Lawsuit - Business Damages

[Donald Rihn, EA]

In South Texas, a large turkey buyer pulled out of the area several years ago leaving local turkey producers high and dry, owing large amounts to local banks for the construction of turkey houses.

There has been an ongoing lawsuit and it may come to either trial or settlement this month.

The gross damages should be taxable. The attorneys for my farmer clients were told to seek help from a tax attorney to "set up something" to defer the taxes. Any idea of what they were talking about? There are Schedule F's, 1120's, 1120S's, and 1065's involved, depending on how the farm was set up.

For those reported on Schedule F of the 1040:
Income reported on line 21, other income, of the 1040 or the Schedule F?

The legal fees are deductible. Question as to if it should go on Schedule F or on Schedule A, with a 2% cut?

Dollar amounts could range from $100,000 up to $750,000 for damages. Legal fees will run about 30 - 40 % of that amount.

Settlement could be for breach of contract, loss of income, or split between the two.

[ED SMITH]

They may be referring to a structured settlement. Meaning the payments would be spread out over a number of years like an installment agreement.

Otherwise I find that tax advice from non-tax attorneys are as useful as turkey droppings.

Law suits can take a long time to resolve, sometimes years, with appeals and all. This one hasn't even gone to trial. As for a settlement, who knows, that is standard pre-trial procedure that the parties try to settle before trial. The end result could also be that your clients lose and get nothing.

In addition to the legal fees, there are other expenses, such as witnesses, stenos, transcripts, copying, etc. that are billed to the client that go on top of the fees.

So, at this point I wouldn't be too concerned about the tax implications until something concrete happens.

[Donald Rihn, EA]

Settlement Reached

So, at this point I wouldn't be too concerned about the tax implications until something concrete happens.

Taxpayers have advised that a settlement was reached. Judge to determine how much to distribute to each party in the suit.

For 1040 clients, I am assuming it goes on Schedule F, subject to SE if profit. Legal fees deducted on Schedule F.

For 1120 client, I am assuming net taxable as other income.