Stormy Daniels, the $130,000, and the IRS. Rob Wood Discusses the Tax Situation

Stormy Daniels, the $130,000, and the IRS. Rob Wood Discusses the Tax Situation

Everyone knows who Stormy Daniels is, and we’ve all heard about the $130,000 settlement payment she received to buy her silence. Ms. Daniels has proposed returning the settlement in order to free herself to tell her story. But would she still have to pay taxes on the $130K? Tax lawyer Rob Wood says that she might. He also discusses the situation in his article, “Stormy Daniels Returning $130K Trump Settlement Won't Escape IRS Taxes.”

 Rob Wood

Rob Wood

Wood says that the Stormy Daniels story has all sorts of interesting tax questions to consider, but in this report, he limits himself to the question whether she can avoid paying taxes on the payment or receive a refund of taxes she has already paid. Wood encounters the question about undoing past transactions “a surprising number of times.” Sometimes it involves a settlement, sometimes a transaction like the sale of a house.

Wood notes that undoing the deal and avoiding tax on any income involved is not easy unless everything occurs in the same tax year. Even though the IRS is not generally friendly to the idea of avoiding taxes, the situation is different where everything happens in the same tax year. In that circumstance, the IRS will accept the notion that the event never really occurred. However, Wood says, this scenario rarely occurs. The next question might be, is there any sort of relief available? Wood says there might be.

Usually, there is a work-around that will let a taxpayer recoup some of the taxes already paid. How to do it is the tricky part. Depending on how many years have passed since the transaction and the tax payment, it may be possible to take a deduction on a later tax return that essentially makes the taxpayer whole again. This approach doesn’t always work out, Wood says.

Wood mentions Section 1341 of the Internal Revenue Code as another possible source of relief from a previous tax payment. The section is a little difficult to explain, but Wood says that it can offer help in a situation like the one Ms. Daniels is facing, even if the IRS statute of limitations has run out. Using Section 1341 will require some expert assistance from a tax attorney if a taxpayer wants to “put the milk back in the bottle.”

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.

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