Former NBA All-Star Dennis Rodman is recognized as much for his piercings, tattoos and ever-changing hair color, as for his impressive basketball career. In the legal community, Dennis Rodman is also famous for causing an incident that led to a landmark tax case, Amos v. Commissioner, Tax Ct. Memo, LEXIS 330 (2003), which created law allowing the IRS to tax personal injury settlements that contain confidentiality provisions.
On January 15, 1997, Rodman was scrambling for a loose ball during a game and fell into a group of photographers. While getting up, he kicked cameraman Eugene Amos in the groin. Rodman’s attorneys negotiated a pre-suit settlement with Amos for his personal injury claim in the amount of $200,000.00, which included a confidentiality provision. Amos did not claim the $200,000.00 settlement amount as part of his gross income on his 1997 tax return, based on well-settled law that personal injury settlements are not taxable as income. The IRS, however, took the position that the money should have been claimed as income because the settlement was really paid for confidentiality rather than for personal injury.
Ultimately, the U.S. Tax Court held that Rodman’s dominant reason in paying the settlement amount was to compensate Amos for his injuries. However, because the settlement agreement did not specify which portion of the amount was for personal injuries and which portion was for confidentiality, the Court arbitrarily allocated $120,000.00 to the personal injuries and $80,000.00 to the confidentiality provision. Thus, Amos was required to pay taxes on $80,000.00 of the settlement amount.
In light of the Rodman case, personal injury attorneys should carefully advise clients about the potential tax consequences of agreeing to confidentiality provisions in personal injury settlements. The best way to avoid potential problems is simply not to agree to confidentiality provisions. However, if that is not possible, you should make sure that the settlement agreement allocates a nominal amount to the confidentiality provision and pay taxes on the amount allocated to confidentiality.