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Bargaining in the shadow of anticipated
tax liabilities, the parties to a settlement agreed that
the defendants would not issue a federal Form 1099 to
the Plaintiff for $700,000 paid directly to Plaintiff’s
law firm, “unless they are required to issue one by the
Internal Revenue Service.” Defendants’ accountants
determined they were required to issue one, and
Plaintiff asserted they violated the settlement
agreement because they failed to seek a private letter
ruling beforehand.
The Court concluded that the Defendants
were not obligated to seek a private letter ruling. When
confronted with an ambiguous contract, where one
interpretation is contrary to public policy and
unenforceable, “the Court may select the alternative
interpretation that would not run afoul of public
policy.” The record was undisputed that the Defendants’
accountants advised them to issue a 1099. The Court
independently examined federal tax law and concluded
that “it is nearly certain that the advice was a correct
statement of federal tax |
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law.” Pursuant to IRS regulations and
Commissioner v. Banks, 543 U.S. 426, 430 (2005), the
Plaintiff’s attorney’s fees are income to the Plaintiff,
regardless of whether they are paid to the Plaintiff or
directly to the attorney.
The parties had also agreed to back-date
the redemption of Plaintiff’s shares in a company as
part of the deal. Plaintiff spoke to an IRS agent, IRS
supervisor and tax attorney, and believed that this
agreement was also contrary to the tax laws. The Court
nevertheless rejected Plaintiff’s contention that the
Defendants were obligated to issue a K-1 to him based
upon the later redemption date. The Court reasoned that
in this instance, the Defendants were at risk for tax
liability and were entitled to take that risk. The Court
stated, however, that the Plaintiff could pursue an IRS
ruling on this issue.
Finally, Plaintiff challenged the
issuance to him of a 1099 for loan forgiveness income.
The Court again rejected Plaintiff’s position, holding
that he had released any such claims as part of the
general release in the settlement.
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