June 25th, 2008

Taxation of Confidentiality Agreements (Amended)

An issue has arisen in recent years about the taxability of personal injury settlements when a confidentiality agreement is reached. Generally, such settlements are not taxable pursuant to IRS section 104(a)(2). But the issue reared its head due to a settlement involving Dennis Rodman back in Amos v. Commissioner of Internal Revenue when Rodman kicked Amos, a camerman, in the groin during a Chicago Bulls game. (Amos-v-Commissioner.pdf)

Prior to suit they reached a $200,000 settlement. But part of that settlement included a confidentiality clause. So the IRS brought an action claiming that part of the settlement was taxable. And the Tax Court agreed, ruling in 2003 that while the proceeds for the personal injury portion were not taxable, that any part of the money that was in exchange for the confidentiality agreement would be. The court wrote that “if a settlement agreement lacks express language stating what the amount paid pursuant to that agreement was to settle, the intent of the payor is critical to that determination.” In the end, the court ruled that Amos was to be taxed on $80,000 of the settlement.

And so that opened up any personal injury settlement that includes a confidentiality clause to potential scrutiny. So what’s a lawyer to do? (Question courtesy of Drug and Device Blog.)

While others have suggested placing a number, perhaps $1, in the agreement on the value of the confidentiality agreement — part of the “express agreement stating what the amount paid pursuant to that agreement was to settle” — I think an issue still lurks. It seems quite possible — and I say this without much in the way of knowledge of tax law — that the IRS would want to go to the merits and look at the actual injuries and compare that to the amount received if they believed a great disparity existed between injuries and recovery. It seems that a $5,000 injury that resulted in a $100,000 settlement, for example, would raise eyebrows regardless of what the legal papers claim.

But the problem really exists if it is simply the defendant that seeks the agreement, as has traditionally been the case. The defendant doesn’t want to be seen as a mark to other potential litigants.

The internet age and issues of privacy and identity theft, however, shift that dynamic. Would a plaintiff receiving a large award really want the information public? Likely not. In fact, at my firm’s web site where I discuss case resolutions I have stripped out the names of my clients for just this reason. Those recoveries are no one’s business but the parties themselves.

And so the solution for an attorney to explore with the settling client — I’m not a tax lawyer and this is not tax advice, disclaimer, disclaimer, yada, yada, yada — is actually somewhat simple: Both sides are seeking that confidentiality agreement. The consideration for the confidentiality agreement is the mutual promise for confidentiality. Plaintiff, simply put, doesn’t wish to alert potential thieves and hustlers that such funds exist. This is a real issue.

(Addendum: The preceding “simple” analysis may well be wrong, as the IRS might still say it has value and tax it.)

Along these same lines, an attorney should be wary of signing any agreement that says the funds are being paid to dispose of a claim was dubious, frivolous, meritless or any such other claptrap. Incredibly, I have seen releases written that way. (“But that’s our standard release, everyone signs them!”) Signing such a document could be seen as an admission that the amount paid was for something other than personal injury, and therefore subject the client to taxation.

(Second Addendum): The safest course of action may be to take back a Hold Harmless agreement from the defendant. That is to say, if they wish to have the confidentiality agreement, then they must also agree to defend and indemnify the plaintiff if the IRS comes calling, and claiming that there was value in the confidentiality agreement.

And yes, I did have fun doing an image search for Dennis Rodman.

See also: More On Taxation of Confidentiality Agreements (Drug and Device)

 

June 25th, 2008

Trial Blog, Part 3 (We Finish Jury Selection)

Jury Selection started yesterday, and now continues:

Friday, June 13th. Jury selection drags on the whole day. One of the defense lawyers tries hard to bond with each potential juror. He talks of movies, television shows, the Belmont Stakes, Sydney Sheldon books and anything that may be of interest to the potential jury. I contemplate stopping him with an objection, but decide that the benefits of a backlash against him for dragging this out outweigh the benefits of finishing the selection process quickly. Also, I like to use this stuff in summation, where I remind them that I am here to talk about the case, and only the case, and am not trying to suck up to them or charm them.

