Stormy Daniels Returning $130K Trump Settlement Won’t Escape IRS Taxes

When Stormy Daniels offered to pay back her Trump settlement, she was proposing that by paying back the money, she should be allowed to talk. In many ways, that sounds reasonable, since the money was for silence, even though today her story would surely be worth millions. At some point, most of us have experienced wanting to go back to square one, to undo something we’ve done. Usually, only one side of the deal has buyer’s remorse, and that means the deal will stick. Still, you might be surprised how many times transactions are undone, with both parties agreeing to go back. Sometimes a court compels it. What about the taxes?

LAS VEGAS, NV – JANUARY 27: Adult film actress/director Stormy Daniels attends the 2018 Adult Video News Awards at the Hard Rock Hotel & Casino on January 27, 2018 in Las Vegas, Nevada. (Photo by Gabe Ginsberg/Getty Images)

Anytime you see a previously concluded deal unravel and go back to square one, it is worth asking about the IRS. Can you ever undo something on your taxes? The IRS gets a piece of just about everything, so you might think of the IRS as the third party in the deal. The IRS presumably took it’s share of Stormy Daniel’s $130,000, and that was in the past. But what about going back to square one, undoing the deal, giving the money back? Does that work with the IRS too? Say that you sell your house, and six months’ later you refund the money and take back the house. For tax purposes, you can argue that you really never sold it in the first place, and that you shouldn’t have to report the sale on your tax return. Similarly, suppose that you buy stock, but the company later refunds your money. Was that two transactions or none when it comes to your taxes?

The IRS stance depends largely on timing. Going back to square one may sound simple, but the tax system is rigid. You may call it a do-over, but the legal doctrine is rescission. When it comes to taxes, the tax system involves an annual accounting period of 365 days. Fortunately, the IRS agrees that some transactions can be unwound, and that the tax effects can be ignored. To pretend a deal never happened, you must meet two tough conditions:

  • Each party must go back to its position before the transaction as if it never occurred. Rescission isn’t a one-sided deal.
  • The go-back must occur in the same tax year as the original deal. See Revenue Ruling 80-58.

It’s this timing rule that is usually the problem. Say you sell your house and the buyer claims the house is infected with mold. The dispute is unlikely to be resolved immediately. That usually means a subsequent tax year. To the IRS, each tax year must stand on its own. Some taxpayers who don’t meet the IRS’s strict same-year timing rule may be tempted to argue that a rescission qualifies as long as the transaction is unwound before they’ve reported the transaction on their tax return.

Example: You sell your car to your brother-in-law for $25,000 in September 2017. He has some problems, so gives you the car back in March of 2018 and you refund the money. Although your 2017 tax return is due April 15th, you haven’t yet filed it when you take the car back. When you file your 2017 return in April 2018 (or October if you go on extension), can you treat this sale as never having occurred? The IRS says no, but some taxpayers might try it.

The IRS has generally maintained a consistent position on this issue. However, the IRS has occasionally loosened up not about timing, but about the extent to which everything is returned to where it was. In several rulings, the IRS has approved a rescission even though one could argue that the parties didn’t exactly go back to square one. For example, in IRS Letter Ruling 200952036, a partnership was converted into a corporation, and then was converted back to a limited liability company (LLC). The partners didn’t entirely go back to square one: when the smoke cleared they were members of an LLC, not partners in a partnership. Even though an LLC is not exactly the same as a partnership, the IRS agreed to treat the transaction as rescinded, having no tax affect.

Be careful, though. Any rescission involves at least two parties. Even in the simple car example, what if your brother-in-law has already filed his 2017 tax return before the rescission? He might even have depreciated or expensed the car, claiming that he owned it. It sure wouldn’t fit with claiming the deal never happened. In more complicated deals, there may be many parties and more entanglements that make it hard to go back. That’s OK with the IRS. The IRS can probably collect taxes on the second transaction too.

via The Tax Lawyer


New Tax On Lawsuit Settlements — Legal Fees Can’t Be Deducted

Many plaintiffs will face higher taxes on lawsuit settlements under the recently passed tax reform law. Some will be taxed on their gross recoveries, with no deduction for attorney fees even if their lawyer takes 40% off the top. In a $100,000 case, that means paying tax on $100,000, even if $40,000 goes to the lawyer. The new law should generally not impact qualified personal physical injury cases, where the entire recovery is tax free. It also should generally not impact plaintiffs who bring claims against their employers. They are still allowed an above the line deduction for legal fees (although there are new wrinkles in sexual harassment cases).


