This document discusses various ways that accountants can assist attorneys in personal injury and commercial litigation. It outlines how accountants can help calculate economic damages such as lost earnings, compute tax consequences of litigation settlements, analyze company finances during punitive damages determinations, and assist in proving key employees. The document also summarizes IRS code section 104 and challenges of allocating settlements between taxable and non-taxable amounts according to the Rodman Rule. Overall, it emphasizes the importance of attorneys and accountants working closely together on litigation involving financial analyses or determinations.

1. The Accountant and the Law
Cooper Levenson, Attorneys at Law
Randolph C. Lafferty, Esquire
Lindsay T. Byrne, Esquire

2.  Computation of:
 Loss of Past Earnings
 Loss of Present Earnings
 Loss of Future Earnings
Personal Injury:
What Role Does the Accountant
Play

3.  The trial attorney has two choices:
 Utilize the accountant to present gross amount of lost
wages and HOPE the jury understands the complex, four
page, jury charge on how to discount future losses to
present value; or
 Use a CPA to discount future losses to present value.
(Preferred Method)
Future Loss of Earnings

5.  Specialized and often overlooked cause of action!
 MILLIONS of dollars have been recovered utilizing this
recognized cause of action!
 Most attorneys are oblivious to this type of claim!
 Rarely utilized in New Jersey
Loss of a Key Employee

6.  New Jersey Rule: An employer is entitled
to damages against a third party for the
loss of services of a key employee injured
by that third party.
Loss of a Key Employee

7.  Inquire as to the character of the business
 Personal services?
 Personal relationships?
 Special attention?
 Is the value of services worth substantially more than the
cost of replacement?
How Can I Tell If My Client Has A
Key Employee?

8.  Injured employee has personal relationships
that have a value in the commercial world
recognized by “any business man”
 Special knowledge/skills not easily acquired by
others
 Employment based on personal attention,
characteristics, and/or labor
How Can I Tell If My Client Has A
Key Employee? (Cont’d)

9.  Lost profits are not dispositive
 Easier to prove with smaller businesses
 Must differentiate profits from personal
endeavors, skills, and attention versus
investment of capital and labor
How Can I Tell If My Client Has A
Key Employee? (Cont’d)

10.  Similar to New Jersey
 Loss of profits alone are not sufficient to state a
cause of action
 However, if lost profits are due to personal
management and endeavor, they are an
accurate measure of earning capacity and
losses
How Does Pennsylvania Handle the
Loss of a Key Employee?

11.  Employers cannot recover!
 Generally, you cannot bring suit for the loss you
suffer from another's death/injury unless the
third party owed a specific duty to the
employer.
Key Employee: National Trend

12.  Lost profits are not dispositive on their own.
 Woschenko rule and exception
 Attorneys and accountants must work closely
to be successful with this cause of action.
Helping Your Client to Prove They
Have (or Are) Key Employees

13.  Role of the accountant
 Extrapolate future lost profits
 Prior/current lost profits
 Costs of replacing the injured employee
 Tracing business income to injured
employee’s efforts
 Role of the attorney: Focus on factual inquiries
Loss of a Key Employee

14. Commercial, Criminal & Business
Litigation

15.  Comes into play with either anticipated or actual
business disputes
 Partner with an attorney in a myriad of circumstances
 Economic damages calculations whether suffered
through tort or breach of contract
 Post-acquisition disputes
 Earnouts
 Breaches of Warranties
Forensic Accounting

16.  Bankruptcy, insolvency, and reorganization
 Securities Fraud
 Tax Fraud
 Money Laundering
 Business Valuation
 Computer forensics/e-Discovery
Forensic Accounting (Cont’d)

17.  Trial attorney is presented with a small window
 Once the compensatory damage verdict is entered, the
jury determines punitive damages are warranted, now
what?
 Net worth and ability to pay suddenly become relevant!
Forensic Accounting in Punitive
Damages Litigation

18. • Judge orders the tax returns and financial
statements be produced and tells the parties to
be prepared to proceed tomorrow!
• The accountant is key: he/she analyzes the
financials overnight, testifies in the morning,
and explains to the jury, in a manner
understandable to the lay man, the financial
composition of a multi-tiered corporation.
Forensic Accounting in Punitive
Damages Litigation (Cont’d)

19. Accounting Consequences in
Litigation Recoveries

20.  General Rule: Monies received for personal injury,
including pain and suffering, are not taxable.
Internal Revenue Code, Section
104

21. Internal Revenue Code, Section
104 Exceptions

22.  Punitive Damages – Exempted by the Small Business
Job Protection Act of 1966
 Damages attributable to back pay, front pay, lost
earnings, and future loss of income are included as
gross income.
 Employment litigation claims generally taxable
 Section 104(a): “emotional distress shall not be treated as
a physical injury or physical sickness.”
Internal Revenue Code
Section 104 Exceptions

23. The Rodman Rule

24.  A settlement was reached in the amount of
$200,000.00
 Settlement agreement included a confidentiality clause
 A liquidated damages clause was included which
provided that if there was a material breach of the
Confidentiality Clause, Rodman would get his
$200,000.00 back
The Rodman Rule (Cont’d)

25.  The dispute between Amos and the IRS was over the
interpretation of IRC Section 104(a)(2) regarding the
interpretation of “physical injury”
 The Test: What was the dominant reason for the
settlement?
 Amos claimed the dominant reason was “physical
injury” and the IRS claimed it was confidentiality
The Rodman Rule (Cont’d)

26.  The Result: Apportionment by the Tax Court
 $120,000 for physical injury (non-taxable)
 $80,000 for the confidentiality clause (taxable)
The Rodman Rule (Cont’d)

27.  Do not agree to a confidentiality clause
 Make a specific allocation within the Settlement
Agreement
 Include reciprocal promises of confidentiality
 Include an indemnity provision that the settling party
must reimburse the recovering party for tax
consequences
 Seek a private IRS ruling in advance of the settlement
How to Avoid the Rodman Rule

28.  Burden is on the recipient of
damages/settlements for personal injury
to establish that they are nontaxable
The Burden of Proof

29.  The Test: Is the settlement compensatory rather than
purely economic in function
 Critical Factors
 Intent of the parties is controlling
 Is the payment on account of “personal physical injuries or
physical sickness”
 The parties, with the advice of their accountants
generate these documents
The Burden of Proof (Cont’d)

30. Generally Accepted Accounting Principles
(GAAP)
The Standard

31. Questions?

32. Thank You!