A man awarded $289 million after his cancer wasproduct is likely to walk away with only a fraction of that amount.
That’s because of a change under last year’s Republican tax cut that results in litigation settlements being taxed at 100 percent, regardless of how much of the money goes to legal fees. Lawyers’ fees and expenses can eat up as much as half of a jury award, Robert Wood, a tax attorney, told CBS MoneyWatch.
As a result, plaintiff Dewayne Johnson could collect no more than $20 million of the original award, according to Wood’s calculations. And that’s before Monsanto, now owned by German drugmaker and biotech Bayer, appeals the ruling, which could reduce the award.
Before passage of, attorney fees used to be deductible, reflecting that many plaintiffs’ lawyers work on a contingent-fee basis. If a person won a $100,000 award, a typical contingent-fee contract for 40 percent would give her lawyer $40,000, plus standard litigation costs related to travel, lining up expert witnesses and other expenses. If the plaintiff kept $50,000 of the award, she would pay taxes on that sum.
But starting in 2018, none of those legal costs are deductible. That means the plaintiff in the example above would pay taxes both on the money she keeps and what she pays her lawyer. The lawyer would also pay income taxes on that payment.
Under the new tax law, more than 90 percent of Johnson’s award could go to legal fees and taxes. Wood broke down the math in a Forbes article:
Johnson was awarded $39 million in compensatory damages, and $250 million in punitive damages. The combined contingent fees and costs Mr. Johnson pays might total 50%. 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, $125 million goes to legal fees and costs, and $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%, Johnson would lose $92.5 million to the IRS. That makes his after-tax haul from a $289 million verdict only $52 million.
The state of California also would take a cut of Johnson’s award. State taxes of as much as $30 million would leave leave him with $20 million or less. While still a substantial sum, that would amount to less than one-tenth of the original award.
Meanwhile, as outlined by Slate, a plaintiff who won a smaller award could conceivably lose money after paying taxes and legal fees.
The impact of the tax change on litigation, Slate argued, is to make bringing a lawsuit much more expensive, which could deter people from seeking damages in court.
While Johnson faces steep taxes and legal fees, Monsanto can deduct the full $289 million, as well as its lawyers’ fees, from its tax bill.
“Business expenses are still tax-deductible,” Wood said. “That’s true with legal fees as well—having lawyers is something businesses have to do. If the business pays the freight, the business writes it off.”
Certain types of lawsuits aren’t affected by the law, Wood noted. That list includes physical-injury cases, which are tax-free, lawsuits against an employer and class-action suits, in which lawyers are paid separately.
But the list of cases that are affected is much longer, and includes lawsuits for defamation, invasion of privacy, wrongful arrest and a host of other scenarios.