August 13, 2018 – The “Tax Cuts and Jobs Act” presumably did not factor into a San Francisco jury’s decision last week to award Dewayne Johnson $289.2 million in his lawsuit against Monsanto Company, et al. His case is potentially affected by it nonetheless.

In addition to $39.2 million in compensatory damages awarded to the former Benicia Unified School District groundskeeper who claimed years of exposure to the herbicide Roundup caused him to develop non-Hodgkin lymphoma, the jury tagged on $250 million in punitive damages against defendant Monsanto for failing to warn users about the dangers of their popular product.

With more than 4,000 people waiting in the wings to have their similarly-styled lawsuits heard, the implications of this verdict are far reaching. Even though an appeal is anticipated, the significance of this bellwether case cannot be understated.

Let’s assume for an unlikely moment the verdict is not appealed and no post-verdict settlement discussions occur. Despite the best intentions of the jury to properly compensate Mr. Johnson for his suffering and punish Monsanto for its maliciousness, the ultimate beneficiary of this outcome is, strangely enough, the U.S. taxpayers thanks to Congress’ recently passed legislation.

The Surprising Beneficiary: Taxpayers

Let’s start with the easy part. Any of the $39.2 million compensatory damage income flowing to the plaintiff, whether in cash or as periodic payments, is tax-free in accordance with 26 U.S. Code § 104(a)(2). Attorney fees and costs will be deducted from this amount, but the remainder belongs to the Mr. Johnson.

Assuming a 40% contingency fee (I have no idea what the retainer agreement calls for but 40% for cases which go to trial is not uncommon though it could reasonably be higher or lower), Mr. Johnson could still expect to see 60% of the gross figure, or $23.5 million, less costs and expenses which likely are significant on a case of this magnitude.

The tax code views punitive damages differently. Very expensively differently. More so today than in 2017 and earlier thanks to the 115th Congress and its passage of PL 115-97 signed into law on December 22, 2017.

That’s because, in its effort to streamline the tax code, our elected officials passed a logic-defying law which eliminates the ability to deduct attorney fees from many types of nonphysical injury lawsuits. This Monsanto case, because it is not employment or whistleblower related (lawsuits which retain their above-the-line deductibility of attorney fees in most instances), is fully taxable to the plaintiff with no ability to offset taxes owed for legal fees paid to the attorneys representing them.

That was not a typo: Plaintiffs owe taxes on the ENTIRE nonphysical injury portion of the verdict even though they never receive the portion they pay for legal representation.

In this instance, Mr. Johnson could expect to pay roughly 50%, or $125 million, if not more, in taxes for the punitive damages component of this verdict.

But the story gets more unbelievable.

Not factoring costs and expenses incurred for developing and trying the case and applying the same 40% contingency fee listed above in the compensatory phase, means Mr. Johnson can also expect to see his $250 million punitive damage verdict reduced by another 40%, or $100 million, for attorney fees.

Doing some quick math reveals $250 million less $225 million (50% for taxes PLUS 40% for attorney fees) nets him $25 million, or 10%, of the total punitive damage verdict.

That was not a typo either: The plaintiff nets a scant $1,500,000 more of the $250 million punitive damage portion of the verdict than he does the $39.2 million compensatory piece.

Does it make sense that a jury verdict of $50 million in compensatory damages and zero dollars in punitive damages would net Mr. Johnson more money than this $289.2 million combination verdict? True, such an outcome would not punish the defendant as intended but one would think a plaintiff deserves more than 10% of the verdict less expenses.

But there’s more.

Congress’ ultimate gift to the taxpayers? Lest you think the attorneys are exempt from paying taxes on their contingency fees earned (since, after all, the plaintiff already paid taxes on that sum once, right?), the attorney fee gets taxed a second time when the attorneys file their own taxes.

The irony of a “tax cut” law resulting in double taxation on sums awarded should not be lost on anyone practicing in this arena.

Nonphysical Injury Structured Settlements to The Rescue

Until or unless stakeholders successfully lobby Congress to rectify this ill-advised tax law, many nonphysical injury claims will continue to disproportionately subsidize those of us who are not even involved in the case. Our federal, state and local tax authorities will appreciate the windfalls, but this flagrant absence of common sense has no place in a judicial system striving for fairness.

Fortunately, some help exists in the form of nonphysical injury structured settlements for practitioners evaluating their post-verdict negotiation options. Nonphysical injury structured settlements don’t invalidate the nonsensical tax law but can help render some parity to an otherwise gloomy reality.

By deferring taxable dollars into the future, plaintiffs can increase the total value of their settlement and lower the percentage of the verdict they ultimately pay in taxes. This increased recovery and steady, guaranteed cash flow also have the added benefit of being a better needs-based outcome for those seeking safety and security after a long-drawn-out legal process.

Practice Pointer: While it may be tempting during post-verdict negotiations to drop the punitive damage component altogether in exchange for the more tax-friendly all-compensatory outcome, caution is urged here since this would likely be viewed as a deliberate attempt to evade taxes. Reasonable, defensible allocation of damages, along with the need for qualified, independent tax advice, is recommended.

Poor Mr. Johnson didn’t ask to get cancer and didn’t set out to be a poster child for the folly of our new tax laws. But his case offers valuable insights into the realities that await those who “win” a lawsuit only to end up on the losing end of the ultimate tax outcome.

Taxes image courtesy of Stuart Miles at FreeDigitalPhotos.net