News Update – Rudy Giuliani ordered to pay nearly $150 million in defamation lawsuit.
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In a recent verdict, Rudy Giuliani was ordered to pay nearly $150 million in damages for defamation to former Georgia election workers Ruby Freeman and Shaye Moss. Giuliani has announced plans to appeal the decision, and collecting from him may be challenging. The breakdown of the damages is as follows: $16.171 million to Freeman and $16.998 million to Moss for defamation, $20 million each for emotional distress, and $75 million in punitive damages. The punitive damage portion of the verdict is the most likely to be contested.
However, the tax ramifications of the judgment remain unclear. Was Giuliani acting in his capacity as a lawyer for former President Trump at the time of the defamation, or engaged in some other business pursuit? This might affect his ability to claim a settlement paid to the election workers as a business expense. On the other hand, the plaintiffs may face tax on the entirety of the verdict or settlement, including funds paid to their lawyers, as punitive damages are counted as taxable ordinary income, even for personal injury claims.
Moreover, a tax on litigation settlements, with no deduction for legal fees, may further complicate matters for the plaintiffs. Legal fees for plaintiffs are often nondeductible, which can result in two sets of tax on the same money; once for the plaintiff, and once for their attorney. To mitigate tax on legal fees, plaintiffs must employ complex strategies to reduce tax liabilities under a 2018 tax law.
It may seem unjust that the plaintiffs are subjected to tax even on compensatory damages, attributable to the nature of their claim. In cases of defamation, recoveries for emotional distress are taxed, whereas recoveries for physical injuries and sickness are tax-free. The tax code has stipulated since 1996 that injuries must be physical to qualify as tax-free. Suits for intentional infliction of emotional distress and physical symptoms of emotional distress are all subject to taxation.