Bobby N. Harmon, CPCU, ARM
January 27, 2005
VIA facsimile @ (808) 529-7177 and e-mail: sguttman@kdubm.com
Mr. Steven Guttman, Esq.
Kessner Duca Umebayashi Bain & Matsunaga
220 South King Street, 19th Floor
Honolulu, HI 96813
RE: Claims Against Mary Lou Woo and Steven Guttman, Esq., et al. -
Wrongful Issuance of IRS Form 1099-MISC - Case No. 99-04339
Dear Mr. Guttman:
Since I still have not been contacted by an authorized Claims Adjuster from the company, or companies, which provide the Professional Liability Insurance for you and for Trustee Mary Lou Woo, I am obliged to send yet another letter regarding the Trustee’s mistaken issuance of an IRS Form 1099-MISC for the proceeds from the settlement of my RICO lawsuit.
Furthermore, judging from Mary Lou Woo’s memo dated February 1, 2001, addressed to your accountant, Michelle Tucker, you apparently issued this Form 1099-MISC against her initial advice. Quoting from this memo:
“I received your message this morning in which you advised that we have no obligation to provide a 1099 or W-2 since the funds were not estate property. Attached is Harmon’s opposition to Bradley Tamm’s withdrawal as his counsel in which he cites numerous issues including W-2, 1099 issues (see page 2, item No. 2). Please review the document and let me know if anything therein changes your position.”
On February 21, 2001, a Hearing was held by Judge Lloyd King, in which he approved an Order granting Greg Dunn and Bradley Tamm’s request to withdraw as my attorneys. I had filed an Opposition to their Motion to Withdraw on February 5, 2001. In my Opposition, I stated:
1. I do not concur with BRADLEY R. TAMM’s statement that I have been insistent on a course of action that is inappropriate, or that this has led to irreconcilable differences between the client and counsel. I have simply asked for information which I believe is material to this case and to which I may be entitled. To provide evidence of this, copies of correspondence between Mr. Tamm and myself are attached as EXHIBITS A-J.
2. I have requested information regarding two primary issues of concern that have not yet been fully answered. The first issue is my belief that TORKILDSON, KATZ, FONSECA, JAFFE, MOORE & HETHERINGTON, a Law Corporation, may have had a conflict of interest and/or made material misrepresentations during the settlement negotiations in this case. TORKILDSON, KATZ were defendants in CIVIL NO. 99-00304 DAE, and were also the Attorneys for P&C INSURANCE COMPANY; HENRY H. PETERS, RICHARD S.H. WONG, LOKELANI LINDSEY, GERARD JERVIS AND OSWALD STENDER, TRUSTEES OF BISHOP ESTATE; NATHAN AIPA; LOUANNE KAM; RODNEY PARK; WILLIAM S. RICHARDSON; GILBERT TAM; and PETER LOWE, and had indicated they were acting on behalf of FEDERAL INSURANCE COMPANY, another named defendant in CIVIL NO. 99-00304 DAE, in related lawsuits. The second issue discussed with Mr. Tamm concerned the W-2 Tax Form, or Form 1099, which I have not yet received. During the settlement negotiations, it was stated by Mr. Tamm that the entire settlement amount would be characterized as Wage Income. As wage income, my understanding is that the employer must provide a W-2 Form, and indicate the amount of Social Security and other taxes withheld and/or paid. This tax form is needed for the preparation and filing of my Year 2000 income tax, and for filing for Social Security Benefits, which I am currently preparing to do.
3. The timing of this Motion is inappropriate as results in undue hardship to the client. I have had to relocate to Kentucky in order to care for my ailing mother and to attempt to find a new home, having lost our home in Hawaii due to the bankruptcy settlement. I have not requested that Mr. Tamm file any legal motions or take any other legal action. I believe that it would result in undue hardship and expense for me to seek, retain and provide documentation to a new attorney at this time merely to obtain documents regarding the bankruptcy proceeding in which Mr. Tamm participated as my attorney.
On February 21, 2001, Michelle Tucker sent a letter to Debra Sakai, of the Department of Taxation, Collections Branch, in which she wrote:
“Enclosed is the following return for the above-referenced bankruptcy case:
1. Form –196, Annual Summary and Transmittal of Hawaii Information Returns (1099-Miscellaneous for Bobby Norris Harmon) for calendar year 2000.
“In accordance with past practice, we are sending this tax return to you for filing and we are not sending this tax return to the usual mailing address.”
