by John Darer® CLU ChFC MSSC RSP CLTC
Law.com's Jordan Mishory reported that one prospective investor was made an offer by Scott Rothstein "to pay about 75 percent of the whistleblower pre-suit settlement of $900,000 up front in exchange for full payment over time. The investor said the offer dealt with one of more than 100 similar settlements". Which leads me to the question of why any whistleblower would accept 75% cash for a lump sum on their case?
Whistleblower damages are essentially taxable so by taking a lump sum you are screwing yourself twice. You get less for the privilege of instant gratification and then, unless you have offsetting tax deductions, you keep less because you only have the net after tax amount to consume.
The following is a synopsis of a seminal tax case involving damages in a whistle blower case:
Murphy v IRS
In a Department of Labor ruling in the whistle blower case of Marita Murphy it was held that Ms. Murphy suffered substantial damages to her health and reputation, and awarded her $70,000 in compensatory damages strictly related to her losses.
The IRS taxed Ms. Murphy’s damages and she asked for a refund of the tax on the grounds that her damages were not income.
In an August 22, 2006 decision, the U.S. Court of Appeals for the D.C. Circuit agreed with Ms. Murphy, and found that compensation limited to making a human being whole for actual documented losses to physical or mental health were not subject to an income tax. The IRS forcibly appealed that decision and the Court of Appeals agreed to vacate its original decision and hear re-argument on the case.
The United States Court of Appeals D.C. Circuit decided on July 3, 2007 to reversed the August 22, 2006 decision
Meanwhile a non qualified assignment or non qualified structured settlement might achieve a better result for the whistleblower victim. One wonders if Rothstein was eventually successful in finding investors and from the standpoint of the whistleblower "relator", whether all settlement options and the tax ramifications of each were fully explored
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