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Tax Issues in Settlements of Claims with Allegations of Sexual Misconduct and Sexual Harassment

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Victims could be left with a third or less of the settlement, depending on their attorney's contingency fee agreement thanks to Tax Cut and Jobs Act of 2017

Harvey Weinstein at the Tribeca Film Festival 2017 

Image: Dreamstime

Effective in 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated deductions for settlements or payments related to sexual harassment or sexual abuse when such settlements or payments are subject to a nondisclosure or confidentiality agreement.

If former Miramax CEO Harvey Weinstein, who has been accused by numerous women of sexual harassment (and in a few cases, assault) that have grabbed headlines recently, ends up negotiating settlements with any of his accusers, many of the settlements will be taxable, or have taxable elements. After paying attorney fees and applicable federal state and local income taxes, it could leave a third or less to the victim depending on their attorney's contingency fee agreement.

For example, the New York Times reported that actress Rose McGowan was offered $1 million by Weinstein (which it was reported she refused). If she had deemed it a fair value, she and Weinstein's people could have negotiated a custom stream of tax deferred payments, which Weinstein, or his company, would fund up-front. Structured settlements do not require the victim to be traumatized by receiving a check or having any ongoing interaction with the employer or defendant, if the matter is in suit.

Sexual Harassment Damages | How to Mitigate the Tax

For those with taxable damages, or with an element of taxable damages a non qualified structured settlement offers significant advantages.

• Earn interest tax deferred.
  
• Earn in interest on the deferred taxes tax deferred.
  
• Earn interest on the interest tax deferred.

Many of Harvey Weinstein's accusers have significant incomes and could benefit from tax deferral.  If personal physical injury is an element of damages and qualifies within the meaning of IRC 104(a)(2),  then that portion of the damages will be tax exempt.  Check out the taxable equivalent yield chart to see the value of the structured settlement tax benefit.

Other settlement planning tools may be useful depending on the nuance of a particular case such as a Plaintiff Recovery Trust.  See Plaintiff Recovery Trust | Taxable Settlement Planning (4structures.com)

What is Sexual Misconduct?

Sexual misconduct is a broad term encompassing any unwelcome behavior of a sexual nature that is committed without consent or by force, intimidation, coercion, or manipulation. Sexual misconduct can be committed by a person of any gender, and it can occur between people of the same or different gender.  [ Source: University of Iowa Operations Manual]

Sexual Misconduct in the Workplace 

A 2008 study of 500 respondents and 92 companies found:

• 54% (272) had experienced some form of workplace sexual harassment.
• 27% of the 272 respondents experienced harassment by their colleague, while 17% were harassed by their superior
• 79% of the victims are women; 21% were men.
• 12% had received threats of termination if they did no comply with the requests of the sexual harassers.

While Hollywood scandals involving the "casting couch" are legion, the 2008 study found that sexual harassment occurs most often in the workplace in these 5 industries:

• Business, trade, banking and finance
• Sales and marketing
• Hospitality
• Civil Service
• Education, lecturing and teaching

Source:  Association of Women for Action and Research (AWARE)

What About Harassment in General?

According to the Equal Employment Opportunity Commission (EEOC), harassment is a form of employment discrimination that violates Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, (ADEA), and the Americans with Disabilities Act of 1990, (ADA).

Harassment is unwelcome conduct that is based on race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. Harassment becomes unlawful where 1) enduring the offensive conduct becomes a condition of continued employment, or 2) the conduct is severe or pervasive enough to create a work environment that a reasonable person would consider intimidating, hostile, or abusive. Anti-discrimination laws also prohibit harassment against individuals in retaliation for filing a discrimination charge, testifying, or participating in any way in an investigation, proceeding, or lawsuit under these laws; or opposing employment practices that they reasonably believe discriminate against individuals, in violation of these laws.

sexual harassment

 'Casting Couch': The Origins of a Pernicious Hollywood Cliché

 

 

 

Structured Settlements for Employment Lawsuits and Other Commercial Disputes

by John Darer® CLU ChFC MSSC RSP CLTC

Structured settlements are not just for personal injury, medical malpractice and wrongful death settlements.

