1017-00004 · Entities. Aurelius Global Media Group · Mediation & Settlement/Aldrich

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CALDERWOOD & HARKNESS LLP 1900 Avenue of the Stars, Suite 2800 Los Angeles, California 90067

CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Gregory Tanaka, Vice President, Legal & Compliance, Aurelius Media Americas Inc.

FROM: Nadia Petrov

DATE: January 12, 2024

RE: Tax Treatment of Aldrich Settlement Payments — Wage vs. Non-Wage Allocation

Matter No.: 1017-00004

I. Purpose and Background

This memorandum analyzes the federal and California state income tax treatment of the $2,350,000 lump-sum settlement payment to Gavin Aldrich, former Senior Vice President of Original Content & Executive Producer of Aurelius Media Americas Inc. ("AMA"), and the agreed allocation between wage and non-wage components. This memorandum is intended to guide AMA's compliance with its withholding, reporting, and deduction obligations in connection with the settlement, and to assess the defensibility of the agreed allocation in the event of an IRS examination.

The Aldrich Settlement Agreement and Mutual Release (the "Settlement Agreement") is expected to be executed on or about January 19, 2024. The Settlement Agreement will resolve all claims and counterclaims in Aldrich v. Aurelius Media Americas Inc., Los Angeles Superior Court Case No. 22STCV41087, including Aldrich's claims for wrongful termination in violation of public policy, breach of the implied covenant of good faith and fair dealing, declaratory relief regarding the enforceability of a post-employment restrictive covenant, and unreimbursed business expense claims, as well as AMA's cross-complaint against Aldrich for breach of the Employment Agreement dated September 5, 2017 (as amended August 1, 2020), misappropriation of trade secrets under the California Uniform Trade Secrets Act ("CUTSA"), breach of fiduciary duty, and conversion.

In addition to the $2,350,000 lump-sum cash payment, the Settlement Agreement provides for the acceleration of 10,200 of Aldrich's 15,300 unvested restricted stock units ("RSUs") in Aurelius Global Media Group PLC ("AGMG"), the publicly traded parent company of AMA. The remaining 5,100 unvested RSUs will be forfeited by Aldrich as part of the settlement consideration.

During mediation and subsequent settlement negotiations, the parties — through their respective counsel, Devon Archer of Calderwood & Harkness LLP on behalf of AMA, and Cameron Whitfield of Whitfield & Associates on behalf of Aldrich — addressed the question of how the lump-sum cash payment should be allocated between wage and non-wage components for tax purposes. On January 10, 2024, the parties confirmed by email their agreement to a 45% wage / 55% non-wage allocation of the $2,350,000 cash settlement payment. This memorandum analyzes the propriety and defensibility of that allocation, identifies AMA's withholding and reporting obligations, and provides recommendations for implementation.

This memorandum does not constitute tax advice to Gavin Aldrich, and AMA has not undertaken any obligation to advise Aldrich regarding the tax consequences of the settlement. Aldrich has been advised through his counsel to consult his own tax advisor concerning the federal, state, and any other tax implications of the settlement payments he will receive. AMA's sole obligation is to properly withhold and report on its side in accordance with applicable law.

II. Agreed Allocation

A. Summary Table

The parties have agreed to the following allocation of the $2,350,000 cash settlement payment:

The RSU acceleration (10,200 RSUs) is treated separately from the cash settlement payment and is addressed in Section V below.

B. Basis for the 45/55 Split

The allocation reflected above is the product of arm's-length negotiations between adverse parties, each represented by independent legal counsel. The parties originally proposed competing allocations that reflected their respective tax interests:

• Aldrich's initial position: Through Whitfield & Associates, Aldrich proposed a 40% wage / 60% non-wage allocation. This position reflected Aldrich's preference to minimize the amount subject to immediate withholding and payroll taxes, thereby retaining more cash at the time of payment and deferring tax obligations on the non-wage component to the filing of his individual tax return.

• AMA's initial position: AMA proposed a 50% wage / 50% non-wage allocation. AMA's preference for a higher wage allocation was driven in part by the desire to ensure that any IRS challenge to the allocation would be resolved in AMA's favor. Additionally, a higher wage allocation provides stronger support for AMA's deduction of the wage component as ordinary and necessary compensation expense under Internal Revenue Code ("IRC") § 162(a), and ensures that AMA has fulfilled its withholding obligations under IRC §§ 3401 and 3402.

