Tax Traps in Class Action Settlements: Avoiding Overtaxation of Plaintiffs and Nondeductibiliy for Defendants

Recording of a 90-minute CLE webinar with Q&A

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Conducted on Wednesday, August 26, 2020

Recorded event now available

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Course Materials

This CLE course will provide in-depth guidance to class action attorneys on the two-pronged challenge of tax consequences of settlements and awards. Counsel must ensure that the plaintiffs are not subject to taxation of fees received by their lawyer. The defendants will want to maximize the deductibility of these payments.

Description

The primary tax concern for a class member is the hidden "contingency fee trap." The combination of Commissioner v. Banks and recent tax legislation is that the plaintiffs cannot report their recovery net of attorney fees, and there is no corresponding tax deduction for attorney fees. Thus, the plaintiffs stand to lose a substantial percentage of their damages recovery to taxes and legal fees.

The defendant will also want to maximize the tax deductibility of settlement payments. In documenting a settlement agreement, plaintiff and defense counsel must be aware of which categories of payments are deductible for each side. In consumer class actions, for example, the portion of a defense settlement attributed to compensating plaintiffs for excessive charges is likely to be deductible. Payments by the plaintiffs for punitive or exemplary damages are generally not deductible.

An oft-used tool is a qualified settlement fund (QSF) under 26 CFR 1.468B-1. A QSF, which is established by agreement and court order, transfers liability from the defendant to the QSF. The QSF stands in the defendant's shoes and enters into and pays the settlement with plaintiffs. This creates an accelerated deduction for the defendant and ample time for plaintiffs and their counsel to mitigate tax consequences.

Listen as this panel of attorneys, experienced with the intersection of tax and class action law, provides guidance for crafting tax-advantageous outcomes.

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Outline

  1. Classes of deductible settlement payments
  2. Classes of nondeductible settlement payments
  3. Nature of the contingent fee "tax trap"
  4. Qualified settlement funds
  5. Other mitigation

Benefits

The panel will review these and other noteworthy matters:

  • Principles of tax law relating to receipt of settlement payments
  • Principles of tax law relating to payment deductibility
  • Qualified settlement fund usage and implementation

Faculty

Krause, Phillip
Phillip M. Krause, CSSC, CLMP
Managing Director of Strategic Planning
Ringler Assoc.

Mr. Krause serves as the Managing Director of Strategic Planning for Ringler Associates, the largest and oldest...  |  Read More

Wood, Robert
Robert W. (Rob) Wood
Managing Partner
Wood LLP

Mr. Wood handles a wide range of tax planning and tax controversy matters. He also serves as an expert witness on tax...  |  Read More

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