5 Rules on Taxation of Lawsuit Settlements

Posted January 29, 2020

THE TRUMP TAX REFORM LAW changed the taxation of lawsuit settlements and judgments in several important ways. Here are five rules to know.

1. Taxes on a Lawsuit Settlement or Judgment Depend on the Origins of the Claim. If the lawsuit seeks recovery of amounts that would be subject to taxation, then the settlement is taxable. For example, if you get laid off at work and sue seeking wages, you’ll be taxed as wages, and probably some pay on a Form 1099 for emotional distress. But if you sue for damage to your house by a negligent building contractor, your damages may not be income. You may be able to treat the recovery as a reduction in your purchase price of the house. The rules are full of exceptions and nuances, so be careful, and be sure to consult a qualified attorney or other tax professional.

2. Settlements or Awards for Physical Injuries Are Tax-Free. Emotional distress damages are taxed unless they stem from physical injuries. If you sue for physical injuries, damages are tax-free.  That includes damages for emotional distress arising out of the physical injuries.  But if you sue for intentional infliction of emotional distress, your recovery is taxed. Physical symptoms of emotional distress (like headaches and stomachaches) is taxed, but physical injuries or sickness is not. Applying the rules to specific cases can be a chicken and egg type exercise, with difficult judgment calls. For example, if in a discrimination lawsuit you receive $50,000 extra because your employer gave you an ulcer, is an ulcer physical, or merely a symptom of emotional distress? A plaintiff can take an aggressive position on their tax return, but that can be a losing battle if the defendant issues an IRS Form 1099 for the entire settlement. The best practice is to negotiate the tax details before you sign the settlement agreement.  Also, if you claim a medical expense deduction for costs later reimbursed by an award or settlement, you must “recapture” the amount you’ve previously deducted on your tax return.

3. Allocating Damages Can Save Taxes.  Most legal disputes involve multiple issues. In an auto personal injury lawsuit, you might claim that the defendant-driver who rear-ended you caused you to not only to suffer injuries and incur medical expenses, but also caused you to lose three months’ wages, damaged the laptop you had in your trunk, and miss planned vacations with your family. In a construction defect claim, you might claim the contractor who installed leaky windows in your restaurant caused you to not only incur expenses to fix the leaks, but also led you to shut down your restaurant, resulting in a loss of income and damage to your business’ reputation. It is best for plaintiff and defendant to agree on tax treatment. Such agreements aren’t binding on the IRS or the courts in later tax disputes, but they are usually not ignored by the IRS.

4. Attorney Fees Can Be A Tax Trap. If you are the plaintiff and use a contingent fee lawyer, and your case is fully nontaxable (say an auto accident in which you’re injured), that shouldn’t cause any tax problems. But if your recovery is taxable, watch out! You’ll usually be treated (for tax purposes) as receiving 100% of the money recovered by you and your attorney, even if the defendant pays your lawyer directly his contingent fee cut. Say you settle a suit for intentional infliction of emotional distress against your neighbor for $100,000, and your lawyer keeps $40,000. You might think you’d have $60,000 of income. Instead, you’ll have $100,000 of income. How about deducting the legal fees? In the big tax bill passed at the end of 2017, there’s no deduction for legal fees. Tax advice early, before the case settles and the settlement agreement is signed, is essential.

5. Punitive Damages And Interest Are Always Taxable. If you are injured in a car crash and get $100,000 in compensatory damages and $200,000 in punitive damages, the former is tax-free. The $200,000 is fully taxable, and you can have trouble deducting your attorney fees. The same occurs with interest. You might receive a tax-free settlement or judgment, but pre-judgment or post-judgment interest is always taxable. That can make it attractive to settle your case rather than have it go to judgment.
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Christopher Shenfield, Attorney at Law  I handle personal injury, civil litigation, and tax matters across California and the U.S. (www.shenfieldlaw.com), addressing personal injury claims, real estate and construction litigation, business litigation, tax disputes, tax advice on legal settlements, and many other matters. You can reach me by email at chris@shenfieldlaw.com and by going to my website by clicking here.