The agreed 45% wage / 55% non-wage split was a negotiated compromise confirmed by email between Devon Archer and Cameron Whitfield on January 10, 2024. The allocation reflects the economic substance of the underlying claims and settlement components, as detailed in Sections III and IV below. The fact that both parties made concessions from their initial positions, and that the final allocation falls between the two opening positions, is evidence of genuine arm's-length bargaining — a factor that the IRS and the Tax Court consider highly relevant in determining whether to respect a negotiated allocation. See Section VI below.

III. Analysis of the Wage Component ($1,057,500)

A. Characterization

The wage component of $1,057,500 represents compensation that Aldrich would have received from AMA had his employment not been terminated "for cause" under Section 7.2(b) of the Employment Agreement dated September 5, 2017 (as amended August 1, 2020) (the "Employment Agreement"). As background, AMA terminated Aldrich's employment on October 14, 2022, citing multiple grounds under the Employment Agreement's "for cause" provision, including alleged misuse of company resources, failure to comply with content development approval protocols, and unauthorized disclosure of confidential project information. Aldrich contested the validity of the "for cause" termination and asserted that the true reason for his termination was his refusal to acquiesce in management decisions that he believed violated AMA's internal content standards policies.

Specifically, the $1,057,500 wage component corresponds to the following amounts:

Severance equivalent: Under Section 8.1 of the Employment Agreement, Aldrich was entitled to severance of twenty-four (24) months' base salary if terminated without cause or if he resigned for "good reason" (as defined in Section 8.1(c) of the Employment Agreement). Aldrich's base salary at the time of termination was $485,000 per annum. Accordingly, the severance equivalent is $485,000 × 2 = $970,000. Because the settlement effectively resolves Aldrich's claim that his termination was not validly "for cause" — and thus that he was entitled to severance — this amount represents the largest component of the wage allocation. It is in the nature of wages because it substitutes for salary that Aldrich would have received over a 24-month period had AMA honored its severance obligations under the Employment Agreement.

Partial pro-rata bonus: Under Section 4.2 of the Employment Agreement, Aldrich was eligible for an annual discretionary performance bonus of up to 50% of base salary. Aldrich's last actual annual bonus was $225,000 for fiscal year 2021 (paid in Q1 2022). For fiscal year 2022, Aldrich worked approximately 9.5 months (from January 1, 2022, through his October 14, 2022 termination) before being terminated. His pro-rata bonus for FY 2022, based on his FY 2021 bonus, would have been approximately $225,000 × (9.5/12) = $178,125, although the parties agreed to use the round figure of approximately $168,750 as a reasonable estimate given the discretionary nature of the bonus. Of this amount, $87,500 has been allocated to the wage component; the remainder is subsumed in the non-wage component as general settlement consideration, reflecting the inherent uncertainty as to whether a discretionary bonus would have been awarded at all for FY 2022 and, if so, in what amount.

The total wage-related amounts are: $970,000 (severance equivalent) + $87,500 (partial pro-rata bonus) = $1,057,500, which equals 45% of the $2,350,000 total cash settlement payment.

B. Federal Tax Treatment

The $1,057,500 wage component is subject to federal income tax withholding and employment taxes under the following provisions of the Internal Revenue Code:

Federal income tax withholding. Under IRC § 3401(a), the term "wages" includes all remuneration for services performed by an employee for an employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The term encompasses back pay, severance pay, and amounts paid in settlement of employment-related claims that are in the nature of compensation for services. See Treas. Reg. § 31.3401(a)-1(a)(5). The settlement payment's wage component — which substitutes for severance and bonus compensation — falls squarely within this definition.

Under IRC § 3402, AMA is required to withhold federal income tax from the wage component at the time of payment. The applicable withholding rate depends on the method used:

If AMA uses the percentage method, withholding is computed based on Aldrich's most recent Form W-4 on file with AMA. However, because Aldrich's employment was terminated on October 14, 2022, and more than one year will have elapsed before the settlement payment is made, AMA should confirm whether it has a valid W-4 on file or whether Aldrich should be asked to submit a new W-4 in connection with the settlement payment.