Also, on February 21, 2001, Michelle Tucker sent a letter to the Internal Revenue Service, Ogden, UT 84201:
“Enclosed is Form 1096, Annual Summary and Transmittal of U.S. Information Returns (1 Form 1099-MISC), calendar year 2000, for the above-referenced bankruptcy case.”
As I had not yet received notice that the Trustees had issued the Form 1099-MISC, on February 24, 2001 I sent a letter addressed to the Personnel Director, Kamehameha Schools Bishop Estate, in which I wrote:
“This is to inform you that I have not yet received my Form W-2 and Form 1099-R for the year 2000. It is my understanding that these forms were due to be mailed no later than January 31, 2001.
“The 2000 Form W-2 is for the Wage Income I received last year in Settlement of various lawsuits with Kamehameha Schools Bishop Estate. The Form 1099-R is for the Retirement Income payments I received from my Pension Plan.
“Both of these forms are needed as soon as possible to enable me to file my Year 2000 Income Taxes. The form W-2 is also needed as I am in the process of filing for my Social Security retirement benefits and Medicare.
“I would also like to request at this time your estimates for the revised monthly Retirement Benefits under my Kamehameha Pension Plan due to the addition of the Wage Income received in the Settlement. Would you also advise approximately when the payment of the revised amount will begin.”
On February 28, 2001, Matt A. Tsukazaki, of Torkildson, Katz, Fonseca, Jaffe, Moore & Hetherington, wrote to my attorneys Arnold T. Phillips, Roy F. Hughes, and Bradley R. Tamm, stating:
“Enclosed please find a copy of a February 24, 2001 letter from Bobby N. Harmon to the Personnel Director of Kamehameha Schools.
“As you know under the Settlement, Release and Indemnification Agreement signed by Mr. Harmon, he agreed to maintain the confidentiality of his settlement (Section J) with Kamehameha Schools and its insurance carriers. We do not believe that Mr. Harmon intentionally sought to breach the confidentiality provision. Rather, we believe that he was not sure to whom he should address his letter and his inquiry. In the future to the extent that Mr. Harmon has any question about the settlement, please advise him that all inquiries should be made by his attorneys. If your legal representation of Mr. Harmon has ceased, as confirmed by your respective offices to my firm, then Mr. Harmon should send all inquiries he may have with Kamehameha Schools to my attention.
“In addressing Mr. Harmon’s letter, we note that the settlement payment was not classified as wages and was not compensation in return for services. Mr. Harmon will not be receiving a W-2 for that amount. Nor will he be receiving a Form 1099-R as the settlement would not have adjusted his total earned income at Kamehameha Schools and would not have affected the amount of his retirement benefits. Obviously, if the settlement payment was designated as payment for services, Mr. Harmon would be required to pay federal and state income taxes on the settlement payment and FICA and possibly other assessments would have to be withheld from the funds. It is our understanding that Mr. Harmon sought to avoid such treatment.
“If you have any questions, please do not hesitate to contact me. Please forward this letter to Mr. Harmon. To the extent that Mr. Harmon’s sole basis for his inquiry was based upon his misperception about the classification of his settlement proceeds there will be no other response to his letter. Thank you for your anticipated cooperation.”
I realize that your position has been that the Settlement Agreement did not specify any portion as wages and, indeed, that was one of your major reasons for Trustee’s Demand that this issue be resolved through Arbitration. You will recall that I have argued that although the Settlement Agreement did not characterize a specific amount wages, this was not the key issue. As you know, I have consistently maintained that the IRS regulations would be the governing factor as to how the proceeds would be taxed, and that this was not an issue that could be decided by an Arbitrator’s interpretation of the Agreement.
Since neither you, nor Trustee Mary Lou Woo, or your accounting firm, have ever cited any IRS regulations regarding this matter, even during the arbitration proceedings, I quote the following from the Internal Revenue Services’ website www.irs.gov:
FAQS Regarding Miscellaneous Taxable Income/Withholding
What if the legal settlement is related to termination of an employee?
Settlements of suits in cases of employee termination arise from a variety of causes of action. The settlement could be for a breach of contract, a tort, or a violation of any one of a number of federal or state statutes such as the Age Discrimination in Employment Act or the Americans With Disabilities Act. All the facts must be considered, for instance the complaint, the settlement document, a court's opinion, etc., to determine what the award is for. There is no simple answer to this question.
