New Law Helps Trial Attorneys Do Tax Planning

Don McNay's Blog (From www.donmcnay.com)

New Law Helps Trial Attorneys do Tax Planning.

By Don McNay, CLU, ChFC, MSFS, CSSC


“Let me tell you how it will be
There's one for you, 19 for me
'Cause I'm the taxman, yeah, I'm the taxman”

-The Beatles


Tax Planning for Personal Injury Attorneys


Since is difficult for a trial lawyer to predict when they will get paid on a case and for what amount, tax planning for trial attorneys can be complicated.

Often, an attorney’s income will be low in one year and high in another.

Receiving a fairly large amount of money in one year can push an attorney into the highest tax brackets. It can also reduce or even eliminate an attorney’s opportunity to take itemized deductions.

Trial lawyers now have the opportunity to receive their fees over a period of time instead of in a lump sum. Instead of paying tax in the year a case is settled, they can defer income and then be taxed in future years.

The ability to structure fees is one of the better financial planning tools available to anyone in any profession. Not only is it a good tax planning tool, It is a way for an attorney to make sure that money is set aside retirement or for their children’s education.

Unlike a traditional retirement plan, attorneys who structured their fees do not have include employees in the plan and there is not a maximum dollar amount as to how much an attorney can structure.

While many attorneys look at structuring their fees to meet long term goals, there are other attorneys who defer money for only a few years. It still helps them with tax planning and gives them additional cash flow while they wait for other cases to settle.

Clay Bigler, CSSC, and I are co authoring a comprehensive article on how attorneys can take advantage of deferring attorney fees. We plan to have the article finished shortly.

For over a decade, there was some uncertainty in the tax laws that made some attorneys hesitant to structure their fees.

In fact, the American Jobs Creation Act, which was signed into law in October 2004, seemed unclear if deferring attorney fees would be permitted past the end of 2004.

Because of the uncertainty, our office spent most of November and December making sure that attorneys who wanted to structure fees were able to do so before the end of the year.

We are happy to learn that our efforts were unnecessary.

On December 20, 2004, the Internal Revenue Service addressed the issue of deferred compensation plans in IRS Notice 2005-1. The notice spells out that attorney fees can be structured or deferred, provided that the attorneys meet guidelines that almost any practicing trial attorney will meet.

You can read IRS Notice 2005-1 (which will be officially published in 2005-02 Internal Revenue Bulletin on January 10, 2005) at: http://www.nacua.org/documents/NonQualifiedDeferredCompensation.pdf


While many attorneys have structured their fees in the past while others were concerned that the IRS had not issued clear guidelines on the subject.

Now that the guidelines have been issued, we expect that a large number of attorneys will take advantage of the opportunity to keep “the taxman” from taking a large amount of their fees.


Attorney Fees and Employment Discrimination Cases

A situation that really could be described as “one for you, 19 for me” was in the area of employment claims.

Some claimants were not being allowed to deduct their attorney fees on employment and other non physical injury awards and settlements.

Since money received on a non physical injury claim is taxable income, this meant that the claimant would pay tax on the full settlement and then pay their attorney as well. Many publications such as the New York Times, pointed out situations where the combination of taxes and attorney fees were more than what the claimant received in a settlement.

The American Jobs Creation Act fixed the tax problem for claimants who receive money from employment discrimination cases. It allows for claimants to deduct attorney fees and costs for claims of unlawful discrimination and a variety of other claims.

San Francisco tax attorney, Robert W. Wood, points out in his article “Jobs Act Attorney Fee Provision: Is It Enough? http://www.rwwpc.com/tn111504.pdf that there the Jobs Act does not address punitive damages, false imprisonment and some other claims but that it does go a long way towards clearing up the inequity that existed.

