Jay Weill writes “The Taxman Cometh for Lemon Law Litigants” for the Daily JournalDecember 2020
A combination of the evolving nature of lemon law litigation in California under the Song-Beverly Warranty Act, Civil Code Sections 1790 et seq., and changes to the federal tax code that repealed the deduction for certain attorney fees awards can cause adverse tax consequences. The act’s fee-shifting provisions — which often force automobile manufacturers into settling cases on, even purportedly questionable claims — effectively limit the number of cases that actually go to trial.
Manufacturers who pay civil penalties and attorney fees under the act must report those payments to the Internal Revenue Service. Internal Revenue Code Sections 6041 and 6045. Certain payments to third parties require manufacturers to file and issue Forms 1099, which reflect the amounts of these payments and identifying information of the payees. To determine whether manufacturers must issue Forms 1099, first you need to determine whether the underlying amounts paid are taxable to the plaintiff litigants. The short answer is yes…