We will focus upon damages received to compensate for economic loss, for example lost wages, business income, and benefits. These amounts are includible in gross income unless a personal physical injury caused the loss.
In general, severance payments are wages for employment and are subject to FICA taxes. This position is supported by no fewer than six court decisions dealing with payments made in the course of the layoffs and downsizing of the 1980s and 90s. Two of these decisions have been affirmed by the Second and Federal Circuits. Associated Electric Cooperative, Inc. v. U.S., 42 Fed. C1. 867 (1999), aff'd 226 F.3d 1322 (Fed. Cir. 2000) (plaintiff was required to sign a Release and Covenant Not to Sue in exchange for the payment); Abrahamsen v. U.S., 44 Fed. Cl. 260 (1999); Abbott v. U.S., 76 F. Supp. 2d 236 (N.D.N.Y. 1999), aff'd 231 F.3d 889 (2d Cir. 2000). Indications that the settlement amounts were wages for employment were that the payments arose in connection with the employment relationship and that the amounts were based on salary and years of service.
Wages are generally subject to FICA tax when they are actually or constructively paid. Employment Tax Regulation section 31.3121(a)-2(a). Severance payments are subject to FICA tax in the year in which they are paid. The FICA tax rate and wage base are those in effect in the year of payment. FUTA tax and income tax withholding also apply. Sections 3306(b), 3401(a). The Supreme Court recently affirmed the Service's position that FICA tax applies for the year of payment, not the year in which the services were, or were not, performed. U.S. v. Cleveland Indians, 121 S.Ct. 1433; 149 L. Ed.2d 401 (2001); rev'g 215 F.3d 1325 (6th Cir. 2000).
Note that the Service has recently issued an MSSP: Audit Guide for Lawsuit Awards and Settlements (January 1, 2001), Training 3123-009(11-00), TPDS No. 86391 G. It provides a lot of interesting information on this topic.
The following is quoted from Business Week Online:
TAX RAMIFICATIONS OF STRUCTURING SETTLEMENTS
No matter how carefully employers run their businesses, many companies face the prospect of paying settlements or court-ordered judgments as a result of legal actions brought by former employees. These payments arise from various causes of action such as claims for race, age or sex discrimination, wrongful discharge, defamation, and breach of contract, among others. Besides payment for traditional compensatory damages, portions of these settlements or court-awarded judgments often go to cover the employee's attorney fees, costs and disbursements, interest, mental and emotional distress, and punitive damages....
According to the IRS, money received by a judgment or settlement, in a lump sum or periodic payments as damages for personal injuries, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other non-pecuniary losses or sickness (such as in a sex harassment case) is not taxable. On the other hand, any money paid to an employee in settlement or judgment as compensation for lost wages, back pay and front pay, severance payments or fringe benefits is subject to withholding taxes. If such money is paid in lost wages, then the employer is required to withhold income taxes and FICA taxes from the payment. The employer would also be required to pay additional sums for FUTA and the employer's portion of FICA.
The potential liability to companies here arises when the IRS finds that the parties improperly treated an amount paid as excludable income (i.e., for pain and suffering) or non-wage income. In such cases, employers are liable for the employee's failure to pay FICA and income taxes together with interest and penalties unless the IRS can receive the amounts owed from the employee. Such penalties may also be assessed against certain corporate officers if the employee fails to pay said amounts. But note that the employer's portion of FICA taxes as well as FUTA tax cannot be paid by the employee and thus the employer is always liable for these taxes....
After understanding what is and is not tax deductible, you may then design the settlement to produce tax advantages for both the company and the employee. ... Once you know what you want to do, be sure to put all settlements in writing with specific allocations for specific payments. Identifying the underlying basis for any payments can help avoid problems with the IRS.
TIP: The IRS is not bound by any allocation but it may be honored if it is reasonable. Understandably, the IRS will look with suspicion upon attempts by the parties to diminish their tax liability, such as amending a complaint in a lawsuit just prior to settlement to eliminate or decrease a demand for back pay....
Copyright © 2001 FindLaw
I do not know how the IRS regulations could be stated any clearer than this. The fact that Torkildson Katz failed to put “specific allocations for specific payments” into the Settlement Agreement, was an error and omission on the part of Kamehameha Schools - not an error on my part. The fact that I have had to repeatedly call this error to their attention, and to your attention, does not constitute an illegal “letter-writing campaign”, and is not a breach of the Settlement Agreement. If my attorneys Bradley Tamm and Greg Dunn had complied, years ago, with my simple request for advice on this matter, instead of withdrawing as counsel, they should have been writing these letters - rather than me.
