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BAAC 529 Defamation
Transcript of BAAC 529 Defamation
have in common? SUCCESS IN
LAW SUITS Our Client BUT DID THEY PAY
THE REQUIRED TAXES? Recently awarded damages in a law suit for defamation.
The reward was divided into several categories.
Let's meet our client and familiarize ourselves with the situation. The Timeline of Events Conflict Damages Breakdown The Project 1 4 5 Popeye had enjoyed a reputation as a strong sailor and a hard worker for many years
His physique and demeanor had earned him numerous commercial contracts and even endorsements from spinach producers A year ago today, his arch-enemy, Bluto, started a nasty rumor that Popeye had been lacing his spinach with steroids
The rumor spread like wildfire, and resulted in Popeye losing all of his contracts and endorsements
The stress of losing his sources of income and the damage to his reputation caused Popeye to descend into a deep depression and to suffer from physical ailments like migraine headaches & facial twitches A law suit ensued.
Popeye filed suit for defamation and intentional infliction of emotional distress
A month ago Popeye received a jury verdict and damages in the amount of $5.2 million 2 3 Conflict cntd. Conflict cntd. The damages were divided into the following parts:
$2 million lost wages, calculated on the basis of the lost employment contracts and endorsements
$750,000 punitive damages
$100,000 reimbursement for medical expenses deducted in the previous year
$150,000 future medical expenses
$1 million for pain and suffering
$800,000 emotional distress
$400,000 legal expenses
Popeye compensated his attorney a total of $435,000 for his services Popeye approached our firm to figure out the tax consequences of the receipt of these damages
The research process occurred as follows... The Main Issue Code §61(a) What portion of the damages is taxable income? Code §104(a)(2) Treas. Reg. §1.104-1 Fabry v. Comm., 86 AFTR2d 2000-5672 (CA11, 2000) Threkheld, 87 TC 1294 Church, 80 TC 1104 Our Client "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived..." "a) In general.
Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213... for any prior taxable year, gross income does not include...
(2) the amount of any damages (other than punitive damages) received... on account of personal physical injuries or physical sickness" "(c) Damages received on account of personal physical injuries or physical sickness...
(1) In general...Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2)" Team Activity 1 Based on the knowledge gathered so far, make an assumption about which portions of the award are taxable or nontaxable Patsy and Carl Fabry, successful owners of Patsy's Nursery in Orange County, FL from 1976-1988
du Pont brand fungicide destroyed inventory
Nursery closed in 1991
Fabrys filed suit for negligence and strict liability, du Pont settled for $3.8 million
$500,000 was attributable to damage to business reputation
Did not include portion in taxable income in 1992 return
Appellate court reversed TC ruling, differentiation between damage to professional and personal reputation is in err
Ruled that the Fabrys' business was a "manifestation" of their persona as it was a closely held business
Main tool in the case: Schleier Test Requirements of the Schleier Test 1. Taxpayer must demonstrate that underlying cause of action giving rise to recovery is based upon tort or tort type rights
2. Taxpayer must show that the damages were received on account of personal injuries or sickness Landmark case in Code §104(a)(2) issues
Invalidated the conclusion of Roemer, 79 TC 398
Law suit brought against James Threkheld and associate by JB Williams over a real estate contract
Court granted Threkheld specific performance and $1.3 million in damages
Threkheld sued JB Williams for malicious prosecution
Severe injury to his professional and credit reputation
Settled outside of court, $300,000 total, $75,000 for injury to professional reputation
Court ruled that distinction between professional and personal reputation injury was no longer applicable
Exclusion appropriate under §104(a)(2) if compensatory damages received on account of any invasion of rights Defamation: Libel v. Slander Libel:
(1) : a statement or representation published without just cause and tending to expose another to public contempt
(2) : defamation of a person by written or representational means
(3) : the publication of blasphemous, treasonable, seditious, or obscene writings or pictures
(1) : the utterance of false charges or misrepresentations which defame and damage another's reputation
(2) : a false and defamatory oral statement about a person Source: Merriam-Webster Dictionary `Wade Church: Attorney General of Arizona in the late 1950's
1971: Filed a complaint against Phoenix Newspapers, Inc. for libel
Jury awarded compensatory damages of $250,000 and punitive damages of $235,000
Substantial part of the award was to compensate for loss of career as a politician; however...
Taxpayer's entire case was entirely based upon how the libel injured him personally
Court ruled that compensatory damages were excludable under §104(a)(2) Team Activity #2 Apply the additional knowledge you gained from the preceding court cases to further determine the taxable amounts of Popeye's award. Code §213(a) "(a) Allowance of deduction.
There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent... to the extent that such expenses exceed 7.5 percent of adjusted gross income." Rev. Rul. 75-232, 1975-1 CB 94 Confronts treatment of future injury-related medical expenses
Taxpayer received a settlement for a suit involving personal injury from a car accident
100x dollars of the settlement was attributable to future medical expenses
Taxpayer had expenses of 20x, 40x, and 50x dollars in the three years following the year of the settlement
Determination: future medical expenses must be offset against award received before medical expense deductions may be taken Team Activity #3 Use the information just gathered to find the appropriate treatment for the damages Popeye received for medical expenses.
Helpful hint: Popeye took deductions for his medical expenses last year Issue #2 MEDICAL
EXPENSES Issue #3 LEGAL
EXPENSES Code §162(a) "In general.
There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business..." Code §212(a)(1) "In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year—
for the production or collection of income..." Church, 80 TC 1104 cont. Damages for personal injury were not the only issue in this case
Church incurred over $250,000 of attorney fees connected with his case against the newspaper
The court determined that to calculate the deductible portion of the fees:
Fees had to be allocated between the taxable and nontaxable portions of the award
Taxable portions were income for the taxpayer
Attorney fees determined to be expenses in the production of income
Multiplied the total attorney fees by a percentage of the taxable portion of the damages over the total damages awarded Team Activity #4 Using all of your knowledge of the taxable and nontaxable portions of Popeye's award, calculate the deductible portion of his attorney fees (if any)
Helpful hint: The reimbursement is simply a REDUCTION of the total fees paid My Recommendations Damage Portions $2 million lost wages $750,000 punitive
damages $1 million for
pain and suffering $800,000 emotional
distress $100,000 reimbursement for
medical expenses deducted in
the previous year $150,000 future
medical expenses $400,000 legal
expense reimbursement INCOME INCOME NOT
INCOME INCOME Medical Portions INCOME NOT
Prepayment Legal Portion $435,000 total
attorney fees Calculation Taxable portion of award: $3,650,000
Total award: $5,200,000
Attorney fees NOT reimbursed: $35,000
Total deduction: $35,000
* ($3.65 million/$5.2 million)
= $25,567 Final Activity My actual case Please open Envelope #2
Your team has 5 minutes
May the best team win! My Solution Taxable amounts: lost wages, punitive damages, damages for emotional distress
Medical amounts: all excludable
Legal expenses: $17,778 deductible Main Takeaways Damages received for pain and suffering from injury to reputation are excludable from income, no matter if personal or professional
Damages for future medical expenses must be offset before deductions may be taken
Attorney fees are deductible if damages in a law suit are deemed taxable income Any Questions? Case Presentation