USA definition of "actual tax consequences"

Who is correctly calculating actual tax consequences of the award?

  • Party A - effective tax rate times the award

    Votes: 0 0.0%
  • Party B - two returns and calculate the difference in taxes owed

    Votes: 0 0.0%

  • Total voters
    0

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Below is a quote from a contract that is being disputed between two accountants about how taxes should be calculated on a cash award.

...amount to be paid shall reflect all actual tax consequences which party would be obligated to pay with respect to the receipt of said award...
In this instance, you have an individual who has agreed to pay a portion of a future award to another party, after taxes. The payout needs to reflect all "actual tax consequences" of the award (federal, state, Medicare, local, etc.). At issue is the federal taxes - the rest of them are pretty straightforward.

Party A believes the correct way is to simply calculate the effective tax rate by dividing the individual's final federal income tax due by their total income for the year and multiplying the effective tax rate by the amount of the award.

Party B believes you should do two tax returns, one with the award included (ie, the original return) and one without, holding all other income, deductions, etc. equal and the difference between the amount of taxes due is the actual tax consequence of the award.

Can some of the experts here weigh on on how they would interpret "actual tax consequences" in this context? Who is right? Party A or Party B?

If you think Party A is correct, do you think they should use total income in the denominator, or would it be more appropriate to use taxable income (ie, after deductions) in the denominator?

Thanks in advance!
 
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kirby

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Once you mentioned this is from a contract, it is a legal issue. Untouchable here. Post in a legal forum. Sorry.
 
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Once you mentioned this is from a contract, it is a legal issue. Untouchable here. Post in a legal forum. Sorry.
Ok... thanks Kirby

Why "untouchable"? Did I miss something in the forum rules about asking questions that might have legal implications?

On the bottom of every page here I see this:
ABOUT US: We are a forum for professional accountants and tax advisers to discuss accountancy and taxation, but we also welcome individuals and business users who have queries relating to these matters.

I am not seeking legal advice and yes, I know that ultimately this may need lawyer and possibly court involvement to resolve. However, I'm just an individual who has a question that relates to taxation. Yes, this question stems from a contract dispute, but I'm looking for what a PROFESSIONAL ACCOUNTANT OR TAX ADVISER interprets the words "actual tax consequences" to mean. Nothing more.

I would like to make it very clear that I am not seeking legal advice and any respondents are free to include in any response the disclaimer "not legal advice, for information purposes only" if they're concerned about creating a legal issue for themselves by answering my question.

Thanks for your consideration.
 
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