Posted January 26, 2020

IN 2013, my client Jorge Vargas (not his real name) was seeking investors for a Hayward start-up that he was putting together that increases the efficiency of solar panels, connecting them to a novel racking system that provided an economical way of making the surplus energy available for heating water. A friend introduced Jorge to a partner at a Silicon Valley venture capital firm. At their first meeting, Jorge asked the partner to sign a nondisclosure agreement.

Such agreements, known as NDA’s, are intended to prevent an idea or technology from being stolen and copied. Mr. Vargas was especially concerned because the venture capital firm was already backing a competitor. “We knew the competitor didn’t have a cost-effective solution to the loss of heat problem with certain solar panels,” he said. “I didn’t want to pitch the partner about what we were doing and have them go back and say to the competitor, ‘This is how Vargas’ company does it.’”
But the VC partner refused to sign an NDA, leaving Mr. Vargas to decide whether to proceed with his pitch.

It is a common quandary, and not just in Silicon Valley. Ten years ago, it was not unusual for entrepreneurs to request, and potential investors to sign, nondisclosure agreements. But today the agreements are largely considered a thing of the past. In fact, some investors say they walk away from a founder who even suggests signing one.

This shift in attitude, which began in the early 2000s, had its origin in Silicon Valley. In the wake of the bursting of the dotcom bubble, entrepreneur became increasingly willing talk about their company to anyone who will listen. The declining use of NDA’s is certainly not in the interests of entrepreneurs. It favors the VC. Although it is rare that an investor steals an idea, it does happen. But in the reverberating chasm of the Silicon Valley, and the networks that aspire to be just like them, they’ve made the easier and less morally defensible position — no NDA’s — increasingly standard practice.

Even if a start-up manages to get an agreement signed, it can be tough to enforce. It’s very hard to prove that you kept information confidential, and it was only disclosed under an NDA. And litigating such cases can be expensive. The entrepreneur has to definitely prove that the investor took its idea and that it suffered damages and losses as a result of the investor’s actions. This meant committing legal and financial resources to pursue litigation, which often isn’t practical for a small business.Many investors say signing NDA’s is impractical for them, either. VC firms look at so many deals today that they could shut themselves out of an area by signing an NDA with one entrepreneur in that area. Also, each time an NDA is signed, it can stall the conversation because of the legal work involved. That can give a competitor the opportunity to get a foothold first.
In many cases where the VC investor refuses to sign the NDA, the entrepreneur gives his or her pitch anyway, in the hope that disclosure might open doors.

When deciding whether to ask for (or insist on) an NDA, consider the following principles.

1. Don’t ask for an NDA unless you have something to protect. The idea is only a small fraction of the value. Most of the value is in the execution.
2. Understand your prospective investor. Carefully consider who you are sharing your ideas with. Unless the investor is very well known, get references. Find out what other deals they have done. Call the companies involved in those deals to ask about their experiences. Determine whether the investor is trustworthy.
3. Consider whether to file for a provisional patent. The refusal of many VC’s to sign NDA’s is a reason why start-ups are increasingly seeking patent protection. A provisional application buys the entrepreneur some time and increases credibility.
4. Take care in what you disclose. Give enough information about what is unique and proprietary. Whenever possible, don’t disclose so much information that someone could replicate the business.

Christopher Shenfield, Attorney at Law, chris@shenfieldlaw.com, Tel 650.373.2054, www.shenfieldlaw.com

Things You Need to Know About Brain Injury Litigation

Posted May 1, 2018


Unless there is objective evidence of brain injury on MRI or CT Scan, the insurance companies assume the individual is faking their injuries or the person has psychological problems that pre-existed the accident. The first order of business is to “objectify” as best as possible our clients’ injuries. A patient’s condition will be the focal point of any case. We know that juries are sympathetic to brain injuries that can be proved. Also, know that in pursuing a brain injury claim, you will be opening up your entire life history to examination. Grade school records, medical records from childhood and anything else through the years that the insurance companies can obtain is open game. Psychological and psychiatric records are obtainable and will be obtained.

