Poor Tax Judgment Turns TCPA Legal Victory into Financial Loss

The world of taxes often reveals unexpected stories, and one such tale comes from the realm of Telephone Consumer Protection Act (TCPA) litigation. This case sheds light on the complexities of TCPA law and how a lack of tax knowledge can turn a potential legal victory into a financial loss.

The TCPA, a federal law, restricts the use of automatic telephone dialing systems and artificial or prerecorded voice calls. It allows individuals to sue for $500 per violation, which can be tripled for knowing or willful violations. Each call can result in multiple violations, significantly increasing potential damages.

Ruben Escano, a pro se litigant, filed several lawsuits under the TCPA, alleging violations by various companies. His meticulous approach and subject-matter expertise earned him praise from the court as a capable litigant. After negotiating a confidential settlement with one defendant, Escano faced a tax-related hurdle. To receive payment, he was asked to provide his social security number on Form W-9. Escano refused, leading to backup withholding. He received a check for only 76% of the settlement amount, leading him to believe the defendant reneged.

During a hearing, Escano questioned the defendant’s attorney about the legal fees, which amounted to $163,000. He argued that if the defendant had paid the withholding directly, it would have been much less costly. Despite his efforts, the court ruled in favor of the defendant, stating they did not breach the agreement. The court awarded the defendant $144,605.43 in attorneys’ fees. With the legal fees exceeding the withholding amount, Escano found himself in a difficult financial situation. Additionally, the deductibility of these legal fees remains uncertain, adding to his tax woes.

This case highlights the importance of understanding tax implications in legal settlements. Failure to provide a Form W-9 resulted in backup withholding, significantly reducing Escano’s settlement amount. It serves as a cautionary tale for individuals engaging in legal battles, emphasizing the need for tax knowledge to avoid such pitfalls.