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Bottles of Monsanto’s Roundup are evident in stores across California, sparking ongoing legal battles related to its safety. A former groundskeeper, diagnosed with terminal cancer, has initiated a lawsuit against Monsanto, claiming that glyphosate, the active ingredient in Roundup, is responsible for his non-Hodgkin lymphoma (NHL). The trial, overseen by San Francisco Superior Court Judge Suzanne Ramos Bolanos, is tentatively scheduled to commence on June 21.
Roundup, produced by Monsanto, now under Bayer’s ownership, has been at the center of numerous lawsuits involving gardeners, farmers, and homeowners contending that their use of the herbicide led to cancer diagnoses. To date, Bayer has faced substantial financial challenges, with nearly $10 billion expended on settlements and over 60,000 additional cases pending. A recent ruling in Georgia awarded John Barnes approximately $2.1 billion, including $65 million in compensatory damages and $2 billion in punitive damages, as reported by CVN News.
However, the tax implications surrounding these awards can be complex. While compensatory damages for personal injuries are generally exempt from taxation under section 104 of the tax code, punitive damages, like those awarded to Barnes, typically do incur tax liabilities. In his case, a staggering 97% of the verdict consisted of punitive damages, implying that most of the financial award would be taxable.
The complexities extend further into how legal fees are treated. A tax reform enacted in 2018 eliminated deductions for many legal expenses. Consequently, plaintiffs may face tax obligations on amounts distributed to attorneys, even though those attorneys must also pay tax on their earnings. For individuals with contingent fee arrangements, the IRS considers them to have received the total award amount, regardless of any direct payments made to the attorney.
For instance, suppose a plaintiff claims that Roundup resulted in cancer and receives $10 million in compensatory damages with a 40% attorney fee. After the attorney takes their cut, the plaintiff ends up with $6 million, which is generally tax-free. However, complications arise if punitive damages are involved. If punitive damages of $40 million are added to the compensation, the math shifts dramatically. The plaintiff may take home $30 million, yet they would owe taxes on the entire $40 million awarded due to the way the tax law categorizes such payments.
The elimination of deductions for legal fees creates a paradox. Even if a plaintiff has a net award of $30 million, they may be taxed on the full extent of their punitive damages, leading to potentially inflated tax liabilities. This situation can be exacerbated if litigation costs exist beyond the legal fees or if the contingent fee exceeds 40%. For plaintiffs, this can lead to owing taxes on sums far greater than what they ultimately receive.
Solutions to navigate this tax landscape do exist, but they often require specialized advice. Certain cases, such as those related to a plaintiff’s trade or employment, may still allow for deductions on legal fees. However, outside of these specific circumstances, plaintiffs may struggle for alternatives. Therefore, seeking professional guidance on the taxation of damage awards prior to settling cases can be vital to prevent unexpected tax burdens.
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