Remember that many of these difficulties can be overcome and dealt with by an experienced brain injury litigation attorney.


In the past 20 years, we have learned a great deal about brain injury, especially that the brain is more vulnerable to injury than we previous thought. It was once thought that a person who did not lose consciousness could not have experienced a brain injury. We now know that this is not the case. Likewise, it was previously felt that no one with a normal MRI or CT Scan could have suffered a permanent brain injury. That is no longer true. However, proving a brain injury is the best and quickest route to winning or settling a brain injury case. In that regard, we are fortunate that startling new sophisticated technologies have come forth in the past ten years which are more sensitive than MRIs or CT Scans in showing objective brain injury.  These are:

  • MRI/DTI: This test done on a normal MRI machine with special software known as “Diffusion Tensor Imaging” and is particularly sensitive to damages in the white matter tracts of the brain. White matter is in the interior of the brain and serves as connection like telegraph wires which connect different parts or lobes of the brains gray matter. When these are injured, communication is diminished and impairment results. DTI tracks the movement of water molecules within white matter fibers. The results have been correlated to outcome, neuropsychological testing, and other factors consistent with known medical science.
  • MRI/SWI: Another version of the MRI is known as “susceptibility weighted imaging or SWI”. This allows the radiologist to see very tiny bleeds in the brain known as micro hemorrhages. These can arise when the brain is shaken and are not normally seen on plain MRIs. The SWI can visualize iron molecules left over from tiny brain bleeds after a trauma. After a high-speed collision there could be hundreds of these tiny micro hemorrhages in a client’s brain.
  • MRI/MRS: this technology known as “spectroscopy” looks at the balance and ratio of certain molecules in the brain matter. If the molecules are out of balance because of trauma, a MRS will pick up the imbalance.


Recovery from a traumatic brain injury can be straightforward or complicated.

A diagnosis of “mild traumatic brain injury” (loss of consciousness if any) is less than 30 minutes with limited amnesia with normal MRI or CT Scan.) It is generally thought that 80% of individuals who suffer this type of brain injury will make a full recovery within six weeks.  However, a person with a pre-existing brain injury, pre-existing psychological or psychiatric difficulties, or pre-existing learning difficulties may have a more difficult time recovering from even a mild traumatic brain injury. Others without these conditions also fail to recover. Persons with TBI often have what is known as a “lack of self-awareness.” This means the individual does not recognize their limitation and changes since the time of the accident and will often say “I’m fine.”  TBI victims discover problems handling the complex demands of the real world. The more intense and longer duration the rehabilitation, typically the better recovery. The window for effective rehabilitation closes six months after injury, so it needs to be taken care of quickly. In the cases of milder injuries, only the passage of time and keeping the mind as active as possible are effective, e.g. reading, interacting with people.  And if medically authorized, begin exercising as soon as humanly possible after the injury. Exercise is known to promote neurogeneration in the brain, the growing of new brain cells. A complex and enriched environment leads to neuroregeneration as well.  Cognition recovery (thinking) occurs primarily in the first year after trauma, but can continue for up to two years. Coping skills can continue to allow for improvement thereafter. Motor recovery (movement, reflexes) can continue for up to ten years.

Obtain Social Security Disability as Needed

In the case of moderate or severe TBI with objective brain injuries, families should consider applying for social security disability immediately. If the patient recovers to the point of not needing such assistance, it can be stopped. However, the system is backed up and the application needs to be put in as soon as possible to avoid long periods without medical funding. Please see the how to apply for social security disability page for detailed instructions.

