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Analyze Tax Implications Before Filing Suit

A smart business owner knows that litigation is never a first option, but circumstances sometimes dictate that it may seem to be your only option.  An analysis of the strengths and weaknesses of your case, compared to the cost of doing nothing, may very well point to bringing an action against your business partner.  However, all too often a plaintiff who believes he has analyzed his case from every angle has forgotten a very important consideration – the potential tax ramifications of the litigation.

Uncovering tax improprieties undertaken by an unrelated third party you are suing would not concern most people.  In fact, it can be a strategic asset, since many litigants may choose to settle with you rather than let their tax issues be placed before the court.  After all, in New Jersey, as in many states, judges have an affirmative obligation to alert taxing authorities to tax improprieties of which they become aware; such reporting by the Court is mandatory.

But when you sue your business partner, it is your own business that is implicated in the litigation.  If he has been skimming money off the top and effectively stealing from you, it is overwhelmingly likely that a tax liability will also result from all the unreported income.  The company (or its shareholders, depending on the company’s structure) may have to pay a large tax bill as a result of the very allegations that you placed before the court.  In addition, some taxes, such as unpaid payroll or sales taxes, may result in personal liability to you under certain circumstances

It is crucial that your attorney understand and fully appreciate that when you sue your business partner over your business, you are not suing an unrelated third party.  Every angle, including (sometimes especially) the tax angle, must be carefully considered prior to commencing suit.