There is an interesting discussion in progress on the Amazon customer forums. One of the post asked the interesting question “Given how much money that some people got – are ‘we’ (global we) going to have to report this money on our taxes? Since its a settlement and not a refund?”
While I only received a modest refund of $24 (I started boycotting books over $9.99 when agency pricing went into effect), many customers have reported receiving refunds in the hundreds of dollars. The biggest amount I saw posted on the forums claimed a $1888.73 refund.
The discussion references IRS Publication 525 (which seems to be about employee and business issues). The document does suggest that punitive damages may indeed be taxable.
One comment says:
This was only a quick search, but most of the links that came up under “Are settlements taxable” seem to think so. Also, https://www.irs.gov/businesses/small-businesses-self-employed/lawsuits-awards-and-settlements-audit-techniques-guide#_Toc305586651
Punitive damages are not excludable from gross income under IRC § 104(a)(2).
With the enactment of SBJPA, Public Law 104 -188, Section 1605(a) in 1996, Congress made it clear in IRC § 104(a)(2) that punitive damages are taxable, regardless of the nature of the underlying claim.
IRC § 104(a)(2) states gross income does not include —
“the amount of any damages (other than punitive) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”
In the Ebook Settlement FAQ, Amazon notes that it did not disclose any personal customer information regarding this settlement. The discussion also notes that “Other Income” generally requires the issuance of a IRS Form 1099, which no one seems to have received.
The discussion seems pretty split with some saying it would be taxable and others saying not. So far, no attorneys or CPAs have stepped up to weigh in on the topic. I didn’t hear anything about any tax liabilities on the previous publisher portion of the settlement – of course, mine was only $2, so it was a non-issue, at least for me.
While it is a fascinating discussion, since I am neither a lawyer or a tax consultant, I have no idea where this ebook settlement actually falls in terms of tax liabilities. Any thoughts?