Rob and I were speakers at a convention in San Diego in 2003 and I came away convinced that he is one of the best minds in the country on this topic. His book, “Taxation of Damage Awards and Settlement Payments” is a great book and available at http://www.damageawards.org/


Summery:

American Jobs Creation Act may not have created any new jobs for trial attorneys but did make it easier for them to hold on to any income they will receive and made it less difficult for their clients to pay them on employment and discrimination cases.

Don McNay is the President of McNay Settlement Group in Richmond Kentucky where they want trial attorneys to make lots of money. You can write to him at don@mcnay.com or read more about McNay Settlement Group at www.mcnay.com

Sports Betting Instead of Casinos (Column for Jan 8)

Don McNay's Blog (From www.donmcnay.com)

Sports Betting Instead of Casinos

“Every gambler knows, the secret to surviving, is knowing what to throw away and knowing what to keep”.

-The Gambler by Kenny Rogers.

I regret that we did not have someone sing the Gambler at my father’s funeral in 1993. Dad started working in a bookmaking operation when he was 15 years and gambled until the day he died. He was very good at it.

Almost all gambling in my father’s era took place behind closed doors. State lotteries did not exist and casinos were only in Las Vegas. The popular forms of gambling were sports betting, horse racing and card games.

Bookmakers like Dad were small business entrepreneurs. They couldn’t advertise or sue non-paying clients but made a good living anyway. Gambling allowed my parents to move from an extremely poor neighborhood to a nice one. It put food on our family’s table.

While 48 states have some form of legalized gambling, only Nevada has legalized sports betting services.

States that make gambling legal seem to focus on lotteries, slot machines and casinos. This is disturbing for two reasons.

Lotteries and slot machines are terrible bets and only large corporations can own a casino. Talented people can work for a casino but there is not a chance for those people to own one.

Instead of starting lotteries and try to lure big casinos, states should license small gambling operations like the one my father had.

Dad was able to make money in the days before ESPN and the explosion of televised sports. Millions of people participate in college basketball office pools and there are newer sports like NASCAR keeping bookmakers busy. Thousands of people bet with illegal bookmakers every week and the states should be taxing that money to provide better schools and services.

Sports gambling is a fair bet. In a football game, one team is going to win and the other will lose. It is not a trillion to one bet like the lottery.

A friend in Washington state told me that legalized poker rooms are popular there. Poker is one of the hottest shows on television and poker rooms would allow states to get a cut of a growing form of entertainment.

I don’t like having a state’s tax revenues tied to the few big corporations that own casinos. If the corporations do stupid or illegal things, like the people who ran Enron, they could take a state down with it. Licensing a variety of smaller companies would give states a wider tax base.

States can license and regulate gambling operations, just like they license and regulate banks, insurance agents and pharmacies. That would allow innovators to get into the gambling business and create more opportunities for wealth.

As a betting man, my proposal is a long shot. No one is pushing sports betting, while the casino and slot machine companies are spending huge amounts of money on lobbyists and political donations. Even though illegal and off shore bookmaking is widespread, colleges and professional teams would fight legalizing sports betting. Also, there are people who legitimately oppose gambling for moral or religious reasons.

I am opposed to the lottery because I think it exploits poor people.

The 37 states that have lotteries seem to ignore the fact that lotteries target their poorer citizens. Sports betting and poker rooms are better alternatives that are fair to the state and to the gambler.

My Dad ran a fair and honest operation where people got paid on time and were cut off before they got too deeply in debt. His career caused him to break the law but he was one of the most honorable men I have ever known.

Dad detested gamblers that preyed on people who could not afford to lose and hated games like the lottery that targeted those people.

Next week, I am going to discuss some ways to improve the lotteries. Before states rush off to embrace casinos and slot machines, I hope they think about allowing small businesses to operate sports betting operations and poker rooms.

As Kenny Rogers said, “The secret to surviving is knowing what to throw away and knowing what to keep.” Sports betting might be the ace that states should keep.

Don McNay is President of McNay Settlement Group where they try to increase the odds of their clients doing well financially. You can write to him at don@mcnay.com and read other things he has written at www.donmcnay.com