The United States Court of Appeals for the D.C. Circuit recently ruled in Murphy & Lavelle vs IRS and USA that the income tax on emotional distress and defamation damages violates the United States Constitution. The opinion is at:
http://pacer.cadc.uscourts.gov/docs/common/opinions/200608/05-5139a.pdf
Los Angeles based tax attorney David Higgins, Esq. of The Settlement Law Group alerts us that should this ruling survive Supreme Court action, then plaintiffs will be entitled to refunds of any tax paid on such damages (and perhaps others). In order to get such refunds, however, plaintiffs must file protective Claims for Refunds within the applicable statute of limitations for the year in which the damages were received.
That statute of limitations is generally 3 years after a timely return was filed by the plaintiff. Thus, assuming the plaintiff filed on April 15, then open years are currently 2003 (statute expires April 15, 2007), 2004 (statute expires April 15, 2008) and 2005 (statute expires April 15, 2009). If a plaintiff got an extension to file his or her 2002 return until October 15, 2003, then the statute on the 2002 year is still open (statute expires October 15, 2006). (If the plaintiff paid tax after the return was filed, such as during an audit or extended payment period, then the statute is longer and the plaintiff should get professional advice.)
Note that if the plaintiff structured such damages using a nonqualified assignment, a new statute of limitations, and claim for refund opportunity, starts each year that a payment is received.
The Claim for Refund form (Form 1040X for individuals) and its instructions are at:
http://www.irs.gov/pub/irs-pdf/f1040x.pdf
http://www.irs.gov/pub/irs-pdf/i1040x.pdf
If any plaintiffs need assistance with the protective Claim for Refund procedure Mr. Higgins, who is admitted to the bars of California and New York, offers his assistance. He can be reached at:
The Settlement Law Group One Wilshire Blvd, Suite 2200 Los Angeles, CA 90017-3321 (213)833-0202; FAX (213)-291-9300 and Mobile (310)415-3344
Stay Tuned!
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