Legal Question

[jbmagic]

My friend of mine won a wrongful termination suit last year

so they sent the money to his Lawyer,and his Lawyer took his % out and made him a personal check.

does he have to report that for his Income tax? He never recieved anything in the mail.

thanks

[albionmoonlight]

In very, very, very broad terms (i.e. don't take this to the bank)--money that you win in a lawsuit that replaces income that you would have received is taxible because you would have earned the money and paid taxes on it. Money that replaces things like pain and suffering is not taxable because that does not replace income that you would have earned. The devil, however, is in the details.

www.irs.gov (http://www.irs.gov/) may be able to help with that. There may also be an 800 number to call on their site. One of the strange things that I learned doing law in D.C. is that the IRS is actually pretty helpful and friendly as govt' agencies go.

[Franklinnoble]

I'm pretty sure awards like this are not taxed... but his lawyer should be able to answer that for him.

[JonInMiddleGA]

Off the top of my head, I suspect there's a Form 1099 floating around out there somewhere.

With a little Googling, I found an interesting bit, from a 2002 IRS publication
http://www.irs.gov/pub/irs-utl/arc2002_section_two.pdf
well, crap
It doesn't want to cut-and-paste & I don't want to retype the entire paragraph, but the gist of it is that the attorney fees are considering taxable in certain US District Courts but not considered taxable in other US District Courts -- meaning that where you live determines whether the attorney fee portion is taxable (and yes, it means you can actually end up losing money by winning a suit).

Given that the discussion centers on whether the contingency fees are taxable income, then I'd say it's pretty safe to say that the judgement is taxable as well.

[judicial clerk]

I think that his lawyer will send him a 1099 for the amount he received. I am also going to guess that non-economic damages such as pain and suffering and loss of enjoyment of life are also taxed. I think that the only thing not taxable are his economic damages (not including lost wages) such as medical expenses.

This could be completely wrong. Maybe one of our accountants or tax attorneys could enlighten us.

[jbmagic]

I think that his lawyer will send him a 1099 for the amount he received. I am also going to guess that non-economic damages such as pain and suffering and loss of enjoyment of life are also taxed. I think that the only thing not taxable are his economic damages (not including lost wages) such as medical expenses.

This could be completely wrong. Maybe one of our accountants or tax attorneys could enlighten us.


His Lawyer didnt send him anything.

He wondering how will the IRS know he got a personal check from his Lawyer.

Maybe his Lawyer got the 1099 only.

[Hawglaw]

Yes.

In fact, the IRS is really beginning to crack down on this. Either his former employer should issue a 1099 or the attorney. I work on the management side of employment law, so I am not sure how the plaintiffs take care of that.... I just know that it is taxed income.

Now, there's way to get around this...but I won't go into that here.

[Hawglaw]

His Lawyer didnt send him anything.

He wondering how will the IRS know he got a personal check from his Lawyer.

Maybe his Lawyer got the 1099 only.


How will the IRS know? His former employer will list it as wages.

[JonInMiddleGA]

The IRS will know because the lawyer will (assuming he isn't cooking his books) report the inbound company check as part of his credits and the outbound check to the recipient as a debit. There is, somewhere, a paper trail.

Also, if the company sent the check to the attorney, made out to the attorney, then I doubt they're showing it as "wages", since the attorney never worked for them.
If, on the other hand, the check was made out to your friend & it is indeed counted as "wages", then it's going to show up on a W2 form somewhere along the way.

[albionmoonlight]

Any time a decision is based on the fact that "the IRS might not find out," it is a risky decision.

[judicial clerk]

Now, there's way to get around this...but I won't go into that here.

Do you reach a post verdict settlement that characterizes the payment as being for something other than lost wages or payment of the judgment?

[Hawglaw]

The IRS will know because the lawyer will (assuming he isn't cooking his books) report the inbound company check as part of his credits and the outbound check to the recipient as a debit. There is, somewhere, a paper trail.

Also, if the company sent the check to the attorney, made out to the attorney, then I doubt they're showing it as "wages", since the attorney never worked for them.
If, on the other hand, the check was made out to your friend & it is indeed counted as "wages", then it's going to show up on a W2 form somewhere along the way.


Believe me... its wages. The employer has to pay its own taxes on it. Unless they've screwed this up, they must list at least some of it as wages. The award, whether it is part of a settlement or a jury award, is more than likely primarily back wages. It doesn't matter who the check is made out to... it's still wages.

[JonInMiddleGA]

It doesn't matter who the check is made out to... it's still wages.

Then they're either going to send the lawyer a 1099 or a W-2, because the wages have to be accounted for somewhere ... and I doubt he's planning to claim the entire amount for his own taxes.

As albionmoonlight said earlier:
Any time a decision is based on the fact that "the IRS might not find out," it is a risky decision.

[Hawglaw]

Do you reach a post verdict settlement that characterizes the payment as being for something other than lost wages or payment of the judgment?


Bingo... The old trick is to make it all emotional distress and pain and suffering damages and you have no tax consequences. Now, having said that, the IRS is wise to this so care must be taken.

[Hawglaw]

Then they're either going to send the lawyer a 1099 or a W-2, because the wages have to be accounted for somewhere ... and I doubt he's planning to claim the entire amount for his own taxes.



Oh, I don't doubt that. All I am saying is that the friend should not rely on the attorney to do what's right. He should take the initiative and make sure that the taxes are paid. Or, the IRS may come calling...

My advice would be to call the employer and ask them where the 1099 or W-2 will be sent. If they say to his lawyer, he needs to follow up with him.

[jbmagic]

thanks all

so my friend should call his Lawyer and get the Form, he needs to file his income tax?

what form does he ask for?

and if Lawyer doesnt have it, then what his next step?

thanks

[Hawglaw]

thanks all

so my friend should call his Lawyer and get the Form, he needs to file his income tax?

what form does he ask for?

and if Lawyer doesnt have it, then what his next step?

thanks

If Lawyer does not have it, Employer should issue it to him.

[Ksyrup]

Bingo... The old trick is to make it all emotional distress and pain and suffering damages and you have no tax consequences.
In the administrative context with respect to insurers, this is similar to characterizing fines and penalties as "costs" so as not to require NAIC reporting.

[judicial clerk]

Bingo... The old trick is to make it all emotional distress and pain and suffering damages and you have no tax consequences. Now, having said that, the IRS is wise to this so care must be taken.

Doing this post-verdict makes my spidey senses tingle.

In Oregon, the State is entitled to a portion of any award of punitive damages. For a while, what plainitff's and defendants would do if the jury awarded punitive damages is agree to a post-verdict settlement and characterize none of the settlement amount as punitive damages, basically splitting the difference and freezing out the state. This doesn't work anymore.