Gross-Up Damages May Be Easier to Collect; Rob Wood Explains It

A plaintiff may be able to collect additional damages in some cases where the actions of the defendant have increased the taxes the plaintiff will have to pay. Tax lawyer Rob Wood says that courts are showing more willingness to consider “grossing-up” a plaintiff’s damage award than in the past. In this report, Wood explains how things have changed and in what kinds of cases. He also discussed this development in his Forbes article, “Collecting Gross-Up Damages For Taxes In Litigation Gets Easier.”

Rob Wood

Rob Wood

Wood notes that courts have been reluctant to gross-up damages for a couple of reasons. For one thing, everybody has to pay taxes, and that doesn’t change because of a damages award. Also, tax laws and tax computations are complex. If a plaintiff wants more money to cover additional taxes, the parties can get into squabbles about tax variables and how much effect a defendant’s actions may have had on a plaintiff’s tax bill.

Notwithstanding the difficulties in computing the additional taxes, a plaintiff can sometimes get additional damages, Wood says. Persuading a court to award the damages may require expert testimony, and Wood has provided such testimony. One kind of case that should be a winner for a plaintiff is the situation where the defendant’s actions have made the plaintiff liable for more taxes. For example, plaintiff had a contract under which defendant would make payments spread over ten years. The defendant breached the contract, forcing plaintiff to sue for the lump sum due. The lump sum will almost certainly expose the plaintiff to a higher tax bill than would have been the case with ten installment payments.

Another situation Wood points to that may allow the grossing-up of damages is in an employment discrimination case. For example, a plaintiff was employed by the defendant and was wrongfully discharged. The plaintiff sues for lost wages. In such a situation, the trial court may be willing to increase the plaintiff’s award to take account of the additional taxes that will result from receiving a lump sum award of wages that would otherwise have been spread over time. Based on recent case law (cited in Wood’s article), the enhanced damage award is more likely in these cases than in the past. Trial lawyers and their clients should keep this in mind.

Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.