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OT Tax Lawyer question
Posted on 6/15/17 at 9:55 am
Posted on 6/15/17 at 9:55 am
Is money received as a result of mediation taxable? A group of former franchise owners sued the franchisor for monetary damages. The claim was that the franchisor lied to the prospective franchisee about the franchisors profits and the profits that the franchisee would make. The prospective franchisee paid the franchisor 40k upfront and 7.5% of total sales per week after opening.
Since the money that the former franchisee paid upfront to the franchisor was already taxed(assuming they paid cash), is the money awarded to each former franchisee from the franchisor as a result of mediation taxable?
Since the money that the former franchisee paid upfront to the franchisor was already taxed(assuming they paid cash), is the money awarded to each former franchisee from the franchisor as a result of mediation taxable?
5
Posted on 6/15/17 at 9:57 am to Placebeaux
Hells yes
ETA: No idea really, I just assume everything is taxable these days.
ETA: No idea really, I just assume everything is taxable these days.
This post was edited on 6/15/17 at 9:58 am
Posted on 6/15/17 at 10:12 am to OysterPoBoy
quote:
No idea really, I just assume everything is taxable these days.
It seems that way but to me if someone gave someone else cash that was already taxed and then had to pay it back.........I got a headache.
franchisee 40k(previously taxed income) -> franchisor (income to franchisor taxed) -> back to franchisee (taxed again)
So the same 40k is taxed three times?
Posted on 6/15/17 at 10:24 am to Placebeaux
If the compensation is for lost wages/lost revenues or something similar, then I think it is taxable.
Posted on 6/15/17 at 10:38 am to Placebeaux
in a personal injury case, the pain and suffering award is non-taxable. Any recovery related to lost income is taxable. in your case, the franchise holder paid a fee to the franchisor and deducted that payment as ordinary and necessary business expense. They are now receiving a refund of the deducted payment. While it may not be "income" it would require reporting. they will pay tax on the recovery.
Posted on 6/15/17 at 10:46 am to piratedude
Any amount? Even if it is less than what was originally paid to the franchisor?
Posted on 6/15/17 at 11:17 am to Placebeaux
If I'm reading correctly, the result of the mediation was essentially a refund of franchise fees paid from the franchisee to the franchisor. Hopefully the mediation paperwork indicates if these are a refund of the upfront fees or the weekly fees, or some sort of allocation between them.
Assuming the franchisee previously deducted these payments to the franchisor, then the refund of such payments would be considered a reduction in current year expense, i.e. taxable income to the franchisee.
Essentially if you deduct something and you later get that refunded, you have to recapture that deduction in the year that the refund occurs.
Now, if the franchisee capitalized these payments (maybe the 40K upfront) then the treatment is a little more complicated.
Assuming the franchisee previously deducted these payments to the franchisor, then the refund of such payments would be considered a reduction in current year expense, i.e. taxable income to the franchisee.
Essentially if you deduct something and you later get that refunded, you have to recapture that deduction in the year that the refund occurs.
Now, if the franchisee capitalized these payments (maybe the 40K upfront) then the treatment is a little more complicated.
Posted on 6/15/17 at 11:33 am to Placebeaux
I don't know anything about franchises, but there is no reason for the money paid to be taxed. The original money paid may of been taxed already but it was still a business expense so the tax basis should of been reduced down the line.
Posted on 6/15/17 at 11:35 am to baldona
"I don't know anything about franchises, or law, but..."
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