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Tuesday
May262015

The $83 Million Verdict in KC: the IRS Will Get a Lot of It. Tax Attorney Rob Wood Explains

 

A jury in Kansas City recently returned a punitive damages verdict of $83 million against a debt collection company for trying to collect a small debt from the wrong person. Portfolio Recovery Associates LLC, one of the biggest debt buyers in the country, spent fifteen months pursuing Maria Guadalupe Mejia for a debt of about $1,000 that was actually owed by a man with a similar name. After they sued her, a Kansas City law firm filed a counterclaim on the woman’s behalf, alleging malicious prosecution and violation of the Fair Debt Collection Act. Tax Attorney Rob Wood discusses the case in this report and in his Forbes article “Woman Billed $1,000 For Credit Card Error Gets $83 Million Verdict, But IRS Gets Last Laugh.”

 

At the outset, Wood notes that collecting the jury award is not a sure thing. There are questions whether the verdict will stand and whether there will be an appeal. However, Wood’s primary interest is the world of taxation, and he says that “the tax rules . . . are quite strange,” and punitive damages in particular are treated “harshly” by the tax code. Punitive damages are taxable, so the plaintiff who recovers punitive damages will have to pay taxes on them. And there will be attorney’s fees to be paid as well, probably on a contingent fee basis. Wood says that, because alternative minimum tax treatment is possible, a plaintiff could actually end up losing money.

That probably will not be the outcome in this case, but Wood says that the plaintiff will end up with less net damages than most people would expect. Wood’s guess is that she will end up with about $15 million, assuming the damages are actually paid. “That’s . . . better than a poke in the eye,” but much less than the average person would guess.

But it is all income to the plaintiff, even if the lawyer collects it first and deducts the fee before giving the balance to the plaintiff. The plaintiff will have to pay taxes on the portion the lawyer keeps as a fee. Wood’s estimate assumes a one-third contingent fee. If the fee were forty-five percent, for example, the plaintiff’s share is much less. Wood recounts a complicated wrongful death some years ago where there multiple layers, including appellate lawyers’ fees, the total fees came to seventy-two percent. In that case, the plaintiff actually lost money after paying taxes.

And, Wood notes, the attorney’s fee in this case would be income and taxable to the lawyer who receives the fee. So the IRS gets to double dip.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

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