Structured settlements are also a great solution for settlements with taxable damages, such as employment lawsuits and commercial disputes, through non qualified assignments and periodic payment reinsurance.

Possible Tax Benefits of Non Qualified Assignments and Periodic Payment Reinsurance in Employment Settlements

Help spread tax liabilities throughout future years, smoothing out income and potentially alleviating high tax obligations in the year of settlement.

1. A potentially greater overall payout than would otherwise be achieved with a single lump sum payment even taking into account taxes that ultimately have to be paid.
2. Avoidance of higher tax brackets
3. Preserve tax deductions that may be lost at higher income levels
4. Avoidance or mitigation of the alternative minimum tax (AMT)

Today there is a variety of solutions

• Annuity funded employment structured settlements that use domestic non-qualified assignments are currently available through appointed structured settlement consultants and brokers for Metropolitan Tower Life Insurance Company, American General Life Insurance Company,  United States Life Insurance Company in the City of New York. American General and United States Life insurance Company in the City of New York, also offer a funding agreement for use with the domestic non qualified assignments, where deferrals are desired longer than one year.
• Independent Life Insurance Company is a provider of annuity funded employment structured settlements that use market recognized non-domestic assignment companies, Structured Assignments, SCC of Barbados and Kenmare Assignment Company Limited (Kenmare) of Ireland.
• Anther non-domestic non qualified qualified assignment program, Havelet Assignment Company of Barbados, funds the periodic payment obligation using a private placement annuity.
• Treasury Funded Structured Settlements can be used and are currently available through Structured Assignments, SCC (SASCC).  Structured Assignments, SCC is a Barbadios company, where in this case the periodic payment obligations are funded through the purchase of United States Treasury Obligations which are held in a sub-trust of a master trust at Midwest Trust Company. the SASCC facility may also be used for structured installment sales, enhanced attorney fee structures  (EAFS) and more.
• Periodic Payment Reinsurance is available through National Indemnity Company, a unit of Berkshire Hathaway and a unit of American General. Many of the same transfers of risk can be accomplished as with non qualified assignments, however periodic payment reinsurance can only be utilized where the paying party is an insurer. An uninsured defendant must use a non qualified assignment. 
• Market Based structured settlement solutions are also available for both plaintiffs and attorneys, with the appetite and risk tolerance.

Updated February 2021

Use of Employment Structured Settlements Helps Negotiate Better Settlements

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

There are many reasons to consider a structured settlement in an employment related lawsuit for the employers, insurers of the employer  and the former employees that are suing them. Check out my latest video

Employment Structured Settlements | Negotiate Better Settlements

More information about Tax Efficient Employment Settlements

Last updated February 15, 2021

"Physical Injury" Damages in an Employment Case? Depends on the "Shoehorn"

by John Darer® CLU ChFC MSSC RSP CLTC

The U.S. Tax Court decision in  Blackwood v. Commissioner, T.C. Memo 2012-190 decision is a reminder that trying to shoehorn "emotional/stress related damages as physical injury in the hope to get tax free treatment doesn't always "fit" the IRS' shoes

Lane Powell attorneys Jeremy Babener and Neil Kimmelfield do a nice job of summarizing that "when a taxpayer seeking damages for stress-induced ailments does not 

1. obtain a medical diagnosis during the underlying dispute and
2. emphasize diagnosed physical ailments in communications with the defendant, the taxpayer will have difficulty establishing that any resulting damages were received on account of physical injuries or physical sickness.

It remains to be seen whether taxpayers who do obtain, and use, medical diagnoses in their pursuit of damages will obtain tax-free treatment when their stress-induced physical ailments are less acute than multiple sclerosis or heart disease". 

