Clint Eastwood Wins False Advertising Lawsuit, IRS Wins Too
Clint Eastwood may be 92, but he’s still fiery, having won his second trial against online marketers who used his image without his permission. His co-plaintiff was Garrapata, an agency that owns the rights to Eastwood’s name and likeness outside of the films. The latest verdict awarded Eastwood and Garrapata $2 million in damages. The sequel was against a California-based marketing firm, Norok Innovation, which leveraged Eastwood’s celebrity status to drive online traffic to a website selling CBD products. The manipulated articles and search results gave the impression that Eastwood had actually endorsed the products, which he had not. In 2021, Eastwood and Garrapata won a similar match $6.1 million recovery against Mediatonas UAB, a Lithuanian company. This lawsuit was also based on false articles in which it appeared that the actor endorsed CBD products.
Are the damages like this taxable income? Yes, they are, but many plaintiffs win a lawsuit only to be surprised when they have to pay taxes. Some applicants don’t even realize it until tax time approaches the following year, when IRS 1099 forms arrive in the mail. With increase in taxes on litigation settlements since 2018, some plaintiffs are even taxed on their lawyer’s fees, even if their lawyer takes 40% on top. This bizarre attorney fee issue generally does not impact compensatory bodily injury cases. Nor should it impact plaintiffs who sue their employers. In employment lawsuits, there is a deduction that allows plaintiffs to use contingency fee attorneys to offset their legal costs. Outside of these two contexts, there are sometimes ways to deduct legal fees even under the new law.
The IRS indicates that the fees for a litigation settlement or verdict are based on the origin of the claim. In Eastwood’s case, that means the collection of his lawsuit is ordinary income. After all, if he had received license fees or royalties, they would have been ordinary income. Therefore, when he wins a lawsuit against one of these companies, it is also ordinary income. However, could Eastwood claim that its image rights are capital property that has been damaged, so capital gains rates should apply? Paying 23.8% would be better than 37%. After all, an intellectual property lawsuit can sometimes produce a capital gain, as can a landlord-tenant dispute case, where the tenant is bought out of a lease. A lawsuit for damages or conversion of property may also constitute a capital gain. The same applies to a lawsuit concerning construction defects, damage to the property or a reduction in its value. How about a lawsuit against an investment advisor for losing your money? Here too, capital gain is a possibility, even a basic takeover. You could get your own money back with nothing taxable.
As you’d expect, the IRS can repel and repel, but these examples may represent legitimate opportunities for capital gain rather than ordinary income. As for legal fees, Eastwood can legitimately claim that he derives business income from his name and likeness, so he should also be able to deduct his legal fees. But since 2018, not everyone has been so lucky and the taxation of legal costs is tricky. If you are the plaintiff and use a contingency fee attorney, you will generally be treated (for tax purposes) as receiving 100% of the money recovered by you and your attorney, even if the defendant pays your attorney directly for their reduction of contingent fees. Say you settle a lawsuit for intentionally inflicting emotional distress on your neighbor for $100,000 and your attorney keeps $40,000. You might think you would have $60,000 in income. Instead, you’ll have $100,000 in income, depending on Commissioner c. Banks, which ruled that claimants should generally treat 100% as gross income.
Then they can try to deduct the expense, but that’s not always possible. The rules are full of exceptions and nuances, so be careful, how settlement allowances are taxed, especially after the tax reform. The IRS taxes most lawsuit settlements, and the exact wording is important. It is preferable that the plaintiff and the defendant agree on the tax treatment. Such agreements do not bind the IRS or the courts in subsequent tax disputes, but they are generally not ignored by the IRS. One of the IRS rules regarding legal settlements and legal fees is that recoveries for physical injuries and physical illnesses are tax exempt. But your injury must be “physical” and emotional distress is not enough. Even the physical symptoms of emotional distress (like headaches and stomach aches) are taxed. The rules can become a chicken or egg problem, with numerous judgment calls. If, in an employment dispute, you receive an extra $50,000 because your employer caused you an ulcer, is an ulcer physical or just a symptom of emotional distress? Many plaintiffs take aggressive stances on their tax returns, but it can be a losing battle if the defendant issues an IRS Form 1099 for the entire settlement. It is best to negotiate tax details before signing and settling.