cAPITAL - Carrington Coleman Lopez ($1.75 million), the Foo Fighters ($1.5 million), and Selena...

2019 Issue One

Where There’s Smoke, There’s Fyre: Spotting and

Stamping Out Securities Fraud Exposure Before

It Ignites

Carrington, Coleman, Sloman & Blumenthal, L.L.P. • 901 Main Street, Suite 5500 • Dallas, Texas 75202 • www.ccsb.com

IINN TTHHIISS IISSSSUUEE

Where There’s Smoke, There’s Fyre:Spotting and Stamping Out SecuritiesFraud Exposure Before It Ignites. . . . .1 Evan Kirkham

To VPP, or Not to VPP . . . . . . . . . . . .3David Heidenreich

Tax Savings Through QualifiedOpportunity Funds . . . . . . . . . . . . . . .4Laura Hebert

Limited Liability Company Officersand Members Must Remain Awareof Instances Permitting IndividualLiability . . . . . . . . . . . . . . . . . . . . . . . 5Hayden Baker

Federal Income Tax AllocationClauses in Personal Injury Settlement Agreements . . . . . . . . . . 6John S. Stevenson, III

APITALc

continued on page 2

In 2017, twenty-six year old Billy McFarland was being heralded as the nextMark Cuban—a genius entrepreneur with unmatched charisma and a knack forconnecting with millennial consumers. His latest and greatest enterprise wasFyre Media, a mobile booking platform promising to connect aspiring andestablished music artists with agents and venues. McFarland had the team, theproduct, and some initial users. What remained to be done was squarely in hiswheelhouse—creating buzz and securing additional financing. McFarland’s planwas bold; host an exceedingly luxurious and exclusive musical festival on aprivate island in the Bahamas formerly owned by Pablo Escobar.

McFarland visited the island with a collection of close friends, employees, hiredsupermodels, and the rapper, Ja Rule. The group shot a promotion video thattook social media by storm. The festival almost immediately sold out. But, withonly one year to prepare for the festival, McFarland had his work cut out—theisland lacked electricity, plumbing, and the promised “luxury tents,” among otherbasic amenities. His fix was to raise over twenty-five million dollars and build itall from scratch.

McFarland found a way to raise themoney, but couldn’t deliver on hispromises. When the guests arrived onthe island, they were horrified to find outthey would be sleeping on soggymattresses in repurposed hurricaneshelters without electricity or runningwater, would be fed two slices of breadwith a single piece of cheese (the nownotorious “cheese sandwich”), and hadno way off of the island. The Fyre Festival was such a disaster that twodocumentaries were released in 2019 cataloging the catastrophe: Hulu’s Fyre

Fraud and Netflix’s Fyre: The Greatest Party that Never Happened.

On July 24, 2018, the SEC filed an enforcement action against McFarland, FyreMedia, Magnesis (another of McFarland’s ventures), Grant Margolin (FyreMedia’s CMO), and Daniel Simon (a contractor hired by McFarland for the solepurpose of inflating financial reports), alleging violations of Sections 5(a) and 17of the Securities Act and Sections 10(b) and 15(a) of the Securities ExchangeAct. The SEC’s complaint alleged the defendants made materialmisrepresentations and omissions to investors about the financial strength of

Real Estate Attorney

John S. Stevenson, III

Joins Carrington Coleman

John [email protected]

John S. Stevenson, III has joined theDallas office of Carrington, Coleman,Sloman & Blumenthal, LLP, as anassociate in the real estate practicegroup. His practice focuses on realestate law, corporate law and commercialtransactions. John is passionate aboutreal estate and enjoys representingclients in deals that continue to shapeDallas’ growing landscape.

To learn more about Mr. Stevenson,please visit our web site athttps://www.ccsb.com.

By: Evan Kirkham214.855.3104 | [email protected]

David Heidenreich,

Editor

Laura Hebert,

Editor

Capital - 2019 Issue One


Fyre companies, had created documents fraudulentlyinflating key metrics, including revenue and income, and hadaltered stock ownership statements to falsely suggest theexistence of collateral for securitized investments. Theevidence against McFarland was insurmountable as he hadbald-faced lied to financiers about the performance of hiscompanies. The lesson from McFarland’s fraud is obvious—don’t lie to prospective investors about company financials.The lessons from the allegations against Margolin are morenuanced.