For most other types of claims, if the suit is not related to the plaintiff’s trade or business, there may be no write-off for legal fees or costs. That means you are taxed on 100% of your recovery. Examples of settlements facing tax on 100% include recoveries:

  1. From a website for invasion of privacy or defamation;
  2. From a stock broker or financial adviser for bad investment advice, unless you can capitalize your legal fees;
  3. From your ex-spouse for claims related to your divorce or children;
  4. From a neighbor for trespassing, encroachment, etc;
  5. From the police for wrongful arrest or imprisonment;
  6. From anyone for intentional infliction of emotional distress;
  7. From your insurance company for bad faith;
  8. From your tax adviser for bad tax advice;
  9. From your lawyer for legal malpractice; or
  10. From a truck driver who injures you if you recover punitive damages.

The list of lawsuits where this will be a problem seems almost endless. The new tax law wiped away miscellaneous itemized deductions and deductions for investment expenses. But part of the tax problem is historical. In 2005, the U.S. Supreme Court held that plaintiffs must generally recognize gross income equal to 100% of their recoveries. even if their lawyers take a share. See Commissioner v. Banks, 543 U.S. 426 (2005). That means plaintiffs must try to deduct fees paid to their lawyers. Fortunately, Congress enacted an above the line deduction for employment claims and certain whistleblower claims. For employment and some whistleblower claims, this deduction remains in the law, so those claimants will pay tax only on their net recoveries.

Yet plaintiffs in employment claims that involve sexual harassment face new tax problems. The new law denies tax deductions for legal fees and settlement payments in sexual harassment or abuse cases, if there is a nondisclosure agreement. Virtually all settlement agreements include confidentiality or nondisclosure provisions. Even legal fees paid by the plaintiff in a confidential sexual harassment settlement are evidently covered. Congress probably intended only to deny defendant tax deductions. But even plaintiffs may have to worry about tax write-offs in sexual harassment cases after Harvey Weinstein.

Up until now, even if you did not qualify to deduct your legal fees above the line, you could deduct them below the line. A below the line (miscellaneous itemized) deduction was more limited, but was still a deduction. Now, there is no below the line deduction for legal fees. Do two checks (one to lawyer, one to plaintiff) obviate the income to plaintiff? Not according to Banks. IRS Form 1099 regulations generally require defendants to issue a Form 1099 to the plaintiff for the full settlement, even if part of the money is paid to the plaintiff’s lawyer.

One possible way of deducting legal fees could be a business expense if the plaintiff is in business, and the lawsuit relates to it. Some may claim that the lawsuit itself is a business, but in the past, that tax argument usually failed. There will also be new efforts to explore potential exceptions to the Supreme Court’s 2005 holding in Banks. The Supreme Court laid down the general rule that plaintiffs have gross income on contingent legal fees. But general rules have exceptions, and the Court alluded to some in which this general 100% gross income rule might not apply.

For example, court awarded fees, statutory fees, or a partnership between lawyer and client divide the proceeds are all worth discussing. But tax advice early–before the case settles and the settlement agreement is signed–are going to be essential.  For many, no tax deduction for legal fees will come as a bizarre and unpleasant surprise after the fact. Plaintiffs who have some advance warning and advice may go to new lengths to try to avoid the lawyer’s share being income to them, or to somehow deduct it. Few plaintiffs receiving a $100,000 recovery will think it is fair to pay taxes on the full amount, when legal fees consumed a third or more.

