As Fox Settles Suits Without Confidentiality, Will Nondisclosure Provisions Disappear?

The news that Fox settled discrimination lawsuits involving 18 former employees for roughly $10 Million without confidentiality provisions may seem to reflect a new openness after past Fox scandals. It may well be. But given the tax laws, it could also suggest a trend in favor, not necessarily of publishing the details, but of not affirmatively precluding disclosure. That may be good business. It also may be good for the defendants’ tax bills. It could be good for plaintiffs too.

This Aug. 1, 2017, photo shows the 21st Century Fox sign outside of the News Corporation headquarters building in New York. (AP Photo/Richard Drew)

The massive tax bill passed at the end of 2017 included a provision that was a direct outgrowth of the #MeToo movement. The tax code now denies tax deductions in confidential sexual harassment or abuse settlements. Notably, this “no tax deduction” rule applies to the lawyers’ fees, as well as the settlement payments. New Section 162(q) of the tax code provides:

(q) PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE. — No deduction shall be allowed under this chapter for — (1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement or payment.”

The provisions does not cover race, gender or age discrimination, but only sexual harassment or abuse. Yet sexual harassment allegations feature as at least part of the claim in many employment disputes. The new law is broad enough that it could apply to all of the money, even though only a relatively minor amount might be for sexual harassment. Traditionally, of course, almost all legal settlement agreements have some type of confidentiality or nondisclosure provision.

It is unclear whether any mention of sexual harassment will trigger the Weinstein provision. If it does, it might bar any tax deduction, even if the sexual harassment part of the case is minor. Plaintiff and defendant may want to agree on a particular tax allocation, attempting to head off the provision. In a $1M settlement involving numerous claims, could one allocate $10,000 to sexual harassment? Legal settlements are routinely divvied up between claims, though being reasonable is important. At the least, there could be additional reasons for the parties to address allocations. The IRS is never bound by allocations in settlement agreements, but the IRS often respects them.

We may start seeing explicit sexual harassment allocations where sexual harassment was the primary impetus of the case, and where the claims are primarily about something else. Perhaps the parties will allocate $50,000 of a $1M settlement to sexual harassment. Alternatively, the parties might agree that no portion of the settlement is allocable to sexual harassment. But an even safer way to make sure tax deductions are available may be to simply not require confidentiality. This does not mean that there has to be a public disclosure of anything.

The plaintiff and defendant may both have their own reasons for not wanting to trumpet details of the case or the settlement. But by omitting confidentiality and nondisclosure provisions, tax deductions for settlement payments and for legal fees are unaffected. Plaintiffs may be better off too. As written, the Weinstein provision could even cut off tax deductions for legal fees paid by the plaintiff in a sexual harassment case. This result surely was not intended, but the wording could cover plaintiff’s legal fees too. We do not yet know how this will be read by the IRS, or whether a technical corrections bill might address this. But omitting the usual confidentiality or nondisclosure provisions from the settlement agreement will obviate the issue entirely. At the very least, we are seeing sexual harassment settlements and legal fees in a new era.

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As Prince Harry & Meghan Markle Wedding Arrives, So Do Taxes

As American actress Meghan Markle prepares to wed Britain’s Prince Harry, most people will not focus on the tax problems complex U.S. tax laws inevitably seem to bring. Early in their engagement, Buckingham Palace announced that Markle will become a British citizen after marriage. Yet tax lawyers quickly pointed out that Meghan Markle’s U.S. citizenship could cause tax headaches for Britain’s royal family. Unless she renounces her American citizenship, she must continue to file U.S. tax returns, plus FBARs, every year, reporting her worldwide income, and disclosing her assets. Even if the couple try to keep their assets separate, disclosing assets may be a particular worry.

