Employee Who Received Settlement For Defamation Claims Was Liable For Back Taxes
Polone v. CIR, 499 F.3d 1041 (9th Cir. 2006)
Gavin Polone sued his former employer, United Talent Agency, alleging, among other things, wrongful termination and defamation. In settlement of the defamation claim, Polone agreed to accept $4 million in four equal, six-month installments, beginning on May 3, 1996. Congress amended Section 104 of the Internal Revenue Code in August 1996 (after the first but before the second installment payment was received), resulting in the inclusion in taxable income of compensation for defamation claims such as Polone’s. The Tax Court held that the pre-amendment Section 104 applied to Polone’s receipt of the first installment, but not to any of the other installments, resulting in his owing taxes on $3 million. The Ninth Circuit affirmed.
