Tax Treatment of Litigation Awards
Section
§ 100.01 Basic Rule
§ 100.02 Exceptions
§ 100.03 Special Corporations Exceptions, Damage Awards, and Expenses
§ 100.01 Basic Rule
Where litigation is resolved with a payment by one of the parties to
another, the tax treatment of the payment can be a significant factor. The
general rule is that amounts received will be included in taxable income.1
There are exceptions to this rule which will exclude part or all of the
payment from taxable income or defer its inclusion to a later date.2 The
deduction of amounts paid rests on the standard test for business
deductions--whether an expense is ordinary and necessary.3 Generally,
application of this rule for the business corporation will result in a
deduction.
In both cases, the test for income tax treatment is based on the claims
made in connection with the litigation. Because the business corporation
is engaged in commercial activities, amounts paid and received in
connection with litigation are likely to be deductible or taxable. This is
reasonable because such litigation is primarily to enforce rights to the
amounts rather than to create something that did not already exist in the
business. But if the situation is one where the tax burden can be avoided
or deferred, the parties to the litigation may be able to settle for a smaller
sum because the amount received is not partially offset by a required
payment of taxes.
Roger J. Magnuson is a Partner at Dorsey and Whitney, LLP, where he serves as Head of the National Strategic Litigation Group and has practiced since 1973. He has been recognized as one of the top trial lawyers in the United States by major national and international publications, including Chambers International Guide to American Lawyers, which profiles the top 500 trial lawyers in the United States, Best Lawyers in America, Who's Who in American Law, and Who's Who in America. Mr. Magnuson was also recognized by a Journal of Law and Politics' survey for Judge's Choice "Wins Most Cases."
Some high profile cases that he has litigated include representation of the Florida Senate in the Bush v. Gore election controversy in 2000; and representation of the Plaintiffs in the widely publicized and studied Mall of America case. For several years he has represented, among other persons and entities, the Minnesota Twins and Major League Baseball principals and players in litigation; and has litigated national and local cases in federal and state court venues. He has appealed before the Supreme Court in a number of cases; as well as the Minnesota Supreme Court. He has authored several articles and 7 books.
Richard A. Saliterman is a Principal in Saliternan & Siefferman P.C., a full-service firm in Minneapolis established in 1976. Mr. Saliterman is a leading expert on corporate business matters, and is the author of several publications on business start-ups, franchises, and trademarks. Mr. Saliterman is the former National Judge Advocate for the U.S. Navy League, based in Washington D.C.
Contributing Editor:
Amanda Chang
Contributing Authors:
Alecia Anderson
Seth Back
John Baker
Shannon Berg
Constatin Burachek
Benjamin Carpenter
Ryan Check
Carl Christensen
Peter Fear
Michael Frasier
Aaron Hall
Catherine Hanson
Paul Harman
Amy Ithlan
Michael Kern
Chris Kuhlman
Brett Larson
Joshua Lederman
Karen Lundquist
James Magnuson
Jennifer Mead
Rao Menier
Heidi Miller
Rachael Moxon
Oliver Nelson
Scott Peitzer
Mitchell Skinner
Jonathan Stechmann
Lael Weinberger
Jonathan Wilson
Alex Zumbulyadis
