The Impact of the 2017 Tax Act on Certain Personal Injury Plaintiffs

The 2017 Tax Act was the most sweeping federal tax legislation in over a generation. While many of its reforms, from dramatically lowering the corporate tax rate to altering the international tax rules, have already received significant attention, little attention has been paid to the 2017 Tax Act’s effects on personal injury plaintiffs. This Article explores these impacts.The 2017 Tax Act added a new provision that indirectly affects plaintiffs who allege sexual harassment or abuse. The new provision disallows the defendants’ deductions in these cases if the parties enter into a nondisclosure agreement. While targeted at defendants, the provision will likely unwittingly harm plaintiffs by reducing settlement offers. The provision also suffers from a host of ambiguities that the Treasury and IRS will need to resolve.The tax legislation also eliminated so-called miscellaneous itemized deductions. In certain types of personal injury cases, such as defamation and emotional distress cases, this development will cause the plaintiff to be taxed on the full settlement amount even though one-third or more of the settlement will often be paid as a contingent fee to the plaintiff’s attorney. Legislative or administrative action is required to remedy this patent unfairness

Explaining Choice-of-Entity Decisions by Silicon Valley Start-Ups

Perhaps the most fundamental role of a business lawyer is to recommend the optimal entity choice for nascent business enterprises. Nevertheless, even in 2018, the choice-of-entity analysis remains highly muddled. Most business lawyers across the United States consistently recommend flow-through entities, such as limited liability companies and S corporations, to their clients. In contrast, a discrete group of highly sophisticated business lawyers, those who advise start-ups in Silicon Valley and other hotbeds of start-up activity, prefer C corporations. Prior commentary has described and tried to explain this paradox without finding an adequate explanation. These commentators have noted a host of superficially plausible explanations, all of which they ultimately conclude are not wholly persuasive. The puzzle therefore remains. This Article attempts to finally solve the puzzle by examining two factors that have been either vastly underappreciated or completely ignored in the existing literature. First, while previous commentators have briefly noted that flow-through structures are more complex and administratively burdensome, they did not fully appreciate the source, nature, and extent of these problems. In the unique start-up context, the complications of flow-through structures are exponentially more problematic, to the point where widespread adoption of flow-through entities is completely impractical. Second, the literature has not appreciated the effect of perplexing, yet pervasive, tax asset valuation problems in the public company context. The conventional wisdom is that tax assets are ignored or severely undervalued in public company stock valuations. In theory, the most significant benefit of flow-through status for start-ups is that it can result in the creation of valuable tax assets upon exit. However, the conventional wisdom makes this moot when the exit is through an initial public offering or sale to a public company, which are the desired types of exits for start-ups. The result is that the most significant benefit of using a flow-through is eliminated because of the tax asset pricing problem. Accordingly, while the costs of flow-through structures are far higher than have been appreciated, the benefits of these structures are much smaller than they appear

Taxing Litigation: Federal Tax Concerns of Personal Injury Plaintiffs and Their Lawyers

This Article addresses the federal tax concerns ofpersonal injury plaintiffs and the lawyers who represent them, typically on a contingencyfee basis. It explains when plaintiffs\u27 recoveries are taxable for income and employment tax purposes and whether and how those recoveries are required to be reported by defendants to the IRS. It also discusses whether attorney\u27s fees and costs are deductible by plaintiffs. In addition to these tax planning and compliance issues, the Article also considers when tax evidence might be admissible. Plaintiffs and defendants often try to introduce tax evidence in an effort to increase or decrease, respectively, the amount of damages awarded. These attempts have been met with varying degrees of success, depending on the jurisdiction and context. The Article then addresses the personal tax issues of trial lawyers themselves. Structured attorney fee arrangements, whereby these lawyers attempt to defer tax on contingent fees, are discussed. The tax deductibility of litigation costs advanced by contingent fee lawyers to their clients is considered. Finally, the Article concludes with a discussion of how provisions of the 2017 Tax Act might affect trial lawyers

Rationally Cutting Tax Expenditures

This article illustrates the differences between the two types of tax expenditures by examining the child tax credit (a distributional expenditure), the charitable deduction (an allocative expenditure), and taxfree saving accounts and the mortgage deduction (both of which are-usually defended on allocative grounds but probably have mainly distributional impacts). These differences should be well understood by policymakers as they consider tax expenditure reform as part of a deficit reduction plan

Fixing Section 409A: Legislative and Administrative Options

This symposium contribution to the Villanova Law Review describes the legislative calamity that is section 409A of the Internal Revenue Code. Section 409A manages, all at once, to (i) fail to better neutralize the tax treatment of deferred compensation with that of current compensation, (ii) impose significant compliance costs on sophisticated taxpayers, and (iii) provide a dangerous trap for unsophisticated taxpayers. Ideally, Congress should repeal section 409A and replace it with a system that taxes deferred compensation more neutrally vis-a-vis current compensation. Failing that, Congress should either replace section 409A with a broad grant of authority to the Treasury and IRS to strengthen the constructive receipt and economic benefit doctrines or amend section 409A to limit its scope to employee compensation paid by public companies. If Congress fails to act, the Treasury should interpret the term “compensation” as used in section 409A to include only compensation paid by public companies to their employees or directors. This arguably counter-textual interpretation of the statute creates the potential for whipsaw of the IRS by nonpublic companies and their employees, but this problem is outweighed by the benefits from cleaning up section 409A

Can Treasury Overrule the Supreme Court?