WINDSOR, ENGLAND – MAY 03: Souvenirs featuring Britain’s Prince Harry and his fiance US actress Meghan Markle are displayed in a gift shop on May 3, 2018 in Windsor, England. St George’s Chapel at Windsor Castle will host the wedding of Britain’s Prince Harry and US actress Meghan Markle on May 19. The town, which gives its name to the Royal Family, is ready for the event and the expected tens of thousands of royalists. (Photo by Christopher Furlong/Getty Images)

More recent reports underscoring Markle’s coming British citizenship have noted that she may well decide to give up her American citizenship. At least this royal couple will be very well advised. Many a dual country couple innocently starts filing U.S. taxes together, and then are both caught forever in the U.S. tax net. 95% of married couples file joint tax returns, making each spouse liable for everything on the return–and anything that might not be on the return. Markle will surely be advised to file taxes separately, so Prince Harry will hopefully not be caught within the U.S. tax net. But if they have children, what about them?

FATCA, the Foreign Account Tax Compliance Act, was passed in 2010, and was ramped up worldwide. It requires an annual Form 8938 filing with the IRS that could end up involving royal assets. FATCA‘s unparalleled network of reporting requires foreign banks and governments to hand over secret bank data about depositors. Non-U.S. banks and financial institutions around the world must reveal American account details or risk big penalties. Markle could follow London’s former Mayor Boris Johnson, now Britain’s Foreign Secretary. Having been born in New York but raised in Britain, Johnson was a dual citizen of the U.S. and U.K. A run-in with the IRS eventually led him to renounce his American citizenship.

According to recently released numbers, for the first time in five years, the number of Americans who renounced their citizenship fell slightly in 2017 (5,133) from the previous year (5,411)which had been a record. The total for the first quarter of 2018 was 1,099. The total for calendar 2016 was 5,411, while 2015 had 4,279 published expatriates. Despite the official list, many who leave are not counted, although both the IRS and FBI track Americans who renounce. America’s global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Many foreign banks do not want American account holders.

Americans living and working in foreign countries must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income. A foreign tax credit often does not eliminate double taxes. Annual foreign bank account reports called FBARs carry big civil and even criminal penalties. The civil penalties alone can consume the entire balance of an account. Ironically, even leaving America can be costly.

What if Markle renounces her U.S. citizenship? America charges $2,350 to hand in your passport, a fee that is more than twenty times the average of other high-income countries. Previously, there was a $450 fee to renounce, and no fee to relinquish, but the U.S. hiked the fee by 422%. Now, there is a $2,350 fee either way. Moreover, to exit, one generally must prove 5 years of IRS tax compliance. And getting into IRS compliance can be expensive and worrisome. For some, a reason to get into compliance is only to renounce, which itself can be expensive.

Markle is said to have a net worth of $5 million, which would mean also paying an exit tax to the U.S. if she renounces. If you have a net worth greater than $2 million, or have average annual net income tax for the 5 previous years of $162,000 or more, you can pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left. A long-term resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but the tax worry can be real, even for those who will not face it.

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Fewer Americans Renounce Citizenship, But Taxes Still Drive Them

For the first time in five years, the number of Americans who renounced their citizenship fell slightly in 2017 (5,133) from the previous year (5,411), which had been a record. The total for the first quarter of 2018 was 1,099. In recent years there has been a marked upswing in expatriations, and tax considerations are often at least a part of the equation. Moreover, these published numbers are probably lower than the actual number of those who expatriated. How complete these lists are remains unclear. Despite the official list, many leavers are not counted, and both the IRS and FBI track Americans who renounce

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The figures for recent years show an important trend. The total for calendar year 2016 was 5,411, up 26% from 2015, which had 4,279 published expatriates. The 2015 total was 58% more than in 2014. The reasons for renouncing can be family, tax and legal complications, and some renouncers write why they gave up their U.S. citizenshipExpats have long clamored for tax relief. One law motivating some is FATCA, the Foreign Account Tax Compliance Act. FATCA has been ramped up worldwide, and requiring an annual Form 8938 filing if your foreign assets meet a threshold.

