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Let鈥檚 play a game. So often, I write and tell you what the tax law is. Today, I want you to have a chance to apply the law.

First, we need facts. We鈥檒l start by saying that I have a fine reputation. Megaco makes some untrue statements about me in the press.

I sue Megaco for damage to my fine reputation. I pick $10 million as the damages to which I think I am entitled.

With little fight, Megaco agrees to settle the lawsuit by paying me $1,775,000. I get the check. Question: Who pays tax on this amount?

I hear a lot of you saying that I pay the tax. Yes, you are right! This is not for personal injury, so I must include the full payment in my income.

I think I made that too easy. So, let鈥檚 mix it up a bit. During my settlement discussions with Megaco, I began to think of my four children and their needs.

So, I say to Megaco, I will settle all my claims if you set up a fund and deposit $1,775,000.

This fund will be administered by a council of five, picked by me. And I reserve the right to fire any member for no reason.

The settlement terms with Megaco say that the funds placed in this fund cannot be paid to me.

The council will determine who gets the money. My hand-picked, and replaceable, council decides that my children will share equally in the $1,775,000 fund.

Now, the tricky part. Who, if anyone, pays tax on this money? I will eliminate one answer 鈥� no one.

Even if a settlement directed that the money must be paid to a qualified charity, the person who directed that will still have taxable income.

That person may also have an offsetting charitable contribution, but it is unlikely to be used all in the first year.

In my example, why did Megaco agree to such a settlement? They must have felt that there was some merit to my case and wanted to limit their losses.

Megaco is paying to get me to release all of my claims against them. Maybe they鈥檙e afraid of a big judgment, maybe they鈥檙e afraid of big legal fees.

Megaco鈥檚 motives do not affect the tax treatment of the settlement for me. What matters is that money is being paid for me to surrender my right to pursue the action.

Yes, I say, but the settlement agreement says that I cannot get the money. How can I be taxed when I cannot get the money?

But I cannot get the money because I voluntarily agreed to that part of the settlement.

Let鈥檚 step back for a moment. Assume that I want to give my four kids money for Christmas.

I ask my employer if they will pay my December salary to my four kids. Four checks made payable to four kids.

This, I hope, will allow me to avoid tax on the pay. The kids, I think, can report the income and pay tax at lower rates.

There is only one possible tax result in this scenario. My employer must report the pay on my W-2 form and withhold payroll taxes.

My decision to direct the funds to my children is irrelevant to the tax treatment to me. In fact, not only do I have taxable income but also a gift.

If I surrender my rights in a lawsuit against Megaco, in exchange for Megaco paying money, I have received money for the release of my rights.

No, no, no, you say. The facts said I cannot get the money. But didn鈥檛 I simply direct the money to others? Others to be determined by my council.

And my council is run by me. I do not see any way that I do not have $1,775,000 of taxable income.

So, what about President Donald Trump and the $1.776 billion settlement with the Department of Justice (which may now be dead)?

The payment releases the DOJ from further claims by Trump. The eventual recipients of this money had no pending claims in this action. It鈥檚 not a settlement with them.

Seems like $1.776 billion of Trump income followed by a taxable gift of $1.776 billion by Trump. Raise your hand if you think the IRS will pursue such an answer.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in sa国际传媒官网网页入口. He can be reached at jimhamill@rhcocpa.com.