The SEC alleged Margolin substantially assistedMcFarland’s fraud by fashioning company reports thatinflated the operational and financial metrics of Fyre Media,all without investigating the accuracy of the informationprovided by McFarland. Specifically, in September 2016,McFarland sent Margolin a falsified report showing 15“accepted” Fyre Media bookings totaling $5.4 million, anaverage of $360,000 per booking. The report includedmillion dollar “accepted” bookings from A-list artists such asJennifer Lopez ($1.75 million), the Foo Fighters ($1.5million), and Selena Gomez ($1 million). Margolin was senta second report by Fyre Media’s CTO, generated directlyfrom the fyreapp.com booking platform, which, by contrast,showed 33 “accepted” Fyre Media bookings totaling just$275,800, on average, less than $8,400 per booking. Asdirected by McFarland, Margolin combined the two reportsto create a new booking report—showing 42 “accepted” FyreMedia bookings totaling $5.6 million. Margolin asked noquestions and failed to investigate the discrepancies. Hesimply followed McFarland’s orders, creating a false reportultimately distributed to prospective investors.

Eight days after the SEC filed suit, Margolin folded. Hesettled with the SEC for $35,000 and a promise to restrainfrom acting as an officer or director of any issuer ofsecurities for seven years. Margolin simply couldn’t deny hehad “unreasonably assist[ed] McFarland in creating falseand misleading statements . . . [and engaged in conduct thatwas] sloppy and ill-calculated.” But why so soon? After all,Margolin never interfaced with prospective investors, wasnot explicitly told McFarland’s booking reports werefraudulent, and was only following orders. Though we canonly speculate about Margolin’s liability calculation,exploring his vulnerabilities reveals two interesting insightslegal practitioners ought to consider when defending clientswho may have “substantially assisted” a securities fraudster.

Perhaps Margolin’s early settlement had something to dowith the knowledge requirement of Securities Act Section17(a). Unlike Rule 10b-5 of the Securities Exchange Act andSection 17(a)(1) of the Securities Act, Sections 17(a)(2) and(3) do not require proof of scienter—only proof ofnegligence. Aaron v. SEC, 446 U.S. 680, 691 (1980)(violation of Section 10b-5 requires defendant to have actedwith scienter); SEC v. Seghers, 298 Fed. Appx. 319, 327(5th Cir. 2008) (“Violations of Section 17(a)(1) require proof

that the defendant acted with scienter); SEC v. Farmer,2015 WL 5838897, at *6 (S.D. Tex. Oct. 7, 2015) (“[T]oshow that the defendant has violated Section 17(a)(2) orSection 17(a)(3), the SEC need only prove that thedefendant acted with negligence.”). Functionally, the SECwould not need to prove Margolin knew McFarland’sbooking report was fraudulent before he incorporated it intothe combined report. The SEC would only need to proveMargolin did not adhere to a standard of reasonable care inperforming his functions as Chief Marketing Officer.Practitioners should be acutely aware of exposure arisingfrom the otherwise indistinguishable 17(a)(2) and (3),because, outside of the pesky knowledge requirements, the“basic precepts of Section 17(a) . . . and Rule 10b-5 are thesame” and claims arising “under the two provisions areoften analyzed as one.” Farmer, 2015 WL 5838867, at *12.

Still, Margolin might have been aware of his duty toinvestigate, a duty which, if ignored, would establish theknowledge required to find him liable under any of theaforementioned provisions. If the court had determined thebooking reports were “inconceivable on [ ] face,” Margolinwould have been hard pressed to combat a finding ofrequisite knowledge. SEC v. Asset Recovery and Mgmt.

Trust, No. 2:02–CV–1372-WKW, 2008 WL 4831738, at *8(M.D.Ala. Noc. 3, 2008); S.E.C. v. Deyon, 977 F. Supp. 510,517–18 (D. Me. 1997), aff'd, 201 F.3d 428 (1st Cir. 1998).He would have been held to a “heightened duty toinvestigate” and would not have been exonerated even if hecould have proved his reliance on McFarland’srepresentations about the accuracy of the booking reports.Sec. & Exch. Comm'n v. CKB168 Holdings, Ltd., 210 F.Supp. 3d 421, 448-49 (E.D.N.Y. 2016) (Promoters of multi-national pyramid scheme acted with scienter to commitsecurities fraud because the promoters were confrontedwith obvious signs of fraud and failed to investigate, relyinginstead on the founder’s communications disputing theillegitimacy of the scheme). Practitioners should be awaretheir client’s could be found having the requisite knowledgeto support the full panoply of statutory securities fraudcauses of action if they fail to investigate representationsthat are inconceivable on face. A defendant’s plea ofignorance is unlikely to negate proof of knowledge,especially as the fraudulent scheme becomes less and lessbelievable, or as in this case, contradicted byincontrovertible computer generated reports.

