Trump’s $15 million ABC defamation settlement has a tax angle

President-elect Donald Trump has scored a string of victories recently, including another in settling his defamation lawsuit against ABC News and George Stephanopoulos. ABC will pay $15 million plus an additional $1 million to Trump’s lawyer Alejandro Brito. You can read a copy of the settlement agreement here. Trump sued ABC News and Stephanopoulos after the latter claimed that Trump had been “found liable for rape” by a Manhattan jury in the E. Jean Carroll case.

Although Ms. Carroll accused Trump of rape, the jury did not actually reach that conclusion. The jury in Carroll’s first lawsuit awarded her $5 million for defamation and assault. Her second trial against Trump ended with $18.3 million in compensatory damages for Carroll’s reputation and $65 million in punitive damages.

What is the tax aspect? There are several. First, even though Trump was the plaintiff in this case, he will not receive the $15 million payment nor the $1 million payment made to his attorney. The $15 million is to be paid as a charitable donation to a “presidential foundation and museum established by or for Plaintiff as established by Presidents of the United States of America in the past.” The Settlement Agreement clarifies that the recipient entity must qualify under Section 501(c)(3) of the Tax Code.

This is a smart move because this way Trump won’t have to pay taxes on the $15 million, even though he was the plaintiff throughout the lawsuit. The additional $1 million paid to his attorney is not so clear. The IRS would have a good argument that the $1 million is income for Trump since these legal fees are part of his obligation to his attorney. In Commissioner against banks, The U.S. Supreme Court ruled that plaintiffs generally must recognize gross income equal to 100% of their recoveries. even if their lawyers participate.

Why couldn’t Trump just receive the $15 million and then donate the money himself? Tax laws make this more difficult. If Trump received the money, it would be taxable income. But even if he donated it all to charity, he would have to deduct it, and the tax consequences of passing it on can be difficult.

You cannot deduct charitable contributions that exceed 60% of your adjusted gross income. Assuming Trump has enough other income, he could potentially claim the entire deduction in one year. But other donations can also make planning more complex. That’s one of the reasons why this direct payment through ABC is much cleaner from a tax perspective.

Although settlement payments are sometimes returned, the direct route is the best. Outside of legal settlements, the idea has become established through prizes and awards. Prizes and awards are taxed by the IRS, but it is possible to award a prize before you receive it. The idea is to keep the price past you and pass it on to someone else before the tax implications hurt you. The IRS has issued guidance on how to do this in Revenue Procedure 87-54.

The recipient must be a qualified charity. You must place the order for charity before the award is presented to you. However, you can make a partial allocation. You can keep the statuette or plaque and even some of the cash, as long as it is clear exactly what amount you are allocating. Finally, in order for your charitable donation to be effective, special wording is required in the documents.