(Bloomberg Businessweek) -- Something unpleasant lurked inside the $130,000 that Donald Trump’s lawyer Michael Cohen paid to Stormy Daniels in 2016: a tax bill. Daniels—whose real name is Stephanie Clifford—would have been obligated to pay as much as $51,480 of that hush money to the IRS. That’s assuming she filed jointly with her husband, also a porn actor, and that they made enough to be in the top bracket. The settlement was “definitely taxable to Stormy, unless she had alleged actual physical injury, which she did not,” says Ruth Wimer, a Washington lawyer and accountant. On her tax return, Daniels would have been asked to identify the reason for the hush money, but she could have declined to provide details if doing so would have exposed her to liability.
It’s not just Daniels. Karen McDougal, the ex-Playboy Playmate who alleges an affair with Trump, would have owed taxes on the $150,000 paid to her by American Media Inc., owner of the National Enquirer. Payments with nondisclosure agreements are “very common” in civil lawsuits and litigation, says Ron Burdge, a consumer lawyer in Dayton. How common? “It’s hush money, so no one knows.”
Cohen scraped up the money through a home-equity line of credit. Until Trump’s tax law took effect this year, taxpayers could deduct as much as $100,000 in interest paid on such loans and credit lines, no matter how they used the money. Now the deduction is only for loans used for home improvements. (Cohen has said he’s renovating his family’s apartment.) Companies and entrepreneurs routinely take deductions for ordinary business expenses. Cohen “could argue that the payment was related to his business or brand,” says Brandon Mourges, a tax lawyer in Baltimore.
That would be “a stretch,” says James Harbert, an employment lawyer in Chicago. “It’s not ordinary practice for a lawyer, without the knowledge of his client, to make a payment to someone for nondisclosure.” Also not customary: paying from your own wallet. “That’s extraordinary—more in the nature of a gift.” And it’s not deductible.
To contact the author of this story: Lynnley Browning in New York at lbrowning4@bloomberg.net.
To contact the editor responsible for this story: Matthew Philips at mphilips3@bloomberg.net.
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