Add higher contingent fees, high case costs, and bigger recoveries, and the tax problems get even more pronounced. Contingent fee lawyers may try to help plaintiffs where they can. Plaintiffs paying taxes on their gross recoveries–even on the share earned by contingent fee lawyers–is a new tax problem plaintiffs will need time to try to plan around. For those who can’t somehow avoid the tax, it could impact whether cases settle, and if they do, at what amount.

via The Tax Lawyer

Oscars $100K Swag Bag’s Taxing Price Tag

How can gifts be taxed as income? The answer is when they are not really gifts. Every year at the Oscars, there are many ‘free’ gifts. Companies pay promoters to get their gear in gift bags, The companies pay a fee to be able to donate the goodies. And the nominees get the stuff for free. Everyone wants celebs to show off their gear, so companies write off the cost. However, celebs have to report it as income, and the tax bill can be considerable. In a way, the biggest winner is the IRS.

This year’s swag bag has 56 items–up from 41 in 2017–and is valued at over $100,000. The bags are not officially endorsed by the Academy, but official or not, they are hard to ignore. This year’s bag includes a luxury 7-day Hawaiian vacationa Luxura Diamonds “conflict-free” necklace, a 12-night Tanzania trip for two, a 10,000 bowl donation to an animal shelter of their choice and bags of pet food, organic, vegan and small-batch Delicacies lollipops, and Rouge Maple syrupAll sorts of products benefit from celebs giving them a try. Here is a list of everything inside this year’s bag.

(Photo by Matt Sayles/Invision/AP)

As we’ll see, that is all taxable, even if it is not provided in cash. Cash can feature at the Oscars too. Last year, there was a cash fees-for-attire angle. Women’s Wear Daily reported that Meryl Streep cancelled a custom couture Chanel creation after the fashion house refused to pay her to wear it to the Oscars. The $105,000 couture dress was already in production when Streep’s team allegedly said, “Don’t continue the dress. We found somebody who will pay us.” A representative for Ms. Streep denied that claim, saying it is against Ms. Streep’s personal ethics to be paid to wear a gown on the red carpet.

But the Daily Mail has said it is not uncommon for celebrities to make money simply by wearing certain gowns, jewels, and accessories for big awards shows. In fact, some are reported to receive up to $250,000 to wear a dress on the red carpet. If a celebrity is paid to wear a dress to an event, can they just pocket the money, or is it taxable? Not surprisingly, like just about everything else, the IRS gets its piece. And while the practice does not appear to be widely discussed, there’s little doubt that designers paying the fees should issue the stars an IRS Form 1099 for the fee.

IRS Forms 1099 are required for the Oscars gift bags too, which have had their own tax and other controversies. In the past, the Academy of Motion Picture Arts and Sciences sued Distinctive Assets for promoting the gift bags as “official” Oscars swag. The lawsuit claimed that, “Distinctive Assets uses the Academy’s trademarks to raise the profile of its ‘gift bags’ and falsely create the impression of association, affiliation, connection, sponsorship and/or endorsement.” The lawsuit was resolved amicablyIn 2006, the Academy stopped officially giving out gifts due to IRS scrutiny. For years, the entertainment industry and the IRS locked horns over these ‘gifts.’

Eventually, the swag disputes were settled, with swag being clearly taxable, and celebs getting IRS Forms 1099. Celeb or not, if you get a gift bag, you have taxable income equal to its fair market value. Can’t you argue this was a “gift” so it isn’t income? Hardly. These merchants don’t give them solely out of affection or respect. And though the value of these goodies really isn’t pay, you must report it on your tax return. In case any attendees forget, they receive an IRS Form 1099 reporting it. Remember, mistakes with Form 1099 cost big, and if you’re missing a Form 1099 you may want to keep quiet.

Gift bags are taxable now, but what about gift certificates or vouchers for trips or personal services? If you redeem the certificates or vouchers, you include the fair market value of the trip or service on your tax return. If you make a selection in a ‘free shopping room,’ the value of your selection is income too. Still, some celebs regift the bags or turn them down. They can take a charitable contribution deduction if they donate the gift bag to a qualified charity. But the fair market value of the gifts must still be reported on their tax returns.

