Lawsuit Filed by Blake Lively Against Justin Baldoni Spotlights Burden on Victims in Tax Matters
Lawsuit Filed by Blake Lively Against Justin Baldoni Spotlights Burden on Victims in Tax Matters
Blake Lively's lawsuit against her "It Ends With Us" co-star and director Justin Baldoni has stirred up media attention in Hollywood and beyond. According to TMZ, the lawsuit claims that Baldoni displayed behavior that caused Lively significant emotional distress. As per the lawsuit, the movie was expected to adhere to conditions such as "no more displaying nude videos or images of women to Blake, no more mentions of Baldoni's alleged past 'pornography addiction,' no more discussions about sexual conquests in front of Blake and others, no more references to cast and crew's genitalia, no more inquiries about Blake's weight, and no further mentions of Blake's deceased father."
Lively's lawsuit alleges that Sony Pictures agreed to her requests, but Baldoni reportedly initiated a reputation-destroying campaign against her. In a statement, Lively expressed hope that her legal action would shed light on these harmful retaliatory tactics and protect others who might be targeted. She boasts a list of celebrity supporters, but Baldoni is said to be planning a countersuit, accusing Lively of waging a smear campaign against him. As the lawsuit progresses, potential tax issues may emerge later in this contentious dispute.
Tax complications are inevitable if any monetary exchange occurs, affecting both Lively and Baldoni. If Lively receives any compensation, is it taxable? Generally, lawsuit settlements are taxable, and in certain circumstances, legal fees can't be deducted unless you meet specific requirements. Given her profession, Lively should have no trouble deducting her legal expenses. However, could she potentially pay less tax on that amount?
Her lawsuit seeks damages for reputational harm and emotional distress. Certain tax cases suggest treating damage to professional reputation and business capability as capital gains instead of ordinary income, which carries lower tax rates. But what about the emotional distress damages?
They are typically taxable, even in the context of sexual harassment. Compensatory damages for physical injuries are exemption on taxes under Section 104 of the tax code. However, the definition of "physical" is unclear, and tax concerns often arise in sexual harassment settlements. If you claim emotional distress, your damages are taxable. If you assert that the defendant directly caused physical injuries or illness, your damages might be exempt from taxes. But many sexual harassment claimants find it challenging to prove these points. Even if there's groping or other assaults, taxes might still be applicable.
There's a pending tax bill that would exempt sex abuse and assault settlements. Meanwhile, some claimants contend that the harassment resulted in post-traumatic stress disorder (PTSD), which is arguably considered physical for tax purposes. Although the IRS taxes most lawsuit settlements, some claimants win their tax cases. For instance, in Domeny v. Commissioner, Ms. Domeny suffered from multiple sclerosis. Her MS worsened due to stress caused by workplace issues, including an embezzling employer. Her employer terminated her, exacerbating her MS symptoms. She settled her employment case and claimed some of the money as exempt from taxes. The IRS disagreed, but Ms. Domeny prevailed in tax court.
In Parkinson v. Commissioner, a man suffered a heart attack while at work. He sued, claiming that the employer's misconduct caused him to suffer a heart attack at work. He settled and claimed that his payment was tax-exempt. The IRS contestated, but the court agreed with Mr. Parkinson. According to the court, intentional infliction of emotional distress could result in bodily harm.
Settlement agreements should include tax-related terms whenever possible. While tax language in a settlement agreement doesn't bind the IRS, the IRS pays attention if the agreement is explicit about taxes. It's essential to be explicit in the settlement agreement about tax forms, too. Plaintiffs don't want to be surprised by an IRS Form 1099 arriving around Jan. 31 after settling their case.
If Baldoni chooses to settle the lawsuit, tax implications arise. Since 2018, the tax law has disallowed tax deductions for confidential settlements in sexual harassment and sex abuse cases, also known as the Harvey Weinstein tax. Similarly, related legal fees are not deductible. The majority of legal settlement agreements feature a confidentiality or nondisclosure clause, which might lead to a specific tax allocation. In some instances, plaintiff and defendant may agree on such a tax allocation to enable the defendant to still deduct a significant portion of the confidential sexual harassment settlement. Others might negotiate a separate "confidentiality preference agreement" to skirt the Weinstein tax deduction limits.
Regardless of the outcome in the Lively-Baldoni dispute, tax challenges lie ahead for both parties. They may consult tax lawyers for advice. Many sexual harassment victims, however, don't have tax advisors, and they might be caught off guard by tax obligations the year following the settlement.
Lively's lawsuit against Baldoni for sexual harassment potentially includes damages for emotional distress, which are typically taxable. If Baldoni chooses to settle the lawsuit, he might be impacted by the Harvey Weinstein tax, which disallowed tax deductions for confidential settlements in sexual harassment cases since 2018. Ryan Reynolds, Lively's husband, has expressed support for his wife, stating, "I stand by my wife's right to speak out about this kind of inappropriate behavior." The IRS Form 1099 might be a concern for both parties if a monetary exchange occurs during the lawsuit settlement.
The pending tax bill aims to exempt sex abuse and assault settlements from taxes, but proving physical harm in sexual harassment cases can be challenging, leading to tax obligations for many claimants. Justin Baldoni, under scrutiny for alleged inappropriate behavior toward Blake Lively, is reportedly planning a countersuit, accusing Lively of waging a smear campaign against him. Harvey Weinstein himself faced significant tax implications and a large tax bill due to his sexual harassment scandal and subsequent settlements.
The tax code offers some exceptions for damages, such as Section 104, which exempts compensatory damages for physical injuries. However, the definition of "physical" is unclear, leading to complex tax situations for those involved in sexual harassment settlements. Blake Lively's lawsuit against her co-star and director has brought focus to the tax complications that often emerge from high-profile cases of sexual harassment and abuse in Hollywood.