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After the Plaintiff Double Tax E. Jean Carroll May Find Herself Shopping at Walmart

February 9, 2024

A Plaintiff Recovery Trust can reduce the plaintiff double tax on her $83.3 million from a defamation case against Donald J. Trump.

Overview

As you may know, E. Jean Carroll was recently awarded $83.3 million in her defamation case against former President Donald J. Trump. After the case, Ms. Carroll quipped to Rachel Maddow on MSNBC: “I have such great ideas for all the good I’m going to do with this money,” “First thing, Rachel, you and I are going to go shopping.” “We’re going to get completely new wardrobes, new shoes, motorcycle for Crowley, new fishing rod for Robbie. Rachel, what do you want, a penthouse?” She also said that “We’re going to do something good with it.”

Unfortunately, because of the tax laws, particularly the “plaintiff double tax”, Ms. Carroll may need to limit where she shops to have any money left to do good.

Double Tax Details

The plaintiff double tax applies to many types of nonbusiness litigation cases, including those involving no physical injuries – such as defamation - and punitive damages. In those cases, the entire award is taxable income (not just the net after attorney fees). Furthermore, the related attorney fees cannot be deducted on Ms. Carroll’s 1040. Having to pay taxes on an award where you cannot deduct the related attorney fee expense is the plaintiff’s double tax.

The jurors awarded Ms. Carroll $7.3 million in compensatory damages for emotional harm, $11 million in compensatory damages for harm to her reputation, and $65 million in punitive damages. All of these amounts are taxable and subject to the plaintiff’s double tax.

Assuming Ms. Carroll lives in New York City, her combined Federal/State/Local income tax rate on this award would be about 51%. Thus, if her attorney is owed the industry standard 40% contingency rate, then of Ms. Carroll’s $83.3 million award, she’d end up with only $7.5 million – just nine (9) cents on the dollar! That does not leave much for shopping or doing good, especially in NYC.

The same taxation applies if her award is reduced on appeal. Say she receives $20 million after appeals or a settlement. Due to the plaintiff's double tax, she’ll end up with about $2 million, or ten (10) cents on the dollar. (Don’t buy that NYC penthouse yet.)

Mr. Trump has indicated that he will appeal, so the case is not final. This gives Ms. Carroll time to do some planning to reduce the taxes on any award she does ultimately receive.

It may be wise for Ms. Carroll to consider a technique known as the Plaintiff Recovery Trust (PRT). A PRT is a specially designed trust that could more than triple her after-tax recovery. For Ms. Carroll (and you) to learn more about PRTs, see our overview on the Plaintiff Recovery Trust.

For a comprehensive overview of tax minimization strategies, see our guide on minimizing tax liability on lawsuit settlements.

Learn how the Plaintiff Recovery Trust addresses the attorney fee double tax created by Commissioner v. Banks.

Frequently Asked Questions

Under IRC § 61, all income from whatever source derived is taxable unless a specific exclusion applies. Lawsuit settlements are included in gross income by default. The key exceptions are physical injury and physical sickness recoveries under IRC § 104(a)(2), which are excluded from gross income when received as compensation for a physical injury or physical sickness claim.

IRC § 104(a)(2) excludes from gross income damages received on account of personal physical injuries or physical sickness. The exclusion applies to compensatory damages only. The injury or sickness must be physical — emotional distress damages, employment discrimination recoveries, breach of contract proceeds, and punitive damages do not qualify for the exclusion and are taxable.

Yes. Punitive damages are taxable as ordinary income regardless of whether the underlying claim involves a physical injury. IRC § 104(a)(2) does not exclude punitive damages. Even in a physical injury case where compensatory damages are excluded, any punitive damages awarded are included in the plaintiff's gross income and subject to federal income tax.

For most plaintiffs, no. The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions under IRC § 67(g) for tax years 2018 through 2025, eliminating the attorney fee deduction for most civil litigation recoveries. IRC § 62(a)(20) provides an above-the-line deduction only for qualifying discrimination and whistleblower cases. Plaintiffs in personal injury, breach of contract, and most tort cases cannot deduct attorney fees under current law.

A Qualified Settlement Fund (QSF) under IRC § 468B separates the timing of the defendant's payment from the plaintiff's taxable receipt of funds. The defendant transfers proceeds to the QSF and takes an immediate tax deduction. The plaintiff does not recognize taxable income until distribution from the QSF, preserving a planning window to implement structured settlements, Plaintiff Recovery Trusts, Special Needs Trusts, or other tax-minimization strategies before receiving taxable income.

A Plaintiff Recovery Trust (PRT), administered by Eastern Point Trust Company, addresses the attorney fee double tax created by Commissioner v. Banks, 543 U.S. 426 (2005), and worsened by TCJA 2017. The PRT separates the attorney fee portion of the settlement from the plaintiff's taxable recovery, allowing each party to recognize income only on their respective portion. Eastern Point Trust Company has saved plaintiffs $30 million or more through PRT structures. The PRT is implemented during the QSF administration window before taxable distributions occur.

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