This article considers whether the Treasury\u27s check-the-box regulations, which have been widely praised by tax practitioners, are valid. These regulations generally allow any unincorporated entity to elect whether it will be treated as a corporation or a partnership for tax purposes. When these regulations were first proposed, there was some debate as to whether such an elective regime was foreclosed by the statutory scheme, which requires that associations be taxed as corporations. This article argues that the focus of this debate was misplaced because, even assuming that the statutory scheme itself was sufficiently ambiguous as to permit an elective regime, the meaning of the term association was settled by the Supreme Court in the 1935 case of Morrissey v. Commissioner. In that case, the Court interpreted the term to mean any unincorporated entity that sufficiently resembles a corporation. Because this interpretation is inconsistent with a purely elective regime, this article argues that thecheck-the-box regulations are invalid. The basis for this argument is a trilogy of Supreme Court opinions that hold that when the Court interprets a statutory term, that interpretation is binding on the Executive Branch and may be altered only by an act of Congress or a subsequent opinion of theCourt. Therefore, these cases stand for the proposition that, at least as far as the Executive Branch is concerned, a judicial interpretation of a statute is effectively incorporated into the underlying statute. This article also argues that the promulgation of the check-the-box regulations are but one example of the Treasury\u27s and the IRS\u27 recent tendency to promulgate taxpayer-friendly rules that are invalid. The article discusses the etiology of this phenomenon

The Contingent Attorney\u27s Fee Tax Trap: Ethical, Fiduciary Duty, and Malpractice Implications

In employment and civil rights lawsuits, the alternative minimum tax may cause a plaintiff\u27s net recovery to be taxed at rates significantly higher than the current maximum rate of 35 percent. This Essay discusses the ethical, fiduciary duty and malpractice implications for lawyers representing plaintiffs who may be affected by this tax trap

Taxing Litigation: Federal Tax Concerns of Personal Injury Plaintiffs and Their Lawyers

This Article addresses the federal tax concerns of personal injury plaintiffs and the lawyers who represent them, typically on a contingency-fee basis. It explains when plaintiffs’ recoveries are taxable for income and employment tax purposes and whether and how those recoveries are required to be reported by defendants to the IRS. It also discusses whether attorney’s fees and costs are deductible by plaintiffs. In addition to these tax planning and compliance issues, the Article also considers when tax evidence might be admissible. Plaintiffs and defendants often try to introduce tax evidence in an effort to increase or decrease, respectively, the amount of damages awarded. These attempts have been met with varying degrees of success, depending on the jurisdiction and context. The Article then addresses the personal tax issues of trial lawyers themselves. Structured attorney fee arrangements, whereby these lawyers attempt to defer tax on contingent fees, are discussed. The tax deductibility of litigation costs advanced by contingent fee lawyers to their clients is considered. Finally, the Article concludes with a discussion of how provisions of the 2017 Tax Act might affect trial lawyers

A Tax Lawyer\u27s Perspective on Section 527 Organizations

Proponents of campaign finance reform generally assume that, by definition, all section 527 organizations are partisan, election-driven organizations. They also believe that by self-identifying to the IRS, these organizations receive substantial tax benefits. Based on these presuppositions, reformers argue that strict regulation of 527organizations is both constitutional and normatively beneficial. In this Essay, I argue that once section 527 is carefully analyzed from a tax perspective, it becomes evident that these assumptions are flawed. Ultimately, I conclude that section 527 should not be used as a mechanism for regulating campaign financ

Controlling Executive Compensation through the Tax Code

This article analyzes Internal Revenue Code § 162(m), which in general denies public companies a deduction for annual non-performance-based compensation in excess of $1,000,000 paid to senior executive officers. Congress enacted § 162(m) with the intent to reduce the overall level of executive compensation and to influence the composition of executive compensation in favor of components that are more sensitive to firm performance. Notably, § 162(m) represents the most direct Congressional effort to influence executive compensation design. In light of recent events, Congress is being called upon to once again address the perceived problem of overgenerous executive pay packages. Accordingly, it is an opportune time to study the impact of § 162(m). This article predicts the likely effects of § 162(m) under the two currently prevailing (but opposing) views of how executive compensation arrangements are negotiated in the public company context, ultimately concluding that the provision is likely ineffective under either view. In addition to predicting the likely effect of § 162(m), the article discusses the empirical studies of its impact since its enactment almost fifteen years ago. Finally, the article describes some of the unintended incidental effects of the provision, such as its discouragement of certain compensation components that are arguably more efficient than the components typically used by public companies