Thousands of patrons, hundreds of event staffers, tens ofinvestors, and a few key executives were all burned by theFyre Festival—perhaps none as swiftly as Grant Margolin.And though the festival began and ended with anunderwhelming cheese sandwich, the ensuing lawsuit didraise some interesting questions and observations aboutexposure to latent securities fraud liability. Practitionersought to be conscious of the ease by which the SEC canmake a case against otherwise peripheral parties becauseof the absence of a knowledge requirement in Sections17(a)(1) and (2) and because of defendants’ heightenedduty to investigate frauds that are inconceivable on face.

continued from page 1 - Where There’s Smoke, There’s Fyre



Wait . . . is that the question? Well, it is for many oil and gasproducers. Due to limited conventional means of financeavailable, many oil and gas producers have been turning toVPP transactions as a means of securing funding forexploration and development expenses.

What is a ‘VPP’ you ask? The acronym stands forVolumetric Production Payment and it is an oil and gasdevelopment financing vehicle that, from my experience, isrecently becoming more in vogue.

A VPP transaction typically involves twoparties – the producer and the investor. Ina nutshell, the producer agrees to convey,and the investor agrees to purchase, aterm overriding royalty interest whichentitles the investor to receive a specifiedamount of oil and/or gas production over aspecified period of time – typically three tofive years or when the specifiedproduction quantity has been delivered.In exchange for such conveyance, theinvestor pays the producer a negotiatedsum, which sum can immediately be –and is often required by the investor to be– deployed by the producer in explorationand drilling activities to enhance theproduction of the subject energy assets.The amount that an investor will be willing to pay in a givenVPP transaction will vary based upon the production historyand the future prospects for the subject oil and gas assets,the term over which such production will be delivered andthe current and anticipated market conditions.

The typical transaction involves three core documents – aPurchase and Sale Agreement, a Conveyance of the TermOverriding Royalty Interest, and a Production and DeliveryAgreement. The Purchase and Sale Agreement is the firstagreement executed by the parties and governs the processby which the investor conducts its due diligence as well asthe closing process. At the VPP closing, the producerconveys the subject interest to the investor through theexecution and delivery of the Conveyance of TermOverriding Royalty Interest, and the parties also enter intothe Production and Delivery Agreement, among otherancillary documents. The Production and DeliveryAgreement is the key agreement which governs therelationship of the parties following the closing, and, amongother things, sets forth the details of how and when thesubject production will be delivered to the investor (whetherin-kind or marketed and sold by the producer on the

To VPP, or Not to VPP . . .

By: David Heidenreich214.855.3031| [email protected]

investor’s behalf) and establishes what constitutes a defaultand provides the investor’s remedies for the same.

Some of the referenced ancillary documents that areexecuted at a VPP closing include: (i) a deed of trust –which is filed of record in the applicable county(-ies) wherethe oil and gas assets are located and which, among otherthings, preserves the right to foreclose (in the event of adefault by the producer) on the portion of the subject oil andgas assets which was retained by the producer and notconveyed through the Conveyance of Term OverridingRoyalty Interest; (ii) UCC-1 financing statements – filed withthe secretary of state of the producer’s state of formationand sometimes also in the applicable county(-ies) wherethe subject assets are located; (iii) an escrow agreement –the agreement through which an escrow agent will holdchange of operator forms (P-4s in Texas) executed by the

producer and which will be delivered tothe investor (or its operator of choice)should a default occur thereby allowingthe investor to take over operations inthe event of a default; and (iv) aperformance guaranty for the benefit ofthe investor from either a parent entityof the producer or another solvent party.

In addition to the foregoing methods forsecuring the rights of the investor toreceive the specified production,investors also face pricing risk andsavvy investors will implement ahedging strategy in the derivativesmarket to protect against decliningprices in the subject energy commodity.

VPP transactions are valuable potential sources of capitalfor oil and gas producers who desire or need to develop orfurther increase energy production to preserve their rightsto produce under oil and gas leases. They, in essence,allow the producer to maintain ownership and control of theunderlying working interests in exchange for a sale of aportion of the anticipated production. As they are alsocomplex transactions, careful attention should be given tothe consideration, negotiation and implementation of VPPtransactions.

