Every large transaction has tax ramifications for the parties, and almost every transaction can benefit from some judicious planning for those consequences. In mediation, the contemplated settlement transaction is no different. Similarly, the alternatives to settlement, namely litigation and arbitration, also have significant tax consequences. A good settlement decision should take into account the tax treatment of the settlement and the tax consequences of not settling.
Sometimes, the tax benefit to a party can bridge what otherwise seemed like an unbridgeable gap in the goals of the parties. Other times, progress toward an agreement can be derailed when it turns out that one party is going to bear previously unanticipated tax consequences.
Advocates and mediators improve their performance with a basic understanding of the principles governing tax treatment of litigation expenses, settlements, and judgments or awards; likewise, they should see the opportunities to create value in the structuring of a settlement.
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