That’s where turning goodies down raises odd tax issues. If you turn down a bonus from your employer, it’s still income according to the IRS. If you say to “pay me next year,” it’s still income when you were handed the bonus and asked to delay it. Organizations and vendors distributing gift bags issue IRS Forms 1099-MISC. So why don’t celebs receive a Form 1099 when they say ‘thanks, but no thanks’? A Form 1099 tags you with income. It can be tough to untangle when you disagree with an IRS Form 1099

via The Tax Lawyer


Using Bitcoin For Taxes…Triggers More Taxes

First it was Arizona, and now Georgia is moving to accept payments in Bitcoin and other cryptocurrency. Both proposed laws are not yet final, but Arizona’s Senate Bill 1091 has passed the State Senate. It seems likely that some other states will follow, and perhaps the IRS eventually will too. In Arizona, the tax man would convert it to dollars at the prevailing rate. You would get credited with the converted dollar amount, so timing could be important. IRS position said cryptocurrency is property in Notice 2014-21. That classification as property has some big tax consequences, accentuated by wild price swings.

Ethereum, Bitcoin and Ripple coins (physical). (Photo by Ulrich Baumgarten via Getty Images)

If you owe $5,000 in taxes, you could pay the $5,000 in dollars. Or soon, you could pay with $5,000 worth of say Bitcoin, Ripple, or Ethereum. As long as the crypto is worth $5,000 when you pay, you’re home free, right? Not really. After all, you need to consider the sale you just made. The transfer of the crypto to the tax man is a sale, and that could mean more taxes for the year of the payment. If you bought the crypto for $5,000 the day you pay your taxes, there’s no gain.

But suppose you bought the crypto a year ago for $1,000 and it’s worth $5,000 when you use it to pay taxes? That’s right, you have a $4,000 gain. Hopefully it is a long-term capital gain, which would make the taxes lower. But you still have taxes to pay—because of your tax payment. You could trigger a tax loss too, if you had bought the crypto for $7,000 and transfer it for taxes when it is worth $5,000.

All sorts of transfers can trigger taxes. For example, payments using virtual currency made to independent contractors are taxable transactions to both parties. The recipient has income measured by the market value at the time of receipt. What’s more, as with other payments to independent contractors, payers engaged in a business must issue IRS Forms 1099. You can’t enter “1,000 Bitcoin” on IRS Forms 1099. You must value the payment in dollars, as of the time of payment. A payment made using virtual currency is subject to Form 1099 reporting just like any other payment made in property.

The person paying the independent contractor with crypto just sold it. Whether that triggers a gain or loss depends on the payor’s tax basis. The gain might be capital or ordinary. If you hold it for more than a year, the best deal is long-term capital gain treatment. But actually, gain or loss depends on whether the virtual currency is a capital asset in your hands. Most people can probably say they are investors in crypto, not a dealer or someone using it in their trade or business. But it is worth considering. Ordinary income vs. long term capital gain treatment can spell a big difference. You might have to pay only 15% on long term capital gain. But top long term capital gain rates are 20%, plus the possibility of the 3.8% net investment income tax under Obamacare.

Every time you transfer crypto, you might trigger gain or loss. Tax basis and holding period are important, as is record keeping. If you receive virtual currency as payment, you must you include its fair market value in income. Report the fair market value in U.S. dollars on the date you receive it. If you “mine” virtual currency, you have income from mining, and the fair market value of what you produced is income. Arizona and Georgia may encourage other states to follow. But remember: consider your basis and holding period, and keep good records.

via The Tax Lawyer


How To Transfer Bitcoin Without Triggering Taxes

2017 may have been the year of the crypto investor, and returns were beyond heady. But it’s 2018 now, and interest in crypto remains high. It may even be more mainstream now than it was last year. Taxes are a worry of course, and they are arguably more difficult than last year. For one, it is clear that so-called 1031 tax-free exchanges can no longer be used for crypto. There any other ways to transfer crypto without triggering taxes, but there is no silver bullet. Still, there are some worth considering on the right facts. For example, how about gifts?

(Photo by Chesnot/Getty Images)

You can give crypto as a gift, and it doesn’t trigger income taxes. That’s right, no income tax to you as the donor, and no income tax to the recipient. Of course, when the recipient transfers or sells it, there would be income taxes then. And at that point, the donee would need to calculate gain or loss. What is his or her tax basis, since it was a gift? The tax basis is the same as it was in your hands when you made the gift.

