Monsanto hit with $289M verdict; taxes could take 90 percent

Monsanto hit with $289M verdict; taxes could take 90 percent

San Francisco jurors awarded $289 million to a man they say got cancer from Monsanto's Roundup weedkiller. Plaintiff Dewayne Johnson cannot count on the money, as Monsanto says it will appeal. Monsanto faces hundreds of other claims, so it may have good reason to fight on.

Yet even if Monsanto were to pay the verdict, new tax rules will be as effective as Roundup in swallowing up most of the big verdict. Under President Donald Trump's tax bill passed in late 2017, there is a new tax on litigation settlements: no deduction for legal fees. Amazingly, many legal fees simply can't be deducted. That means Johnson must pay tax even on monies his attorney collects. That is so even though the attorney must also pay tax on the same money.

Here's the bizarre new math. Johnson was awarded $39 million in compensatory damages, and $250 million in punitive damages. The combined contingent fees and costs Johnson pays might total, say 50 percent. If so, he gets to keep half, or $19.5 million of the compensatory award. Since it is for his claimed non-Hodgkin's lymphoma, that part should not be taxed.

Of the $250 million punitive award, and still assuming 50 percent, $125 million goes to legal fees and costs, with $125 million to Johnson. So before taxes, his take home is $144.5 million. What about after taxes? The $250 million in punitive damages are fully taxable, with no deduction for the fees to his lawyer.

At 37 percent, Johnson would lose $92.5 million to the IRS. That makes his after-tax haul from a $289 million verdict only $52 million. Plus, state taxes could take more. California could take over $30 million of what's left, leaving him with less than $20 million. Remember, the cap on state tax deductions is now $10,000.

Of course, take home pay of $18 million is nothing to sneeze at. However, that is a far cry from what most people assume. Perhaps the jury would also be surprised. The shocking result comes from the Trump tax law, which kills off tax deductions for many legal fees. Compensatory damages for physical injuries or physical sickness are still OK. Even so, exactly what injuries are "physical" can sometimes seem like a chicken or egg issue.

Moreover, basic legal fee tax treatment still surprises many people. If you are the plaintiff with a contingent fee lawyer, the IRS treats you as receiving 100 percent of the money, even if the defendant pays your lawyer directly. If your case is fully nontaxable, that causes no tax problems. But if your recovery is taxable, all or in part, you could be taxed on more money that you actually collect. Up until the end of 2017, you could claim a tax deduction for your legal fees.

In 2018 and thereafter, there is no deduction for these legal fees. Not all lawyers' fees face this terrible tax treatment. If the lawsuit concerns the plaintiffs' trade or business, the legal fees are a business expense. If your case involves claims against your employer, or certain whistleblower claims, those legal fees are also OK, and can be fully deducted (above the line).

But for other cases, you are out of luck unless you are awfully creative. There are sometimes ways to circumvent these tax rules, but you'll need sophisticated tax help, and nothing is foolproof. Settlements require tax advice, preferably before the case settles. Sometimes, you can justify an allocation of legal fees that is not strictly pro rata, but you need to document it, and the IRS may not agree.

Awards of pre- or post-judgment interest can produce the same tax problems as punitive damages, with no deduction for legal fees. Meanwhile, defendants like Monsanto can clearly deduct the entire $289 million on their taxes. With a potential net take home of less than $20 million for the plaintiff, that's a surprising result. One could well understand if Johnson and his lawyers try to devise some kind of creative workaround.

After all, a number of states (including California) are being inventive to get around the new $10,000 deduction cap on state taxes. Plaintiffs may have to be equally creative.

In a settlement, does it help if the defendant agrees to pay the lawyer and client separately? It can, although it does not fix the basic tax dilemma.

Two checks do not entirely obviate the income to the plaintiff. Besides, the Form 1099 regulations generally require defendants to issue a Form 1099 to the plaintiff for the full amount of a settlement, even if part of the money is paid to the plaintiff's lawyer. However, some taxpayers may still claim reporting positions on these facts.

Court-awarded fees may also provide some relief, depending on how the award is made, and the nature of the fee agreement. If a court separately awards fees to the lawyer alone, and the fee agreement makes clear they belong only to the lawyer, they arguably should not be part of the plaintiff's income. But what if there is no court order?

If a statute provides for attorney fees, can this be income to the lawyer only, bypassing the client? Perhaps in some cases, although contingent fee agreements may have to be customized in particular ways. The relationship between lawyer and client is that of principal and agent. It can take considerable effort to distance a plaintiff from the fees his lawyer is due.

A settlement provision that fees are in the nature of a statutory fee might give you an argument, but it is hardly a fix. The client may still be saddled with the income. And what of lawyer-client partnerships? In theory, each partner should report his or her share. However, most such partnerships fail because of non-existent or belated documentation.

All of these (and a few others) are at least worth discussing. Arguments about tax deductions are too. For example, under the broad "catch-all" provision for the above the line legal fee deduction, there may sometimes be arguments that a plaintiff's civil rights have been implicated, even without a Section 1983 claim. It may be a weak argument, but a weak argument is better than no argument.