UTA’s Defamation Payment to Polone Ruled Not Taxable

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UTA’s Defamation Payment to Polone Ruled Not Taxable

By JERRY MOSKAL

Contributing Reporter

WASHINGTON Film and television producer Gavin Polone won a split decision in U.S. Tax Court when a judge ruled that he was not liable for more than $640,000 in back taxes and penalties stemming from his payout after being fired by United Talent Agency.

The judge ruled Polone was responsible for more than $800,000 that the producer had also contested.

Polone, who has since gone on to produce the films “Panic Room” and “8mm,” along with the television series “Gilmore Girls” and “Curb Your Enthusiasm,” had a contentious relationship with UTA that ended in his highly publicized termination in 1996.

After he was dismissed by the agency amid allegations of sexual harassment, Polone and UTA entered negotiations to avert litigation over his removal. UTA agreed to pay him $4 million to settle a potential claim of defamation and $2 million on a potential breach of contract claim. UTA also issued an apology for leaking news of his firing to the media.

The dispute with UTA flared after Polone questioned the agency’s management practices. Enmity toward Polone heated after Nancy Jones, a talent agent Polone had hired for UTA’s television department, raised sexual harassment charges, the opinion stated.

“Although the petitioner did not describe his relationship with Ms. Jones as a ‘romantic relationship,’ at one point he and Ms. Jones had a ‘personal and sexual relationship,'” the ruling said. “They went on vacation together to Mexico and traveled together outside the office.”

The payments are at the root of Polone’s tax case.

According to ruling, Polone did not pay taxes on the money allotted to the defamation settlement on the advice of his accountant and lawyer. The Internal Revenue Service later claimed the payments were taxable, and said he owed more than $1.2 million in back taxes and $244,000 in penalties.

Late November, Judge Juan F. Vasquez ruled in U.S. Tax Court that Polone would not have to pay $407,880 in 1996 back taxes or any of the $244,701 in penalties for 1996 to 1998. Vasquez, though, upheld the IRS ruling that Polone pay about $816,000 in taxes for 1997 and 1998.

The judge found that while the defamation portion of the payout was considered income, the Internal Revenue Code does provide an exemption from taxation on compensation for injuries or sickness, and that earlier decisions had “embrace(d) nonphysical injuries to the individual, such as those affecting emotions, reputation or character.”

The tax court trial stemmed from a petition Polone filed appealing the IRS order. Under Vasquez’ opinion, a decision in the case will be signed once the taxes owed for 1997-98 are computed.

Edwin L. Norris, a Los Angeles tax attorney for Polone, did not return calls. Polone could not be located for comment. An IRS spokesman said the agency is barred by law from commenting on pending tax cases.

Polone long has been a formidable force in the industry. At UTA, where he cultivated a reputation as a hard-nosed negotiator both with studios and at the agency itself, where at one point he was being paid $2.5 million a year.

Among his clients were Conan O’Brien, host of NBC’s “The Late Show”; screenwriter David Koepp (“Jurassic Park” and “Mission Impossible”); and Larry David, the co-creator of “Seinfeld” who now stars in “Curb Your Enthusiasm.”

Polone now operates under Pariah Productions, which has produced the TV shows included “Family Affair” and “Hack.”

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