However, keep in mind that to avoid income taxes, a gift has to really be a gift. The tax law is littered with cases of people who claimed something was a gift, but who got stuck with income taxes. With gifts not being subject to income taxes, it can seems tempting to try to characterize money or property you receive as gifts. But be careful: the IRS hears this ‘it was a gift’ excuse a lot. And the IRS is unlikely to be persuaded unless you can document it.

Plus, the IRS usually expects a gift to occur in a normal gift-like setting. For example, if an employer or former employer gives a loyal employee $10,000 is that a gift? No, it is a bonus, treated as wages. Even trying to document it as a gift may not change that result. True gifts may not trigger any income taxes, but there could be gift taxes involved. If you give crypto to a friend or family member—to anyone really—ask how much it is worth. If the gift is worth more than $15,000, it requires you to file a gift tax return. For 2018, $15,000 is the amount of so-called “annual exclusion.” You can give gifts up to this amount each year to any number of people with no reporting required.

Any gifts over that $15,000 amount require a gift tax return, even though you may not have to  pay any gift tax. Rather than paying gift tax, you normally would use up a small portion of your lifetime exclusion from gift and estate tax. For 2018, that number went up dramatically. The amount you can transfer tax-free during your life or on death just went up to $11.2 million per person. That is $22.4 million per married couple.

What if your gift isn’t to a person, but to charity? If you give to charity, that can be very tax-smart from an income tax viewpoint. If you give crypto to a qualified charity, you should normally get an income tax deduction for the full fair market value of the crypto. If you bought it for $500, and donate to a 501(c)(3) charity when it is worth $15,000, you should get a $15,000 charitable contribution deduction.

What’s more, you won’t have to pay the capital gain or income tax on the $14,500 spread. That’s a good deal. It’s why most savvy people—think Warren Buffett—want to donate appreciated property rather than money to charity. Remember, if you use crypto to buy something, the IRS considers that a sale of your crypto. You have to calculate gain or loss. You might have bought something with your crypto. But you made a sale in the process.

Also take note of the IRS enforcement efforts. The IRS is looking for reporting of crypto, thanks to summonses, tracking software, and training its criminal IRS agents. That should make a lot of people who might have been lax in the past starting to think more carefully about April 15th.

via The Tax Lawyer


IRS Forms 1099 Impact Your Taxes, But Don’t Ask For Missing 1099s

Are you collecting your IRS Forms 1099? You may not like IRS Forms 1099, but the IRS sure does. In fact, the agency loves them, because they allow for easy computer matching against tax returns. Businesses may not even like sending the forms out, but they are required to. What’s more, there are penalties for failing to issue them, so many businesses err on the side of issuing more and more of the forms. No one wants trouble from the IRS. Generally, businesses must issue the forms to any payee (other than a corporation) who receives $600 or more during the year. That is just the basic threshold rule, but there are many exceptions. That’s why you probably get a Form 1099 for every bank account you have, even if you earned only $10 of interest.


The key to Forms 1099 is IRS matching. Every Form 1099 includes the payee’s Social Security Number and the payer’s employer identification number. The IRS matches all Forms 1099 under a particular Social Security Number with the payee’s tax return. That means you have to report it or there’s a mismatch. If you disagree with the information on the form but can’t convince the payer you’re right, explain it on your tax return. If you receive a Form 1099, you can’t just ignore it, because the IRS won’t. There are many varieties. There’s a 1099-INT for interest; 1099-DIV for dividends; 1099-G for state and local tax refunds and unemployment benefits; 1099-R for pensions and payouts from your individual retirement accounts; 1099-B for broker transactions and barter exchanges; 1099-S for real estate transactions, etc. There are many categories, but the Form 1099-MISC (for miscellaneous) seems to prompt the most questions and covers the biggest territory.

Keeping payers advised of your current address is a good idea, as is reporting errors to payers. However, if you don’t receive a Form 1099 you expect, consider not asking for it. In some cases, even if you are missing a Form 1099, you still may not want to ask the payer for it. After all, if you are expecting a Form 1099, you already know about the income. You can just report that amount on your tax return, and you don’t need the form. IRS computers have no problem with you reporting additional income that does not match a Form 1099 (only the reverse is a problem). If you call or write the payer and ask for a Form 1099, you may end up with two of them, one issued in the ordinary course (even if it never got to you), and one issued because you called. It happens more than you might think.

