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Friday, October 28, 2005

Wood on Resolving Litigation by Payments to Charity

Tax_analysts_62Robert W. Wood (Robert W. Wood, P.C., San Francisco) has published Resolving Litigation by Payments to Charity, also available on the Tax Analysts web site as Doc 2005-21715, 2005 TNT 207-30.  Here is the opening:

Occasionally, it may be possible to resolve legal disputes by plaintiff and defendant agreeing that the defendant will make a payment to a charity.... I first encountered a payment to charity in this context with the enormous Microsoft class action brought in California. One of the elements of that settlement involved Microsoft making contributions to charity. Although I was not representing Microsoft (I was, instead, providing tax advice to the class of plaintiffs), I wondered at the time whether Microsoft could legitimately claim charitable contribution deductions for contributions to charity that were hardly voluntary. Perhaps it is an academic point. I'm rather certain that Microsoft did claim the charitable contribution deductions.

If a plaintiff could receive a settlement or judgment but rather directs the defendant to make payment to a charity, there are some interesting assignment of income issues, too. In the case of a judgment, there seems little doubt that a plaintiff cannot avoid the incidence of the income tax by directing that he does not want the payment and rather wants the judgment paid to a charity. A settlement is arguably different, in that the plaintiff has no right to income until he signs the settlement agreement releasing his legal rights.

The recent announcement that Oracle's CEO, Larry Ellison, reached an agreement to pay $100 million to charity to resolve an insider trading lawsuit raises the stakes. That unusual settlement arrangement requires Oracle board approval, and it certainly is possible that it will not be paid as planned. Still, it raises some interesting tax questions if it is ultimately consummated.

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