A recent ruling by the Tax Court has attorneys and mediators pondering its effects. According to attorneys Henning consulted, however, the results should be minimal for most settlements.
The facts of the case: January 15, 1997, Chicago Bull Dennis Rodman ran into a pack of courtside photographers during a game against the Minnesota Timberwolves, causing minor physical injuries to Eugene Amos. In addition, television footage showed Rodman kicking Amos in the groin. Amos received a settlement from Rodman. The agreement contained extensive confidentiality provisions for both parties but especially for Rodman’s benefit, including disclosure of the amount paid to Amos and restrictions on disparaging or defaming either party.
Amos did not declare his settlement on his income tax, stating that the income was received as a result of personal injury and therefore, not taxable. The IRS, however, went after Amos, charging that the size of the award was actually based on the confidentiality agreement, and not a result of personal injury. The Tax Court determined that the dollar amount was inconsistent with the extent of the injuries and allowed that 40 percent of the damages were taxable, not the full value minus $1.00, as the IRS had claimed.
Attorneys Henning spoke to agreed that there are two elements that make this particular case unique such that it should not affect other personal injury settlements.
First, this was a clear situation where the settlement amount, released by the IRS as $200,000, was obviously in excess of any actual injury. In this case, unlike most cases, there was no obvious injury. Normally, there is no question that the plaintiff was injured. What is usually disputed is the defendant’s role in that injury.
Second, the celebrity status of Dennis Rodman meant he had an obvious interest in paying an excessive amount in return for confidentiality. “In most cases, both sides, plaintiffs and defendants, have an interest in keeping confidentiality,” says Andrew T. Bayman, Esq. of King & Spalding, LLP. “The plaintiff usually doesn’t want the settlement to be made public as much as the defendant wants to keep it confidential.”
Plaintiffs receiving a settlement don’t want to be hounded by investment counselors, potential swindlers and pursued by others trying to get a piece of the settlement. Defendants have an interest in not opening the flood gates of frivolous litigation. This mutual desire for confidentiality differs from the Rodman case in which Rodman had an interest far exceeding that of the plaintiff, to keep the terms confidential and keeping the matter out of the media. “In this case, Rodman was actually paying Amos off, buying his silence,” says Robert B. Friedman, Esq., also of King & Spalding.
Attorneys feel the opinion in this case is unique to the facts of this case. Usually the IRS hasn’t questioned when there is a legitimate injury. "It was the publicity and the media attention that made this case different," says Bayman.
Henning neutral Bill Goodman has found that parties in his mediations are playing it safe by specifically allocating a small amount of money for confidentiality. “I’m seeing this approach quite often,” Goodman says. He agrees with Bayman and Friedman that particularly in large settlements, both parties have an interest in keeping the matter confidential.
“Nobody wants a world where everything is made public. It would make cases very hard to settle,” says Friedman. Every case is unique; the settlement can depend on where a case is filed and the specific injury. Normally a plaintiff can’t make a direct comparison of the value of a specific injury to someone else with the same injury because the circumstances leading to the injury vary to such an extent.
Of course, one of the ironies of this case is that one of the confidential items of the Rodman settlement, thanks to the Tax Court ruling, is now a matter of public record. |