Businesses must send out Forms 1099 by Jan. 31 for the prior calendar year. However, don’t assume that you are off the hook for reporting income if you don’t receive a Form 1099 by February or even March. There are penalties on companies that issue Forms 1099 late, but some come as late as April or May when you may have already filed your return. Even if you never receive a Form 1099, if you receive income, you must report it. You don’t need a 1099 to report income.

The information will be reported to the IRS based on your Social Security number regardless of whether you receive the form. Update your address directly with payers, as well as putting a forwarding order in with the U.S. Post Office. You’ll want to see any forms the IRS sees. Any Form 1099 sent to you also goes to the IRS. If there is an error on a Form 1099 tell the payer immediately.

If you forget to report a Form 1099, the IRS will send you a computer-generated letter billing you for the taxes. If it’s correct, just pay it. Most states have an income tax, and they will receive the same information as the IRS. If you missed a 1099 on your federal return, your state will probably bill you too.

via The Tax Lawyer


Bitcoin IRS Tax Amnesty…Sort Of

The IRS has trained its criminal agents to pursue Bitcoin and other digital currencies. The IRS is using tracking software, and the IRS successfully went after Coinbase accounts via summons. And more IRS enforcement is surely on the way. Yet there has long been speculation that a special IRS amnesty program will be announced for Bitcoin and other digital currencies. Even government officials have mentioned the idea, but so far, it hasn’t arrived. Without a formal amnesty, you can still amend a few returns to pick up additional income you failed to report. But some people are reluctant. A more predictable tax and penalty result is what IRS amnesty programs usually provide.

(AP Photo/Kin Cheung)

If the IRS finds you first though an audit, you won’t be protected. But some people are not comfortable just preparing and filing a few amended tax returns to correct mistakes. For more serious transgressions, traditionally, if you voluntarily go to the IRS to correct your tax problems before the IRS discovers them, you won’t be prosecuted. Still, one can feel pretty vulnerable with a powerful agency like the IRS.

Although there is not a special IRS amnesty for crypto, there is one for offshore accounts. If you have an offshore account, the IRS amnesty can offer crypto investors a back door. With extensive data swapping deals between the IRS, foreign governments, and foreign banks, almost no offshore account is secret any more. Yet, offshore account holders can safely fix their problems, even if they intentionally evaded reporting in the past. The cost of the IRS amnesty can be small compared to the risk of vastly larger civil penalties or prosecution. Civil FBAR penalties alone can wipe out foreign accounts.

There are two IRS programs, the OVDP or Offshore Voluntary Disclosure Program, and the Streamlined program. The OVDP is a clean wash-your-hands kind of way to correct past tax filings and come clean. It involves filing up to 8 years of tax returns (or amended tax returns) and FBARs. You pay taxes, interest and a 20% penalty on whatever you owe. For most people, there’s also a 27.5% penalty on your highest offshore account balance. In some cases, that penalty can be 50%, depending on the bank and timing. In contrast, the Streamlined program involves only 3 years of tax returns, not 8. You file 6 FBARs in Streamlined instead of 3, to match the longer FBAR statute of limitations.

The Foreign Streamlined program (for U.S. persons abroad) has no penalty. The Domestic Streamlined program involves a 5% penalty pegged to the highest offshore account balance over the 6 FBAR years. Still, Streamlined filings are subject to worrisome IRS audits. Thus, for crypto investors with risk, the OVDP seems a far better hook for resolving crypto tax problems. As long as you are filing amended tax returns, other corrections unrelated to your foreign accounts can be handled too. After all, before you sign amended tax returns under penalties of perjury, you need to make sure they are accurate. If you failed to report any other income, you should include it on your amended returns.

By its terms, the OVDP applies to foreign account matters. Other corrections are technically not part of the OVDP, so the IRS could pursue these items outside the OVDP. In reality, though, the IRS appears to be processing them all together. In short, if you have other unrelated corrections to your returns, by all means make them. In fact, cleaning up domestic tax problems is a feature of many OVDP cases. Until the IRS has a special crypto amnesty, the OVDP may be worth a look.

via The Tax Lawyer