Read their full write up here Download Damages for Stress-Induced Physical Ailments

Download Blackwood T C Memo 2012-190

Employment Structured Settlements | Customized Stable Income| An Incredibly Humanitic Tax Efficient Settlement Solution (4structures.com)

Structured Settlement in Employment Cases: Wrongful Termination, Emotional Distress NY| CT| NYC| NJ| Boston

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Why use structured settlements in employment settlements? If you are a plaintiff your employment benefits are taxable and your employment lawsuit recovery could be ALOT smaller in year one, after applying taxes. New York City area structured settlement expert John Darer frames the issue and discusses settlement planning solutions for emotional distress, discrimination, sexual harassment, wrongful termination, failure to promote and other employment related claims

 

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More information about employment structured settlements

 

Last updated June 8, 2021

Non Qualified Assignment Is Solution for Taxable Damages and Attorney Fees

Non-qualified assignments offer significant benefits to both defendants and plaintiffs resolving lawsuits with taxable damages-those that do not meet the income tax exclusion for personal physical injury, physical sickness or workers compensation [IRC 104(a)(1) or IRC104(a)(2)]

Registered Settlement Planner and structured settlement expert John Darer gives an overview of non-qualified assignments which can be used in environmental, divorce, employment, property cases, commercial disputes and structured attorney fees as well as other non-litigation applications like deferral of celebrity endorsement fees, lotteries and contests and structured installment sales (an alternative to the 1031 Exchange or as a 1031 fall back)

 

More information Non Qualified Assignment (Tax Deferred Structured Settlements)

 

 

Non Qualified Structured Settlement Annuities | Non Qualified Assignments

by John Darer® CLU ChFC CSSC RSP

With the announcement by Prudential that it has suspended new business via its Pruco non qualified assignment facility, the non qualified structured settlement market now includes:

Allstate International Assignments, Ltd., which funds assigned obligations through Allstate Life Insurance Company and Allstate Life Insurance Company of New York.

Barco Assignments, Ltd., which funds assigned obligations through Liberty Life Assurance Company of Boston. With "The Rock" now having "left the room" perhaps some will remember that Barco was the first comprehensive non qualified assignment company.

It is worth the reminder that litigation annuities from companies other than the above may possibly be used in such cases where the paying entity is willing to retain the annuities as an asset on the entity balance sheet. A requirement that the annuity be part of the resolution of of litigation is generally a prerequisite in such cases.

Non Qualified Structured Settlement Benefits Magnified By Tax Hikes

by John Darer® CLU ChFC CSSC RSP

A deal reached in the New York State legislature will hike state income taxes by an astounding 31% for all New Yorkers making more than $500,000 a year reports Sunday's New York Post

A second, slightly lower tier would increase state income taxes by 14.5% for singles earning $250,000 to $500,000 annually and for married and joint filers earning $300,000 to $500,000. 

Tax increases increase the intrinsic value of non qualified structured settlements as a tool for resolution of employment cases (e.g. wrongful termination, sexual harassment, qui tam), divorce, structured attorney fees and other settlements which where a non qualified assignment may be used.

New York based celebrities, athletes, actors and actresses may have more incentive to structure their endorsement fees.

Other factors which should stimulate use of non qualified assignments are:

• Inevitable federal tax increases
• Proposed end to sliding scale attorney fees in medical malpractice cases in New York, if enacted.

Employment Structured Settlement Market Could Benefit from Withholding Solution

The lack of a withholding tax solution is a roadblock to many employment structured settlements. The IRS Private Letter Ruling obtained by IFS Corp addresses the tax treatment of the recovery, but the employment structured settlement solution still must address how to address the withholding issue.

Like a traditional structured settlement, a structured settlement used to resolve an employment liability involves a promise to pay future payments over time by the employer, or its insurer. Such an obligation is then assigned by way of a non qualified assignment to an assignee who takes on the obligation and the funding amount and purchases an annuity of funding agreement to fund its obligation.

If the case involves elements of back pay or front pay, there is an obligation to pay withholding for both the employer and the employee portions. This might include federal state or local taxes, in addition to social security. The amounts to be withheld may vary depending on the number of exemptions taken and the general availability of tax rates. These may of course have a further potential to vary from time to time after inception. Neither the assignees nor the annuity issuers currently sponsoring such employment structured settlement annuities want to take on that administrative role. Employers fear that the burden cannot be shifted and want to avoid the cost of participating in hearings or other tribunals if things don't work out as the plaintiff intends. Not to mention the fact that penalties for failing to withhold are severe.

There seems to be an opening for an innovative company to come up with a withholding solution. That would indeed grow the structured settlement industry.

Note: There are many other elements of employment related settlements that lend themselves to employment structured settlements.