FATCA was enacted in 2010, and over five years, was painstakingly implemented worldwide by the U.S. Treasury Department. In now spans the globe with an unparalleled network of reporting. America requires foreign banks and governments to hand over secret bank data about depositors. Non-U.S. banks and financial institutions around the world must reveal American account details or risk big penalties. Some renounce because of global tax reporting and FATCA. Dual citizenship is not always possible, as this infographic  shows. America’s global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Their American status can make them untouchable by many banks.

Americans living and working abroad must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income. A foreign tax credit often does not eliminate double taxes. Moreover, enforcement fears are palpable for the annual foreign bank account reports called FBARs. They carry big civil and even potential criminal penalties. The civil penalties alone can consume the entire balance of an account.

Ironically, even leaving America can be costly. America charges $2,350 to hand in your passport, a fee that is more than twenty times the average of other high-income countries. The U.S. hiked the fee to renounce by 422%, as previously there was a $450 fee to renounce, and no fee to relinquish. Now, there is a $2,350 fee either way. The State Department said raising the fee was about demand and paperwork, but the number of American expatriations kept increasing. Moreover, to exit, one generally must prove 5 years of IRS tax compliance. And getting into IRS compliance can be expensive and worrisome. For some, a reason to get into compliance is to renounce.

However, if you have a net worth greater than $2 million, or have average annual net income tax for the 5 previous years of $162,000 or more, you can pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left. A long-term resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but the tax worry can be real, even for those who will not face it.

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Stormy Daniels, Michael Cohen, Giuliani, Trump & Taxes

At first it appeared that Michael Cohen had paid off Stormy Daniels with his own money, and without President Trump’s knowledge. Then, Rudy Giuliani said President Trump had reimbursed him. Then, there was some reshuffling about who knew what when. There were some awkward questions about whether President Trump knew of the deal at the time, or only learned of it later. The timing and mechanics of the reimbursement seem a little confused. From a tax viewpoint–which surely isn’t the most important part of this story–many of these details may not matter. Even so, the tax issues are an interesting side show. Just about every kind of payment has tax consequences, to both the recipient and to the one who paid the money. That latter point has now been partially clarified.

President-elect Donald Trump meets with former New York City Mayor Rudy Giuliani at the clubhouse of the Trump National Golf Club November 20, 2016 in Bedminster, New Jersey. – Rudy Giuliani, US President Donald Trump’s new lawyer, said Wednesday, May 2, 2018, on Fox News Channel’s Hannity, that Trump repaid $130,000 to his personal attorney Michael Cohen for payment to porn star Stormy Daniels, contradicting the president’s past comments on the controversy. (Photo by Don EMMERT / AFP) (Photo credit should read DON EMMERT/AFP/Getty Images)

There’s no question that Stormy Daniels would have to pay tax on the $130,000 payment. Settlement money is almost always taxable to the recipient, unless it is for personal physical injuries or physical sickness. That is one of the rules about taxes on legal settlements. But on the payer side of the equation, it isn’t so clear whether someone paying her could deduct the payment, leaving aside the question of who effectively paid the money. Michael Cohen may have expected reimbursement at the time or only learned of the reimbursement later. Someone else was ultimately paying the bill.

For tax purposes, that suggests that Mr. Cohen was an agent, not the principal. Cohen may or may not have deducted the $130,000 payment as some kind of business expense. But should he have? When you pay for a business expense and your employer reimburses you, you might treat it as a wash, money in and money out with tax consequences. Or, you might claim the deduction, and report the income on the repayment. Most people prefer the former, so their taxes are easier, cleaner, and lower. It is really the principal who has the tax issue, the beneficial owner, not the agent who may be paying for someone else.

Federal income tax liability is generally allocated based on ownership under local law. In the case of bank accounts, there may be one nominal owner, but the money might effectively be held in trust for someone else. The IRS can try to tax the beneficial owner of an account, regardless of that person’s rights to the funds under prevailing local law. The IRS and the courts often look beyond local law to impose taxes on the party who is the beneficial owner. People can and do become embroiled in tax disputes over such issues, and if you are the owner or principal, you are likely to be taxed.

