|
IRS Guidelines Quell Initial
Concerns Over Structured Attorneys’ Fees
New Legislation Also Brings Advantages for Both
Sides in Employment Cases
The American Jobs Creation Act of
2004 (“AJCA”) brought changes and temporary uncertainty to the legal
landscape.
Initial Questions and Concerns About
Structuring Attorneys’ Fees
The legislation created a new Internal Revenue Code Section 409A that
significantly changed the tax treatment of non-qualified deferred
compensation plans and arrangements by imposing a number of restrictions and
requirements. These new rules broadly defined non-qualified deferred
compensation and cast doubt on whether or not structuring attorneys’ fees
would be subject to these changes. For a brief time, deferring fees came to
a halt until the IRS issued a set of guidelines clarifying which service
providers the new regulations applied to.
In a nutshell, the IRS guidelines declare contingent attorney’s fees exempt
from Section 409A as long as the attorney is actively engaged in the
practice of law and provides legal services during the year to two or more
unrelated clients who are also not related to the attorney or to each other.
Double Taxation on Attorneys’ Fees
Ends
The Civil Rights Tax Relief Act (which was also part of the AJCA) brought
good news for plaintiffs in employment discrimination cases. This new law
now allows plaintiffs who win or settle employment cases to take a full
deduction on their federal income tax returns for their attorneys’ fees and
other litigation costs. The double taxation on attorneys’ fees has been
considered unfair to plaintiffs who pay tax on “income” they never receive.
In the past, it was not unusual for taxes on the award coupled with taxes on
the attorneys’ fees to leave the plaintiff with little net recovery. In some
cases, a large tax bill exceeded what the plaintiff received from the
settlement, thereby turning a court victory into a financial disaster. The
Civil Rights Tax Relief Act has remedied this problem.
Also Helpful for Defense
The most obvious benefit is for the plaintiff. However, the new law can
create a better settlement for both sides. With the tax on attorneys’ fees
no longer a part of the equation, reasonable offers are more likely to be
accepted. Parties may be able to reach a settlement more quickly and avoid
lengthy and expensive litigation.
Structured Settlements Easier to Use
in Employment Cases
Since the settling plaintiff no longer needs to set aside a portion of the
settlement to pay the double tax on the attorney’s fee, funding a structured
settlement to earn triple tax deferred interest is more easily achieved.
The money in a structured settlement earns interest on funds that would have
otherwise been lost to taxes in the year of settlement. Triple tax deferred
interest is earned on:
• Principal;
• Accumulating interest;
• Taxes deferred at settlement.
Eliot Spitzer
Highlights Persistent Problems in Insurance Industry
Late last year, New York State
Attorney General Eliot Spitzer announced a civil action against Marsh &
McLennan for certain brokerage practices. What began as an inquiry into
a failure to disclose compensation eventually turned into an active
investigation of bid rigging and improper steering. “This is not unlike
the steering and other alleged abuses within the structured settlement
industry,” Martin Jacobson, General Counsel at Creative Capital,
commented.
“Steering business to keep it within a group of companies is a
potentially abusive practice. In structured settlements it is vital that
the plaintiff is protected by making sure the life company issuing the
annuity has acceptable ratings, and that the plaintiff is getting the
best annuity rate from amongst those life companies with acceptable
ratings.”
“At the end of the day, the defendant’s insurer is completely released –
with no recourse – in every structured settlement,” Marty continued. “It
is therefore only the plaintiff who has any interest in which life
company issues the annuity. Yet many P&C issuers have short approved
lists of life companies which they try to steer every structured
settlement to. Sometimes these companies have weak ratings and sometimes
they have poor rates.”
When asked about these issues, former New York State Superintendent of
Insurance, James P. Corcoran, stated that “perhaps an inquiry should be
made into the steering practices allegedly taking place at the claims
end of the structured settlement business, particularly among a handful
of insurers who try to dictate which brokers and which life companies
must be used in all structured settlements emanating from their insured
claims.”
Creative Capital
Continues to Grow
We were happy to welcome the following people to the Creative Capital
team in 2004 as we expanded our operation into new locations.
Brentwood, Tennessee – Ben Goff, MBA, CCE, and Teresa Goff joined the
team with significant experience in the finance and insurance
industries. The Goff's founded Advocate Capital, Inc. which is one of
the most successful litigation finance companies in existence.
Long Island, New York – Victor Rodriguez brings a solid background in
financial services. Prior to joining Creative Capital, Victor was
employed as a Financial Advisor and Settlement Specialist with UBS
Financial Services. He has also worked at Smith Barney Inc. and MetLife.
Chicago, Illinois – Brian Michaels is a frequent lecturer on structured
settlements, tax, trusts and the intricacies of how they function
together. Brian has over 20 years experience providing structured
settlement, trust and tax solutions for individuals and business
entities. In addition to providing structured settlement services in the
bodily injury area, Brian also is an expert in integrating structured
settlements with trust services and the use of structured settlements in
non-physical injury cases, such as employment cases and contract
disputes. He previously managed the trust division of Allstate Bank
where he worked closely with the structured settlement division of
Allstate Life.
|