As you know, I paid my year 2000 taxes declaring the full proceeds that I received from the settlement as wage income. It is Kamehameha Schools that has breached the Agreement, and broken the law, by failing to pay their share of the employment taxes, and by failing to contribute the required additional payments into my Retirement Plan.
In pursuing my claims against Trustee Mary Lou Woo and your law firm, I will gladly meet with the claims adjusters representing your Professional Liability Insurance carriers, and provide them with complete documentation regarding this matter - much of which I consider to be confidential and do not wish to present in this letter, or directly to you.
Meanwhile, you may refer your insurance company claims representatives to the following web address for additional background information:
www.the-catbird-seat.net/Claims-By-Harmon.htm
Please feel free to contact me if you have any questions or need any additional information. Your prompt action is requested in order that these long-standing liability claims, and the bankruptcy estate, can be closed as quickly and economically as possible.
Very truly yours,
Bobby N. Harmon, CPCU, ARM
cc: Michael G. Cherkasky, President and Chief Executive Officer
Marsh & McLennan Companies, Inc.
(via fax @ 212-345-4838)
John D. Finnegan, President and Chief Executive Officer
The Chubb Corporation
(via fax @ 908-903-2027 and Email: info@chubb.com)
William K. Slate II, President/CEO, American Arbitration Association
(via fax @ 212-716-5905 and Email: Websitemail@adr.org)
Mark Appel, Senior Vice President
International Centre for Dispute Resolution
(via e-mail: AppelM@adr.org)
Harry Kaminsky, Vice President
Neutrals’ Services, Phoenix, AZ
(via e-mail: KaminskyH@adr.org)
James B. Farris, Senior Case Manager, American Arbitration Association
(via fax @ 559-490-1919 and e-mail: Farrisj@adr.org)
Mary Lou Woo, c/o Steven Guttman, Kessner Duca Umebayashi, et al.
(via fax @ 808-529-7177 and e-mail: sguttman@kdubm.com)
Mark Bennett, Attorney General, State of Hawaii
(via fax @ 808- 586-1239 and e-mail: hawaiiag@hawaii.gov )
Dee Jay Mailer, CEO, Kamehameha Schools (via fax @ 808-523-6313)
P&C Insurance Co., Inc. (via fax @ 808-523-6313)
Governor Linda Lingle, State of Hawaii (via fax @ 808-586-0006)
Hugh Jones, Deputy Attorney General (via fax @ 808-586-1477)
J.P. Schmidt, Hawaii Insurance Commissioner (via fax @ 808-586-2806)
Janet Hughes, Internal Revenue Service (via fax @ 303-844-3596)
Billy Beaver, Pension & Welfare Benefit Admin. (via fax @ 626-229-1098)
Ralph F. Boyd, Jr., U.S. Dept. of Justice (via fax @ 202-514-1116)
Lyn Flanigan Anzai, Hawaii State Bar Association (via e-mail: lanzai@hsba.org)
Susan Tius, Esq., c/o Rush Moore Craven Sutton Morry & Beh
(via fax @ 808-521-0597)
Gerard Jervis, Lokelani Lindsey, Henry Peters, Oswald Stender, and Richard Wong, c/o Kenneth Hipp, Esq., Marr Hipp Jones & Pepper
(via fax @ 808-536-6700)
Jeffrey H.K. Sia, Esq., Ayabe Chong Nishimoto Sia & Nakamura
(via fax @ 808-526-3491)
Robert S. Tameler, ALPS, Claims Admin for Bradley Tamm and Greg Dunn
(via fax @ 406-728-7416)
Michael F. Perlis, Esq., Stroock & Stroock & Lavan, LLP, Atty for Federal Ins Co
(via fax @ 310-556-5959)
Mike Coulter, Deputy Managing Director, Aon Insurance Managers
(via fax @ 808-540-4301 and e-mail: mike_coulter@agl.aon.com)
Casimer Fidele, Tradewind Insurance Company
(via fax @ 808-521-7489)
PricewaterhouseCoopers, c/o Warren Price III, Esq.
(via fax @ 808-533-0549)
Terry Mullen, CEO/Pres., John Mullen & Co.
(via fax @ 808-531-0053)