Frontal Lobe Injuries Can Be Quietly Devastating

A frontal lobe is the most advanced part of our brain and is, unfortunately, the most vulnerable to injury. Often neurosurgeons and some neurologist do not look closely enough at patients to make the determination as to whether a frontal lobe injury has occurred thinking that if they are walking and talking, they are okay.  Frontal lobe injuries are subtle, but can be devastating. A person with this type of injury can experience “disinhibition”, which means any thought becomes speech regardless of content which exhibits itself as inappropriate comments in conversations.  Disinhibition can lead to increased addiction problems, violence or social awkwardness.  Someone’s IQ can be unaffected by a TBI, but other parts of the brain that “pilot” or guide one’s brainpower can be messed up.  Decision-making and complex social interactions can cause major problems in one’s life and career.  Divorce, addition, depression and anxiety rates are elevated with frontal lobe injuries.

Loss of Cognitive Reserve: A Future Made Darker

Cognitive reserve is simply the amount of brain matter that you go through life with which protects you against dementia or Alzheimer’s disease or symptoms of a future brain injury. If you lose brain cells, you lose cognitive reserve. Another type of cognitive reserve is found in persons who have a high IQ or high job status. If these are lost, then cognitive reserve against future dementia is lost as well. Traumatic brain injury can adversely affect cognitive reserve in both instances. A young person suffering a moderate to severe brain injury will face both types of lessening of cognitive reserve in their lifetime and therefore will be more likely to suffer dementia or Alzheimer’s and to suffer it at an earlier age.


Obtain Competent Medical Help for Your Injury

Many older physicians, even neurologists, were trained that people with normal MRIs and CT Scans who did not have a brain bleed are fine. They are not aware of the latest research or the latest tools to look at the brain. It is highly possible that they do not know anything about cognitive reserve or other new discoveries. Often, medical providers will not take your case if they know you were injured in a car accident. Those who will see you will be dismissive and will assume that you are trying to pull one over on someone for money.  These attitudes can have a devastating effect on your subsequent brain injury litigation. Poor reports, skepticism in a medical record or failures to make a proper referral to a specialist can all adversely affect your claim, through no fault of your own. If you are having any of these difficulties with your treating physicians, let your attorney know.


During a recovery please, be aware that the insurance company will try to contact you and speak to you through the adjuster. They will likely have this conversation recorded. If there is a later claim for a brain injury, they will try to use this conversations as proof “that there was nothing wrong with the individual.” This is nonsense since most people with traumatic brain injury can speak and speak normally. The difficulties they are having is often not particularly manifested in speech.

Make sure you obtain photographs of the vehicle you were in if you were in a car accident. Also, make sure the vehicle will not be sold or crushed. The insurance companies will often have the vehicle taken from the lot and crushed in quick fashion. If there has been a blowout or other mechanical failure, it is extremely important that the object that failed be preserved.

Make sure you have plenty of “before/after” witnesses. These are generally people not from your own family, but who have known you before and after your injury and can testify that there have been changes in you over time. People from a church, business or school are best. These witnesses can often overcome ambiguities or difficulties found in a client’s medical records. Juries seem to believe honest before/after witnesses, often more than hired experts.

All social media engagement by you or your family (Facebook, Twitter, blog postings or other sites) will be examined by the insurance company. Any post-accident photos or postings contrary to your case will be used against you. So always be truthful.


Return to Work (or at least try)

Juries admire people who try hard, even if they fail. A person who sits at home for years awaiting trial, without even attempting to find work, is often punished by a jury. Of course, if the injury is severe, this may not be possible. Nothing is more effective than the testimony of a boss or co-worker describing the problems in the real world that led them to being fired. Working with rehab experts and/or worker’s compensation professionals can help with this sometimes difficult problem.

Get Started Quickly!

Evidence from an accident or fall can disappear, sometimes within hours. Despite the horrors of confronting a TBI, family members should seek legal counsel ASAP if the circumstances indicate fault. Video surveillance cameras, for example, are everywhere to capture incidents, but they are often erased after 30 days. Medical issues are also time sensitive.  Insurance coverage, PIP coverage and rehabilitation fights with the hospital are common problems in the first week after an injury.

If you have any questions about this article, please feel free to call me and I would be pleased to assist you.

Christopher Shenfield, Attorney at Law, Burlingame, California.  Telephone (650) 373-2054.  Email chris@shenfieldlaw.com