the accountant & the law rl-lb
TRANSCRIPT
The Accountant and the Law
Cooper Levenson, Attorneys at Law
Randolph C. Lafferty, Esquire
Lindsay T. Byrne, Esquire
Computation of:
Loss of Past Earnings
Loss of Present Earnings
Loss of Future Earnings
Personal Injury: What Role Does the Accountant
Play
The trial attorney has two choices:
Utilize the accountant to present gross amount of lost wages and HOPE the jury understands the complex, four page, jury charge on how to discount future losses to present value; or
Use a CPA to discount future losses to present value. (Preferred Method)
Future Loss of Earnings
Specialized and often overlooked cause of action!
MILLIONS of dollars have been recovered utilizing this recognized cause of action!
Most attorneys are oblivious to this type of claim!
Rarely utilized in New Jersey
Loss of a Key Employee
New Jersey Rule: An employer is entitled to damages against a third party for the loss of services of a key employee injured by that third party.
Loss of a Key Employee
Inquire as to the character of the business
Personal services?
Personal relationships?
Special attention?
Is the value of services worth substantially more than the cost of replacement?
How Can I Tell If My Client Has A Key Employee?
Injured employee has personal relationships that have a value in the commercial world recognized by “any business man”
Special knowledge/skills not easily acquired by others
Employment based on personal attention, characteristics, and/or labor
How Can I Tell If My Client Has A Key Employee? (Cont’d)
Lost profits are not dispositive
Easier to prove with smaller businesses
Must differentiate profits from personal endeavors, skills, and attention versus investment of capital and labor
How Can I Tell If My Client Has A Key Employee? (Cont’d)
Similar to New Jersey
Loss of profits alone are not sufficient to state a cause of action
However, if lost profits are due to personal management and endeavor, they are an accurate measure of earning capacity and losses
How Does Pennsylvania Handle the Loss of a Key Employee?
Employers cannot recover!
Generally, you cannot bring suit for the loss you suffer from another's death/injury unless the third party owed a specific duty to the employer.
Key Employee: National Trend
Lost profits are not dispositive on their own.
Woschenko rule and exception
Attorneys and accountants must work closely to be successful with this cause of action.
Helping Your Client to Prove They Have (or Are) Key Employees
Role of the accountant
Extrapolate future lost profits
Prior/current lost profits
Costs of replacing the injured employee
Tracing business income to injured employee’s efforts
Role of the attorney: Focus on factual inquiries
Loss of a Key Employee
Commercial, Criminal & Business Litigation
Comes into play with either anticipated or actual business disputes
Partner with an attorney in a myriad of circumstances
Economic damages calculations whether suffered through tort or breach of contract
Post-acquisition disputes
Earnouts
Breaches of Warranties
Forensic Accounting
Bankruptcy, insolvency, and reorganization
Securities Fraud
Tax Fraud
Money Laundering
Business Valuation
Computer forensics/e-Discovery
Forensic Accounting (Cont’d)
Trial attorney is presented with a small window
Once the compensatory damage verdict is entered, the jury determines punitive damages are warranted, now what?
Net worth and ability to pay suddenly become relevant!
Forensic Accounting in Punitive Damages Litigation
• Judge orders the tax returns and financial statements be produced and tells the parties to be prepared to proceed tomorrow!
• The accountant is key: he/she analyzes the financials overnight, testifies in the morning, and explains to the jury, in a manner understandable to the lay man, the financial composition of a multi-tiered corporation.
Forensic Accounting in Punitive Damages Litigation (Cont’d)
Accounting Consequences in Litigation Recoveries
General Rule: Monies received for personal injury, including pain and suffering, are not taxable.
Internal Revenue Code, Section 104
Internal Revenue Code, Section 104 Exceptions
Punitive Damages – Exempted by the Small Business Job Protection Act of 1966
Damages attributable to back pay, front pay, lost earnings, and future loss of income are included as gross income.
Employment litigation claims generally taxable
Section 104(a): “emotional distress shall not be treated as a physical injury or physical sickness.”
Internal Revenue Code Section 104 Exceptions
The Rodman Rule
A settlement was reached in the amount of $200,000.00
Settlement agreement included a confidentiality clause
A liquidated damages clause was included which provided that if there was a material breach of the Confidentiality Clause, Rodman would get his $200,000.00 back
The Rodman Rule (Cont’d)
The dispute between Amos and the IRS was over the interpretation of IRC Section 104(a)(2) regarding the interpretation of “physical injury”
The Test: What was the dominant reason for the settlement?
Amos claimed the dominant reason was “physical injury” and the IRS claimed it was confidentiality
The Rodman Rule (Cont’d)
The Result: Apportionment by the Tax Court
$120,000 for physical injury (non-taxable)
$80,000 for the confidentiality clause (taxable)
The Rodman Rule (Cont’d)
Do not agree to a confidentiality clause
Make a specific allocation within the Settlement Agreement
Include reciprocal promises of confidentiality
Include an indemnity provision that the settling party must reimburse the recovering party for tax consequences
Seek a private IRS ruling in advance of the settlement
How to Avoid the Rodman Rule
Burden is on the recipient of damages/settlements for personal injury to establish that they are nontaxable
The Burden of Proof
The Test: Is the settlement compensatory rather than purely economic in function
Critical Factors
Intent of the parties is controlling
Is the payment on account of “personal physical injuries or physical sickness”
The parties, with the advice of their accountants generate these documents
The Burden of Proof (Cont’d)
Generally Accepted Accounting Principles (GAAP)
The Standard
Questions?
Thank You!