On January 15, 1997, while playing in a basketball for the Chicago Bulls, Dennis Rodman dove for a loose ball and ended up falling into a group of photographers who were stationed on the sideline. As television cameras panned over to where Rodman had fallen, the country saw Rodman kick one of the cameramen, Eugene Amos, in the groin. After the incident, Amos sought treatment for groin and back injuries and later filed a police report. He then retained a lawyer to pursue personal injury claims against Rodman. In conjunction with pre-suit negotiations, the attorneys hired by Amos and an attorney retained by Rodman negotiated a settlement for $200,000. Rodman’s attorneys insisted that any settlement agreement include a confidentiality provision that mandated that Amos keep the nature and amount of the settlement secret.
When Amos filed his tax return for 1997, he excluded the full $200,000 he received in settlement from Rodman. Unfortunately for Amos, the IRS claimed that he was not entitled to exclude any of the settlement amount because he had failed to introduce any evidence of his injuries. The IRS conducted an audit and then attempted to tax all but one dollar of the $200,000, contending that the settlement was really about confidentiality to settle a nuisance claim to avoid further bad publicity for Rodman and that the settlement was not about any legitimate injuries to Amos. Amos’ attorney claimed that the entire amount of the settlement was paid due to legitimate injuries suffered by Amos. The court found that position “belied by the terms of the settlement agreement.” The court also considered other items included in the settlement agreement itself, including Amos’s agreement not to (1) defame Dennis Rodman, (2) disclose the existence or terms of the settlement agreement, and/or (3) publicize facts relating to the incident. Ultimately, The Commissioner of Internal Revenue determined that Amos owed income taxes on the entire $200,000 settlement in the sum of $61,668.
On appeal, the United States Tax Court held that $120,000 of the settlement was excludable from gross income as the proceeds of an injury settlement, but the remaining $80,000 was subject to federal income taxes. The tax court allocated 60% of the settlement as monies paid for physical injuries sustained by Amos, and the other 40% as monies paid in consideration for the other items listed in the settlement agreement, including the confidentiality provision. The U.S. Tax Court found that the settlement money was paid in consideration of several items included in the settlement agreement above and beyond the compensation paid for Amos’ physical injuries. The court ruled that the parties did not intend all of the settlement proceeds to be allocated to pay for Amos’ physical injuries.
As a result of Rodman’s case, in conjunction with a request for a confidentiality provision in a settlement agreement for a personal injury case, the plaintiff’s bar is oftentimes requesting some additional language so that their client can avoid any previously unanticipated tax consequences. To that end, the plaintiff’s bar is now aware that the IRS may challenge the allocation of the settlement proceeds contained in the settlement agreement and seek more taxes. If a confidentiality provision is requested, counsel must now work together when a case is resolved to avoid any adverse tax consequences.