors who were plaintiffs in lawsuits Novoselsky was cooking up; (ii) doctors whose economic interests were aligned with the plaintiffs; and (iii) lawyers with whom Novoselsky had fee-sharing agreements.
Posted by Isabella King, Associate Editor, Wealth Strategies Journal.