Conversely, if you are just holding something as an agent for someone else, you generally should not be taxed. A nominal owner is not the owner for federal income tax purposes. In Bollinger, 485 U.S. at 349, the Supreme Court said that “the law attributes tax consequences of property held by a genuine agent to the principal”. The Court enunciated a three-part agency safe harbor. Under it, you should not be treated as the owner for tax purposes if:

  • A written agency agreement is entered into with the agent contemporaneously with the acquisition of the asset;
  • The agent functions exclusively as an agent with respect to the asset at all times; and
  • The agent is held out as merely an agent in all dealings with third-parties relating to the asset.

What if you don’t meet all three conditions? The Tax Court has said that these Bollinger factors are non-exclusive. See Advance Homes, Inc. v. Commissioner, T.C. Memo. 1990-302. Even an oral agency agreement might suffice, although you surely want it in writing. Assuming a true agency, the agent should not face taxes on income over which he has no control and no beneficial right. As for Mr. Cohen and President Trump, the unfolding details are likely to matter. Of course, most people are not going to be too worried about the tax issues.

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Michael Cohen Takes Fifth, But Don’t Try It On Your Taxes

President Trump’s lawyer Michael Cohen is in hot water after his home and office were searched. The feds want details, and took the unusual step of searching a lawyer’s office despite claims of privilege. Mr. Cohen says he will take the Fifth. If you have serious tax issues, can you take the Fifth on your taxes?  In Lee v. United States, Theodore Lee argued that he couldn’t file his 2006 tax return because it would incriminate him. After all, he claimed, when his tax return was due, he was deep in an audit with the IRS over returns he had filed for 1999 through 2005. He was fearful that the IRS would prosecute him, so he took the Fifth. The court rejected his claim. The Fifth Amendment does grant a privilege against self-incrimination. However, that doesn’t mean you can just refuse to file taxes.

US President Donald Trump’s personal lawyer Michael Cohen(C) leaves the US Courthouse in New York on April 26, 2018. – US President Donald Trump acknowledged on Thursday that his personal lawyer, Michael Cohen, represented him in a ‘deal’ involving porn star Stormy Daniels. Trump had previously denied knowledge of a $130,000 payment Cohen made to Daniels that she claims was to prevent her from talking about their alleged 2006 affair.Trump, in a wide-ranging telephone interview with ‘Fox and Friends,’ admitted for the first time that Cohen represented him in a ‘deal’ with Daniels, who has filed a lawsuit seeking to have the ‘hush agreement’ negotiated by Cohen thrown out. (Photo by HECTOR RETAMAL/AFP/Getty Images)

The mere act of filing an annual income tax return has little real and appreciable tendency to incriminate the filer, said the court. In fact, merely invoking the Fifth in a tax case can invite penalties or get the IRS looking more harshly at you. You have to file tax returns, and you have to report your income. Way back in 1927, the Supreme Court considered a man who refused to file a tax return, claiming that to do so would incriminate him. In U.S. v. Sullivan, the Supreme Court said that it was too bad if disclosing illegal income opened him up to prosecution.

Even a criminal must file tax returns and pay taxes. And you have to do it accurately. What if the IRS asks you questions you are afraid to answer? Answering IRS questions in an audit or investigation can be nerve-wracking. Do not speak up without your lawyer present, and ask your lawyer what to is fair to discuss. But claiming Fifth Amendment protection in taxes cases can be a mistake. The issue can also come up with books and records. You have to keep them to fulfill your tax filing obligations. You even have to keep bank account records for accounts outside the U.S. Undisclosed offshore bank accounts can qualify as money laundering.