A juror tells us he was sued as the owner of a car, when his wife was in an accident. The claimant, he tells us, trumped up the damages. He even saw the guy remove a cervical collar after visiting their home. Since it happened 20 years ago, and he says he says he is still bitter about it, I ask that he be removed for cause. The judge disagrees, and I exercise a peremptory challenge.

I exercise another challenge on a woman who never smiles. While she certainly answered all the questions “correctly,” I make a gut call based on body language.

Another juror has a husband that sells insurance. That is usually a reason to challenge a person for cause. But she works for a child protective services agency, and seems to have a warm and pleasant disposition. She’s the type of person you would feel comfortable talking to, which is important for my client when she needs to open up on the stand. I keep her.

Another juror works for a cancer hospital and helps the dying. Since my client works with the elderly, principally those with Alzheimer’s and dementia, this is a great fit. But she takes herself off the jury saying she can’t be fair. I ask her anyway to expound on why she enjoys her work, since my client enjoys hers and her inability to do her work is a significant part of my case. Since there are many people who don’t enjoy their work, and some may be on the jury and not necessarily believe that there are people that actually enjoy what they do, I’m eager to have someone similar to my client discuss how and why she loves hers so much.

A couple of people indicate that they will give the plaintiff whatever she asks for, since they know she has already won the liability case. These folks get tossed for cause.

Jury selection ends after two days. That was way too long. We are told to come back Tuesday for opening charge, opening statements and witnesses. My plan is to put the two drivers on the stand first and then my client.

Next up: We open and start taking evidence

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Addendum — The full series of posts:

Synopsis of the case at my firm’s website

    • .

 

 

June 25th, 2008

Trial Blog, Part 2 (Jury Selection Starts)

Continued from yesterday, when I was assigned to a trial judge:

Wednesday, June 11th: Since my home is more convenient to the courthouse than my office, I’ve hauled back a few trial bags full of stuff, and have my skeletal model and medical illustrations strewn about the home. My five year old sees the trial bags and tells my wife, “Daddy’s got a LOT of homework.”

I prepare for trial by thumb wrestling with the kid. He beats me. But he cheated by using two hands. I hope it’s not an omen.

Thursday, June 12th. Jury selection starts. The leasing company has a new lawyer, since the other one had a jury picked elsewhere. We have a panel of 25 and will use a courtroom for selection. Clients do not attend, though permitted. It is the local custom due, in large part, to the fact that we usually use cramped jury rooms to pick.

Some folks say cases are won and lost at this stage, so you hate to mess up. Some of the jurors that we see:

1. A juror says to one of the other attorneys, “The insurance company should just give her what she asks for” (since liability is already decided). I don’t know if he is trying to talk himself off the jury or mis-speaking. He speaks English well, but it is clearly a second language to Spanish. I follow by asking, if Ms. Plaintiff asks you for all the gold in Fort Knox, does that mean you would give it to her?” He says of course not, indicates he had mis-spoken, and that any award must be fair and reasonable. Defendants want to knock him off for cause, and I say no. We get a judicial ruling. I lose. He’s gone for cause.

2. A juror says he doesn’t feel right holding the leasing company (owner of the car) liable just because the driver was negligent. I don’t think he’s trying to talk himself off, but it doesn’t really matter. He’s a goner. Defendants love this guy and desperately try to rehabilitate him but he sticks to his guns. Gone on consent.

3. A juror claims not to speak English well. I’ve seen this routine many times before. I never believe it because, if they couldn’t speak well, they wouldn’t have made it past the jury clerk. In order to avoid a mass exodus from the courtroom, I use my canned speech about the importance of jury duty, it’s place in the Bill of Rights, and the desires of our nation’s Founders to keep power in the hands of the people, not all-powerful judges.

4. A juror has a son about to do his third tour in Iraq. He would otherwise be OK, but as serious as my client’s injuries are, I don’t want him doing a comparison to what his son and friends are going through. I exercise my first peremptory challenge.