The Volumetric

Production Payment

is an oil and gas

development financing

vehicle. It

typically involves

two parties and three

core documents.



Established as part of the 2017 Tax Cuts and Jobs Act, thequalified opportunity zone (QOZ) program incentivizesinvestment in low-income areas by allowing investors todefer or even exclude capital gains invested in qualifiedopportunity funds (QOFs). Unlike Section 1031 like-kindexchanges, which are now limited to use only for capitalgains from the sale of real property, QOFs can be used toshield any type of capital gains, as long as the gains resultfrom a sale to or exchange with an unrelated party. To takeadvantage of the tax savings potential of QOFs, eligiblecapital gains must be invested in a QOF within 180 daysafter the sale or exchange giving rise to the gains (withcertain exceptions applying to partnership gain). InOctober 2018, the Internal Revenue Service publishedproposed regulations that provide more detail about QOFs.Taxpayers are entitled to rely on those proposedregulations.

QOZs, which were designated by each state’s governorand certified by the US Treasury Department, are censustracts that are home to low income communities. Links toa nationwide list of QOZs and a map showing theirlocations is available at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx. Over 8,700 opportunity zoneshave been certified in the United States and its territories.Texas has 628 qualified opportunity zones. The majorityare in rural areas, but there are over 100 in Harris County,24 in Bexar County, 21 in Travis County, and 18 in DallasCounty.

The Internal Revenue Code defines a QOF in part as “anyinvestment vehicle which is organized as a corporation or apartnership for the purpose of investing in qualifiedopportunity zone property.” Proposed regulations haveclarified that limited liability companies may also serve asQOF vehicles. In order to qualify as a QOF, at least 90percent of the fund’s assets must be QOZ property, asmeasured on the last day of the first six months of thefund’s existence as a QOF and on the last day of the firsttaxable year of the fund. A fund can designate the monthof its initial taxable year in which it is initially considered aQOF, providing some flexibility as to when the six-monthtesting period begins. A QOF will self-certify using IRSForm 8996, of which a draft version was released inDecember 2018. QOZ property can take the form of eitherequity interests in a QOZ business or real or personalproperty that is directly owned by the QOF and used in aQOZ business.

The QOF program offers capital gains deferral andexclusion. A taxpayer who invests eligible capital gains ina QOF within the required 180-day period can elect to defertaxes on that gain until the earlier of (i) the date on which

the investment is sold or exchanged, and (ii) December 31,2026. The initial basis in the QOF investment will be zero,but basis steps up to 10% of the capital gains invested afterfive years and to 15% of the capital gains invested afterseven years. In addition, if the investment is held for atleast ten years, then upon a sale or exchange of theinvestment, basis increases to the fair market value of theinvestment on the date of sale or exchange, meaning thatany appreciation over the original investment amount willnot be recognized.

To take an example, if hypothetical investor Lisa has$10,000,000 in capital gains from a sale to an unrelatedparty occurring on December 31, 2018, and within 180 daysfollowing the sale Lisa puts the entire $10,000,000 in aQOF, she can elect to defer recognition of the $10,000,000until (i) the investment is sold or exchanged, or (ii)December 31, 2026, whichever is earlier. At that time, Lisamust recognize gain in an amount equal to (i) the capitalgains deferred, or, if the investment has decreased in value,the fair market value of the investment, less (ii) 15% of theoriginal investment amount since the investment has beenheld for at least seven years. If Lisa still holds her$10,000,000 QOF investment on December 31, 2026, shewould recognize $8,500,000 in gain on that date($10,000,000 less 15%) assuming that the investment hadnot decreased in value. If on December 31, 2026, theinvestment had decreased in value to $8,000,000, then onthat date, Lisa will recognize gain of $6,500,000($8,000,000 less 15% of her original $10,000,000investment). If Lisa then sells the investment for$15,000,000 on January 1, 2030, which would be morethan ten years after the original investment date, she willnot recognize gain on any of the sale proceeds.