So, if the IRS asks you if you have any foreign bank accounts, can you take the Fifth? You can, but it probably won’t help. Even if you claim the Fifth, the IRS can hand you an “information document request” to produce your records. If you refuse, the IRS will issue a summons. Then, if you refuse to answer that, the IRS will take you to court, which will probably order you to comply. But, doesn’t your constitutional right to take the Fifth trump the IRS? After all, even in court, you can say, “I refuse to answer on the grounds that I may incriminate myself.”

Does this work with taxes and the IRS? Not always. Ironically, you can refuse to talk, but you cannot refuse to produce most documents. Your own private papers are personal records. If they might incriminate you, they are protected by the Fifth Amendment. But the Required Records doctrine says you must hand over some documents no matter how incriminating they are. The government requires you to keep certain records, and the government has a right to inspect them. The IRS and prosecutors have exploited this rule.

It can mean that pleading the Fifth in response to a subpoena for foreign account records can cause even more trouble than claiming it on your tax returns. Required records are those where the reporting has a regulatory purpose, where a person must customarily keep the records the record-keeping scheme requires him to keep, and the records have public aspects. In the case of foreign bank records, the courts uniformly deny Fifth Amendment protection. Numerous courts have all given the IRS a free pass, ruling that no Fifth Amendment protection applies.

Despite repeated requests, the U.S. Supreme Court has been unwilling to hear this issue. So, is it likely that the Fifth Amendment will be much help on your taxes? Not really. In most cases, a tax audit is civil and there is little risk that it will become otherwise. Still, a majority of criminal tax cases come directly out of civil tax cases. The IRS civil auditors ‘refer’ a case to the IRS Criminal Investigation Division. The IRS civil auditor will not tell you this is occurring, so the first time you hear about it, your case may have gone from bad to worse.

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Despite Michael Cohen Raid, How To Get Attorney Client Privilege For Your Taxes

The government searched the office and home of President Trump’s attorney, Michael Cohen, catapulting attorney client privilege into the daily news. We still do not know exactly what evidence prosecutors are seeking, although Stormy Daniels payment details are surely one area of interest. It is a rare treat for investigators to comb through files in a normally off-limits attorney’s office. Exactly how that combing is being done, how it should be done and by whom, is also a big debate. Michael Cohen made a bid to have his people make the first cut of what was privileged, but that attempt was rejected. It is not clear if prosecutors on the case are reviewing the materials, or if an independent privilege team is doing so.

In a Monday, April 16, 2018, file photo, Michael Cohen, President Donald Trump’s personal attorney, center, leaves federal court, in New York. (AP Photo/Mary Altaffer, File)

The latter would involve additional protections for the materials, since some surely are privileged. The exception being discussed that might render some materials fair game is the crime-fraud exception. There is no privilege if the client’s communication was made with the intention of committing or covering up a crime or fraud. But who decides is another big question. The exception applies if the client was in the process of committing or intended to commit a crime or fraudulent act, and the client communicated with the lawyer with the intent to further the crime or fraud, or to cover it up.

Many Americans may face legal issues over their taxes, and it is one area where they may encounter attorney client privilege. Everyone over a minimum income threshold must file a federal income tax return each year. In most states, you must file a state income tax return too. And if you are in business, you have tax returns for business entities too, and probably payroll taxes. And like it or not, you must sign all of them under penalties of perjury. Altering the penalties of perjury statement or refusing to sign renders the return invalid. It does not even count to start the IRS statute of limitations (usually three or six years). Plus, if during an audit you lie to the IRS, it is an entirely separate crime. See 26 U.S.C. § 7206. In fact, many of the most serious criminal tax cases involve bad moves during the audit. If you lie or to create fake documents in the course of an audit, you compound your problems.

As you reflect on these sobering issues, consider attorney client privilege. Thanks to attorney client privilege, if you tell your lawyer that you hid money offshore, the IRS cannot make your lawyer talk. The IRS generally cannot even make your lawyer produce documents. When it comes to taxes, lawyers and accountants are not the same. Accountants do not have attorney client privilege. If you make statements or provide documents to your accountant, he or she can be compelled to divulge them no matter how incriminating they may be. There is a “tax preparation” privilege in Section 7525(a)(1) of the tax code, but it does not apply to criminal tax cases so is of little value.

