Blake Lively’s Lawsuit Against Justin Baldoni over Taxation and Emotional Distress
Blake Lively’s case against Justin Baldoni has generated considerable argument in both the Hollywood and legal circles. Severe emotional distress was claimed, citing inappropriate behavior by Baldoni on the set of their film.
Starting from the mentions of weight and past addictions, to crossing personal boundaries, Lively’s case creates not only ethical and reputational issues but also serious tax implications.
The Claims and Allegations
Among the many things Lively accused Baldoni of doing was to prevent him from passing around explicit content, discussing other cast members’ personal lives, and inquiring about her weight. The suit continues to declare that Baldoni initiated a smear campaign to destroy Lively’s character, despite the prior agreement he entered with Sony Pictures to rectify her issues.
With word of Baldoni filing a countersuit against Lively, charging her with defamation, the legal battles going forward will definitely bring tax issues regarding both parties into sharp focus, particularly if financial settlements are a factor.
Tax Implications for Blake Lively
The tax implications of a settlement, in case Lively receives one, depend upon the nature of the damages. Damages for emotional distress, on which her complaint is based, are generally considered taxable under U.S. tax law. The only tax-free compensations under Section 104 of the tax code are those linked to physical injuries. The gray area, however, is in defining what constitutes “physical” harm. Some plaintiffs have argued, for example, that conditions such as PTSD constitute physical injuries and, therefore, could exempt such damages from taxes.
These claims of reputation damage and professional harm for Lively may provide her the opportunity to characterize some of her settlement as capital gains, not ordinary income, and thus at a lower tax rate. Her legal fees, considering she is an actress and the nature of the suit, are most likely deductible as business expenses.
Tax Consequences for Justin Baldoni
A settlement of the lawsuit could bring heavy tax implications for Mr. Baldoni. Since 2018, when what has been called the “Harvey Weinstein tax” was enacted, settlements related to sexual harassment or abuse are not deductible if they include a nondisclosure agreement. That has made it costlier for defendants to settle such cases privately.
The defendants have tried creative ways around this, such as placing the confidentiality provisions in a separate agreement, but the IRS often challenges these types of arrangements. Thus, legal fees for Baldoni associated with the lawsuit might be nondeductible, further clouding the financial consequences stemming from the case.
Lessons from Precedent
Other cases, like Domeny v. Commissioner and Parkinson v. Commissioner, present different factual scenarios, and therefore, the tax treatment is different. In some cases, plaintiffs who can trace their emotional distress to physical ailments or other medical conditions that were aggravated have been able to avoid taxation of portions of their settlement recoveries. Settlement agreements that clearly allocate the damages among a multitude of claims are more apt to withstand IRS scrutiny.
The Blake Lively vs. Justin Baldoni legal battle will no doubt continue to garner media attention. Apart from personal and professional interests, there is probably another layer of complexity in the tax implications for both parties in the case. For plaintiffs and defendants alike, the tax consequences of legal recoveries are important to understand if one desires to avoid some surprises at tax time.