The rules defining what qualifies as a QOZ business and asQOZ business property are complex, but to summarize,QOZ business property is tangible property used in a tradeor business if (i) it is acquired by purchase after December31, 2017, (ii) either the original use of the property in a QOZcommences with the QOZ business or the QOZ businesssubstantially improves the property, and (iii) duringsubstantially all of the holding period, substantially all of theuse of the property is in the QOZ. A QOZ business is atrade or business in which, among other things,substantially all of the tangible property owned or leased bythe business is QOZ business property and at least 50percent of the gross income of the business is derived fromthe active conduct of the business. A QOZ business cannotoperate a private or commercial golf course, a country club,massage parlor, hot tub facility, tanning facility, racetrack,gambling establishment, or a store if the principal businessis the sale of alcohol for consumption off premises.

The rules governing QOFs are complicated and in somecases, still await clarification. However, if the right investorsand the right projects come together, QOFs combine greatpotential for tax savings and community improvement.

Tax Savings Through Qualified

Opportunity Funds

By: Laura Hebert

214.855.3109 | [email protected]



Generally, the members of a limited liability company (“LLC”)are not personally liable for the debts, obligations, orliabilities of the company in which they are members. Ineffect, this means that a member’s own personal assets arenot on the hook for any of the obligations of the entity. Forthis very reason, many individuals elect to operate theirbusiness as an LLC. However, as sweet as that deal maysound, the members of an LLC must remain cognizant oftheir personal conduct. In February 2018, the TexasSupreme Court, in State v. Morello, provided one suchinstance where, regardless of whether the member of anLLC was acting in his capacity as an agent or member of thatLLC, he could still be found individually and personally liable

for a violation of the Texas Water Code.1

In Morello, the State of Texas brought a civil action under theTexas Water Code against both Bernard Morello and theentity in which he was the sole member, White LionHoldings, LLC (“White Lion”). The factual scenario givingrise to the action was relatively straight forward. Many yearsearlier in 2004, Morello purchased a piece of property thathad been subject to a “hazardous waste permit and acompliance plan” governed by the Texas Commission on

Environmental Quality (“TCEQ”).2 Shortly after hispurchase, Morello assigned all of his interest in the property,including any obligations under the TCEQ compliance plan,to White Lion. However, as detailed in the facts of the case,White Lion failed to perform its many obligations under thecompliance plan. Accordingly, the state’s suit soughtrecourse for those violations of the compliance plan.

Logically, one would think that because White Lion was theowner of the property subject to the compliance plan, WhiteLion would have been answerable for any violation.Nevertheless, the state brought suit against White Lion andMorello in his individual capacity. The state’s theory, inprincipal part, rested under section 7.102 of the Texas WaterCode, reading that any “person who causes, suffers, allows,or permits a violation of a statute … within the [TCEQ’s]

jurisdiction … shall be assessed” civil penalties.3 Therefore,the state argued that Morello, as a “person,” caused WhiteLion’s violation of the compliance plan, a plan promulgatedunder a statute within the TCEQ’s jurisdiction.

After the trial court granted summary judgment in favor of thestate and a reversal of that grant by the Austin Court ofAppeals, the parties argued their case before the TexasSupreme Court. Unsurprisingly, Morello’s argument restedon the plain language of the Texas Business OrganizationsCode, that “a member … is not liable for a debt, obligation,

or liability of a limited liability company.”4 However, theCourt quickly disregarded Morello’s argument, stating that“the State’s position is not based on the Business

Organizations Code; it is based on the Water Code.”5 Assuch, according to the Court, whether Morello could befound personally liable was to be analyzed by determiningwhether he was a “person who cause[d], suffer[ed],

allow[ed] or permit[ted] a violation” of the compliance plan.6

In ultimately finding thatMorello could be foundpersonally liable underthe Water Code, theCourt furthered threeprimary arguments. First,the Court found nopersuasive reason toexclude an individualfrom the term “person”contained within section7.102. Second, thatWhite Lion was the soleowner of the property andheld sole responsibilityfor the compliance planwas immaterial to theCourt. Accordingly, the Court held that by the language ofsection 7.102, any “person” who caused a violation could

be found liable, not simply “the person holding the permit.”7

Last, finding that Morello’s actions were in his capacity asan agent and member of White Lion, the Court citednumerous inter-jurisdictional cases standing for theproposition that a corporate agent may not escapeindividual liability where that agent “personally participated

in the wrongful conduct.”8 Therefore, in the opinion of theCourt, where a statute applies to any “person,” an“individual cannot use the corporate form as a shield whenhe or she has personally participated in conduct that

violates the statute.”9

The Morello case is significant in that it provides a particularexample of where an officer or member of an LLC can befound personally answerable for his or her conduct,regardless of the capacity in which that conduct wasperformed in. While the protections of an LLC remainsignificant with respect to how it protects the personalassets of its members, individuals must remain aware oftheir personal conduct. Morello demonstrates one suchinstance where, pursuant to the applicable statutorylanguage, an LLC’s member may have to answer for his orher own violative conduct rather than the conduct of theentity.

