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Costs of Litigation- What is a Legitimate Cost?

Costs of Litigation- What is a Legitimate Cost?

According to 26 U.S.C.A. § 7430(c)(1) and I.R.C. § 7430(c)(1), the term “reasonable litigation costs” are defined as follows:

(A) reasonable court costs, and

(B) based upon prevailing market rates for the kind or quality of services furnished—

(i) the reasonable expenses of expert witnesses in connection with a court proceeding, except that no expert witness shall be compensated at a rate in excess of the highest rate of compensation for expert witnesses paid by the United States,

(ii) the reasonable cost of any study, analysis, engineering report, test, or project which is found by the court to be necessary for the preparation of the party's case, and

(iii) reasonable fees paid or incurred for the services of attorneys in connection with the court proceeding, except that such fees shall not be in excess of $125 per hour unless the court determines that a special factor, such as the limited availability of qualified attorneys for such proceeding, the difficulty of the issues presented in the case, or the local availability of tax expertise, justifies a higher rate.

In the case of any calendar year beginning after 1996, the dollar amount referred to in clause (iii) shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, by substituting “calendar year 1995” for “calendar year 2016” in subparagraph (A)(ii) thereof. If any dollar amount after being increased under the preceding sentence is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.

Corson v. C.I.R., 123 T.C. 202 (2004) addressed what is a reasonable litigation costs and specifically discusses section 7430. The opinion states that section 7430 defines reasonable litigation costs as reasonable court costs and reasonable fees paid or incurred for the services of attorneys in connection with the proceeding. Corson, 123 T.C. at *212 (citing Sec. 7430(c)(1)). Corson involved the review of determining what are the fair litigation costs of the prevailing party in a tax claim.

Furthermore, attorney’s fees, which may be considered litigation costs in a claim, are limited by statute and are adjusted for living cost. Id. (citing Sec. 7430(c)(1)(B)(iii)). According to the National Center for State Courts’ Civil Litigation Cost Model, the median costs of litigation broken down by case type are as follows: Automobile $43k, Premises Liability $54k, Real Property $66k, Employment $88k, Contract $91k, and Malpractice $122k. More on this can be found here.

As you can see, the cost of litigating a legal claim can be very expensive. A contingency lawyer will generally agree to forgo all attorney fees and litigation costs if there is no verdict or settlement in the client’s favor. It is this factor that will likely benefit a client in various ways. Examples of the same are that the attorney bears all the economic risks associated with the litigation, and the contingency fee substantially insures the attorney will be diligent and assertive in the handling of the claim, because the attorney will not get paid, if all, until a successful resolution of the case. A person may want to keep all of this in mind when assessing of the legitimacy of the lawyer’s share of the recovery in a successful claim.

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