In sensitive civil or criminal tax matters, the answer is the Kovel letter, named after United States v. Kovel. This case stands for the proposition that you can get attorney client privilege with your accountant by having your lawyer hire the accountant. In effect, the accountant is doing your tax accounting and return preparation but reporting as a subcontractor to your lawyer. Properly executed, it imports attorney-client privilege to the accountant’s work and communications. The Kovel arrangement generally works well. It can be less effective with client-accountant relationships that pre-date the Kovel letter, but even there it can help. However, some IRS lawsuits have eroded some parts of the privilege.

For example, in United States v. Richey, the Ninth Circuit refused to protect an appraisal that a taxpayer, lawyer and accountant were trying to keep from the IRS. There have been some other attacks too. In United States v. Hatfield, the court forced disclosure of discussions between the lawyer and accountant. But this is rare, Kovel is still good law and the practice remains widespread. For clients with complex or sensitive tax situation, adding a Kovel letter can provide some additional comfort and control.

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Amend Your Tax Return Right After Filing? Be Careful

You just filed your taxes, so why would you amend? Maybe you realized you made a careless mistake, forgot your check or W-2, or left off income from a Form 1099 you found in the bottom of a drawer. Whatever the situation, it is not too early to amend. But should you? It depends. Math errors are not a reason to file an amended return, since the IRS will correct math errors on your return. The IRS may process your return without them. You normally also do not need to amend if you discover that you omitted a Form W-2, forgot to attach schedules, or made similar mistakes. The IRS will request them if needed. So don’t assume that a mistake means you must amend. 

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One key factor is timing and your intent when you filed. If you are evaluating whether to amend, ask yourself whether the return you filed was accurate to your best knowledge when you filed it. If it was, you are probably not legally required to file an amendment. You might want to amend, but you probably do not have to amend. Next, ask if you can correct it without amending. You usually can’t correct a tax return without amending it. But there’s an exception for some mistakes up until the normal due date–or your extended due date if you went on extension.

If you file a ‘superseding’ return before the due date of the original return (including extensions), it can take the place of the originally filed return. In effect, the “errors” of the first original return didn’t happen. It can be used to make an election that cannot be made on an amended return, or to make certain other changes. But be careful with this unusual procedure. You might confuse the IRS and end up having a dispute about which of the “original” returns is valid, and whether an amended return actually functions as a superseding one. Apart from this odd exception, you can generally only fix mistakes by amending your return.

If you find you made a mistake, receive revised Forms 1099 or K-1, etc., the IRS says you should amend. But you are not actually required to file an amended return. If you do, though, you can’t make only corrections that get you money back, but not those that increase your tax liability. Every tax return–including amended ones–are filed under penalties of perjury. So be accurate and complete. If you are going to amend, you do it by filing a Form 1040X within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later.

You must use Form 1040X whether you previously filed Form 1040, 1040A or 1040EZ. Amended returns are only filed on paper, so even if you filed your original return electronically, you amend on paper. If you are amending more than one tax return, prepare a separate 1040X for each return. If you file an amended return asking for considerable money back, the IRS may review the situation even more carefully. As an alternative, you can apply all or part of your refund to your current year’s tax. Normally the IRS has three years to audit a tax return.

You might assume that filing an amended tax return would restart the three-year statute of limitations. Surprisingly, it doesn’t. In fact, if your amended return shows an increase in tax, and you submit the amended return within 60 days before the three-year statute runs, the IRS has only 60 days after it receives the amended return to make an assessment. This narrow window can present planning opportunities. Some people amend a return just before the statute of limitations expires. If your amended return shows you owe more tax than on your original return, you will owe additional interest and probably penalties too. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions. The IRS will compute the interest and send you a bill if you don’t include it. If the IRS thinks you owe penalties it will send you a notice, which you can either pay or contest.

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