Lunch break across the street at the Court Deli. The crowd is a stew of lawyers and litigants, witnesses being prepped, cops and court officers, judges and clerks. Perhaps some folks who are building the new Yankee Stadium two blocks away are also in the crowd. Soccer is on the big screen TV. You watch what you say and you use your best table manners in this diner because you don’t know which members of the jury pool may be close at hand.

Selection goes slowly with four lawyers. The crawling pace and a revised trial schedule from the judge shreds my witness schedule. I have to start over. Scheduling witnesses, which always includes doctors, is the bane of trial practice.

Tomorrow we will only work until 3. I hope to finish selection and open. Monday is off. Opening Friday afternoon and then continuing Tuesday is not an ideal situation.

I arrive home exhausted and a bit agitated at the delays. The new puppy promptly pees on the rug.

As I type this up at night I see the exploding story of Ninth Circuit Chief Judge Alex Kozinski and his collection of comically lurid photographs is all over the legal blogosphere. While the story is certainly fascinating, and has plenty of sizzle, I can safely predict that not one single juror in the room knows who the judge is. Or cares. The lawyers probably don’t know him either. It bears no relation to real life. Unless, of course, you are the guy in the middle of the storm.

Next up: Jury Selection Continues

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Addendum — The full series of posts:

 

June 24th, 2008

Trial Blog, Part 1 (Bronx Trial Assignment Part)

This blog was silent while I was on trial. But I kept real-time notes. They now follow, with Part 1 today:

Tuesday, June 10th: Arrive Bronx County Supreme Court for 9:30 calendar call in “STP,” the Special Trial Part. Justice Howard Silver acts as traffic cop up on the 7th floor of the massive courthouse, sending some cases to pick, adjourning others and hopefully settling a few. On previous appearances here my case had been marked, after several adjournments, “final.” Then it was marked “final, final.” And finally it was marked “absolutely final,” as he made clear he would not accept additional applications for more time.

One of my three adversaries strolls in at 11:00, and asks for another day or two, because he has a jury picked in Brooklyn. That case will either settle, he says, or he will find another attorney to try this one. Silver says no way, no how. Go pick.

At 12:30 we are assigned to a judge (instead of being sent to the jury clerk), and told to report back at 2:00. The assigned judge takes a shot at settlement.

The case details: July 2005 rear-end collision on a local highway. My client is a back-seat passenger in the lead car. She suffers a fractured hip, among other injuries, has a plate and screws put in, and stays in the hospital and rehab for 16 weeks. Her orthopedist says she has traumatic arthritis now and will need a hip replacement in the future. She is in her 60s and worked as a nurse’s aide. Summary judgment was granted 20 months ago against the driver and owner of the car that hit her from behind. Interest at 9% will run from that point. There is also an open issue, albeit a small one, as to whether the driver of her car shares in any liability.

For reasons that escape me, the leasing company that owns the car that plowed into her from behind never called me and seriously tried to dispose of the case. This is odd since loss exposure can reach seven figures, with big interest piling up. They have litigated to the end of the line. As a result of the running interest, and a deterioration of my client’s condition over the two years, I have raised my demand. Four times. That’s what happens when you use real numbers for demands instead of pie-in-the-sky stupid numbers.

The three defense lawyers represent the driver of the host vehicle, the driver of the trailing vehicle and the leasing company for the trailing vehicle. Under New York’s vicarious liability law, owners were liable for the negligence of their drivers until Congress passed the Graves Amendment, also in July 2005. I quickly filed this suit after the House and Senate agreed to the amendment, but before President Bush signed the legislation. My client can, therefore, proceed against the leasing company. (Not so for the also-injured driver of the host vehicle, who filed suit well afterwards.)

Settlement talks don’t work. We are told to return Thursday to pick the jury and to be prepared to open Friday.

Next up in Part 2: Jury Selection Starts

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Addendum — The full series of posts:

Synopsis of the case at my firm’s website.