Hulk Hogan/Gawker Settlement A Huge Tax Loss for Wrestling Star

Posted on November 09, 2016

The four-year lawsuit between pro wrestler Hulk Hogan and online media company Gawker recently ended with a massive $140 million judgment in favor of the star.

Hogan sued the company for invasion of his privacy after it published a sex tape that featured Hogan and the wife of a friend.  Even though Hogan sought just $100 million in damages, the jury ended up awarding him a total of $140 million for economic damages and emotional distress.  In the end, the two parties settled the case for $31 million, which is subject to the approval of the judge overseeing Gawker’s bankruptcy case brought on by the settlement.

After attorneys fees and taxes, how much of that sum Hogan will see in the end remains to be seen.  When it comes to attorneys fees and taxes, the two are closely linked.  According to tax law, successful plaintiffs who use contingent fee lawyers are subject to paying tax on 100 percent of the settlement.  So, that means if Hogan owes his lawyers a standard 40 percent legal fee, he will pay tax on the gross settlement amount, not the net.

Might there be other ways Hogan could escape the long arm of the IRS when it comes to his $31 million payday?  The answer is yes and no.

Hogan will likely have to report all of his settlement, including the attorneys fees, as income.  He may be able to avoid this if he could somehow claim that the lawsuit and settlement pertain to his business.  Even though a portion of the settlement was for economic damages, it’s a stretch to call this a business expense.  If so, he could claim the legal fee as an itemized deduction.

However, the deduction would also set into motion other taxes, including the alternative minimum tax.  If Hogan were to pay the 40 percent legal fee, he would likely not be able to deduct the legal fees because of the application of AMT.  Again, he would be taxed on the entire $31 million.

So, while the initial announcement of the massive $140 million verdict certainly made worldwide headlines, in reality Hogan will likely only walk away with about $10 million, assuming that the reduced judgement is ever paid.  In addition to the lawyers Hogan used to secure the settlement with Gawker, he would be wise to hire the best tax attorney he can find.

Do you have an IRS problem? Contact us, we can help.  


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