Outside the legal community, Dennis Rodman is well known for his ferocious defense and rebounding skill during his long career in the NBA as well as his tattoos, piercings and wild off-the-court partying lifestyle. In the legal community, Mr. Rodman is well known for causing an incident that led to a landmark tax law case, Amos v. Commissioner, 2003 Tax Ct. Memo LEXIS 330 (2003) which created new law allowing the IRS to tax Personal Injury settlements which include Confidentiality Provisions.
The Amos v. Commissioner Case
On January 15, 1997, Dennis Rodman was still in his heyday as a defensive specialist with the World Champion Chicago Bulls, and the Bulls were playing the Minnesota Timberwolves. After scrambling for a loose ball, Rodman fell into a group of photographers on the sidelines. As television cameras rolled, while getting up Rodman kicked a cameraman, Eugene Amos, in the groin. Amos later sought treatment for groin and back injuries, filed a police report and retained a lawyer to pursue Personal Injury claims against Rodman. Before a formal lawsuit was filed, the attorneys for Amos and Rodman negotiated a $200,000 settlement agreement, which included a Confidentiality Provision stating that Amos had to keep the nature and amount of the settlement secret.
The Tax Court Case
Relying on well-settled law that Personal Injury settlements were not taxable, Amos did not claim the $200,000 as part of his gross income on his 1997 Tax Return. To his surprise, the IRS claimed that he should have claimed the money as income because his injuries were minimal and the monies were really paid for the Confidentiality Provision.
At the end of the case, the court determined that the $200,000 settlement had to be allocated between the amount paid for the Personal Injuries (which was exempt from taxation) and the amount paid for the Confidentiality Provision (which was taxable). Ultimately, the court arbitrarily allocated $120,000 to the Personal Injuries and $80,000 to the Confidentiality Provision.
Practical Tips for Dealing with Confidentiality Provisions in Personal Injury Cases
Because, based on the Amos case, Confidentiality Provisions lead to tax consequences in Personal Injury cases, the following are some practical tips to avoid potential problems:
- Don’t Agree to Confidentiality. A Confidentiality Provision leads to tax problems. If you can avoid it, do not agree to confidentiality. To avoid problems or misunderstandings, be sure to indicate in all settlement demands that no confidentiality will be agreed to without additional consideration ($) and agreed upon terms regarding tax issues.
- If a Defendant Insists on Confidentiality, Get More Money in Settlement. If a defendant requires privacy, it should come with a price. Get significantly more money for the confidentiality.
- Allocate and Specify. If money is being paid for injuries and confidentiality, make sure that a written settlement agreement allocates the money between the two. In addition, be specific about the physical injuries which are being compensated for in the settlement. Beware that all sums allocated to the confidentiality are taxable. Also beware that the IRS may challenge the allocation and seek more taxes. If the specific injuries being compensated for are listed in the settlement agreement, that helps bolster the argument that a majority of the money was paid for those injuries, rather than for secrecy.
- If Possible, Have the Defendant Indemnify the Plaintiff for Tax Consequences. Usually parties wish to be done with each other upon the signing of a settlement agreement. However, with the looming tax issues involved with Confidentiality Provisions, it is wise to try to get the defendant to indemnify your client for any unforeseen tax consequences. That way, if your client pays taxes on the proceeds allocated to the Confidentiality Provision, but later the IRS challenges the allocation and additional taxes are owed, the defendant must pay them.
The following article is informational only and not intended as legal advice. Speak with a licensed attorney about your own specific situation. © Copyright 2011 MacElree Harvey, Ltd. All rights reserved.