Limited Liability Company Officers

and Members Must Remain Aware

of Instances Permitting Individual

Liability

By: Hayden Baker214.855.3140 | [email protected]

________________________________________________

1. State v. Morello, 547 S.W.3d 881 (2018).2. Id. at 883.3. TEX. WATER CODE § 7.102.4. Morello, 547 S.W.3d at 885 (quoting TEX. BUS. ORGS. CODE § 101.114)5. Id.

6. See id. See TEX. WATER CODE § 7.102.7. Id. at 886.8. Id. at 888.9. Id.

The Morello case is

significant in that it

provides a

particular example of

where an officer

or member

of an LLC can be

found personally

answerable for his

or her conduct.



Federal Income Tax Allocation

Clauses In Personal Injury

Settlement Agreements

By: John S. Stevenson, III214.855.3090 | [email protected]

This bulletin provides only general information and is not intended as legal advice.To unsubscribe to this publication, please contact Vicki Campbell at [email protected]

Attorneys work hard to ensure that their personal injurysettlement agreements are airtight from a legal perspective.However, attorneys sometimes neglect to include a specificfederal income tax allocation provision, which can oftenhave wide-ranging consequences for all parties involved.

A carefully drafted taxallocation provision canprovide guidance for allparties to the settlementagreement on how totreat personal injuryproceeds for federalincome tax purposes,including (i) whether therecipient parties shouldinclude all or a portion ofthe settlement proceedsas gross income, (ii)whether the payingparties should issue a1099 to the recipient and(iii) what portion of suchproceeds, if any, will bedeductible. Generally,the IRS will not disturb

an allocation agreed to by the parties of a settlementagreement if it is generally consistent with the substance ofthe settled claims.

The IRS has issued guidelines regarding the taxation ofpersonal injury proceeds. Any amounts received as a resultof a personal injury or wrongful death settlement can betaxable, nontaxable, or partially taxable depending on thetype of case and the type of compensation for injuriessuffered. Proceeds received as a result of physical injuriesor sickness, e.g., compensation for medical bills, areexcludable from gross income under IRC § 104(a)(2).Proceeds that are not a result of physical injuries orsickness are taxable. For example, payments for lostwages (or if you are a business owner, lost businessincome) are generally taxable and are also often subject toSocial Security and Medicare taxes.

Proceeds received as a result of emotional distress ormental anguish are only tax-free if the emotional distressor mental anguish is a direct result of a physical injury orillness. Proceeds received for emotional distress or mentalanguish that do not originate from a personal physicalinjury or physical sickness must be included in income.However, the amount you must include is reduced by: (1)amounts paid for medical expenses attributable toemotional distress or mental anguish not previouslydeducted and (2) previously deducted medical expensesfor such distress and anguish that did not provide a taxbenefit. Attorney’s fees associated with a monetary awardfor physical injuries and physical sickness may be non-taxable as well.

Other taxable personal injury settlements with non-physical injuries include invasion of privacy, discrimination,harassment, and wrongful termination, which are taxed asordinary income. Again, because there are no physicalinjuries, the settlement award is taxable. Further, punitivedamages, which are relatively rare in the case of personalinjury claims, are not excludable under IRC § 104(a)(2)and will thus be taxed as ordinary income.

Failing to address important income tax considerations ina settlement agreement may result in an IRS audit of oneor more parties to the agreement. Further, if you are arecipient of personal injury proceeds and fail to includecertain taxable personal injury proceeds as income on your1040, the IRS will demand that you file an amended returnwith the correct amount owed, in addition to a substantialtax understatement penalty and interest on the amountowed. These issues are easily avoidable with the inclusionin a settlement agreement of a well drafted income taxallocation provision.

WHAT LEGAL ISSUES

ARE IMPORTANT

TO YOU?

Let us know what legal topics you wouldlike to read about in the next issue of the

Capital Newsletter. We want to knowwhat’s on your mind.

Please send an email to David Heidenreich([email protected])

orLaura Hebert

([email protected])

A carefully drafted

tax allocation

provision can provide

guidance for all

parties to the

settlement agreement

on how to treat

personal injury

proceeds for

federal tax purposes.

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