If AMA uses the supplemental wage flat rate method, the applicable rate is 22% for supplemental wages of $1 million or less, and 37% for supplemental wages in excess of $1 million during the calendar year. Because the $1,057,500 wage payment alone exceeds $1 million, AMA must withhold at 37% on the amount exceeding $1 million — i.e., 22% on the first $1,000,000 ($220,000) and 37% on the remaining $57,500 ($21,275), for total federal income tax withholding of $241,275. However, if Aldrich receives any other supplemental wages from AMA during 2024 (which is unlikely given his termination), the $1 million threshold would be computed on an aggregate basis across all supplemental wage payments.

FICA taxes. Under IRC §§ 3101 (employee share) and 3111 (employer share), the wage component is subject to the Federal Insurance Contributions Act ("FICA") taxes, which consist of the following:

Social Security tax (Old-Age, Survivors, and Disability Insurance — "OASDI"): The employee share is 6.2% on wages up to the Social Security wage base, which is $168,600 for 2024. AMA must also pay the employer share of 6.2% on wages up to the same threshold. Because Aldrich has not earned any wages from AMA (or, to our knowledge, from any other employer) during 2024, the full $1,057,500 wage payment will be subject to Social Security tax, but only on the first $168,600. The employee Social Security tax on $168,600 is $10,453.20, and the employer Social Security tax is the same amount.

Medicare tax (Hospital Insurance — "HI"): The employee share is 1.45% on all wages, with no wage ceiling. AMA must also pay the employer share of 1.45%. The employee Medicare tax on $1,057,500 is $15,333.75, and the employer Medicare tax is the same amount.

Additional Medicare tax: Under IRC § 3101(b)(2), an additional 0.9% employee-side Medicare tax applies to wages exceeding $200,000 (for single filers; $250,000 for married filing jointly). There is no employer match for the additional Medicare tax. Under IRC § 3102(f), AMA is required to withhold the additional 0.9% Medicare tax on wages paid to Aldrich in excess of $200,000 during the 2024 calendar year, without regard to Aldrich's filing status or wages received from other employers. Because the $1,057,500 wage payment exceeds $200,000, AMA must withhold the additional 0.9% on $857,500 ($1,057,500 − $200,000), resulting in additional Medicare tax withholding of $7,717.50.

Federal Unemployment Tax Act ("FUTA"). Under IRC § 3301, AMA is liable for FUTA tax at a rate of 6.0% (before credit for state unemployment taxes) on the first $7,000 of wages paid to each employee during the calendar year. Because Aldrich has not received wages from AMA in 2024, the first $7,000 of the settlement wage payment is subject to FUTA. Given AMA's compliance with California's state unemployment insurance program, AMA should be eligible for the maximum FUTA credit of 5.4%, resulting in a net FUTA rate of 0.6% and a maximum FUTA liability of $42.00. This is an employer-side obligation only.

C. California State Tax Treatment

California imposes state income tax withholding and employment taxes on amounts constituting wages under state law, which generally conforms to the federal definition of wages for withholding purposes:

California income tax withholding. Under California Revenue and Taxation Code ("R&TC") § 13009, employers are required to withhold California personal income tax from wages paid to employees. For purposes of California withholding, "wages" has the same meaning as under IRC § 3401(a), with certain modifications not relevant here. The $1,057,500 wage component is therefore subject to California income tax withholding.

California does not conform to the federal supplemental wage flat rate of 22%/37%. Instead, California withholding on supplemental wages is calculated either using the employee's filing status and applicable tax brackets (the "method A" approach) or at the flat supplemental wage rate specified by the Employment Development Department ("EDD"). For 2024, the California supplemental wage flat rate is 6.6%, except that for bonuses and supplemental wage payments exceeding $1,000,000 in a calendar year, the rate is 10.23%. Because the $1,057,500 wage payment exceeds $1,000,000, AMA should apply the 10.23% rate to the amount exceeding $1,000,000 — i.e., 6.6% on the first $1,000,000 ($66,000) and 10.23% on the remaining $57,500 ($5,882.25), for total California income tax withholding of approximately $71,882.25. Alternatively, AMA may calculate withholding using the method A approach if Aldrich's California DE 4 (Employee's Withholding Allowance Certificate) is on file and indicates that the method A approach would result in more accurate withholding.

California State Disability Insurance ("SDI"). SDI contributions are required on wages up to the SDI taxable wage limit, which is $153,164 for 2024. The SDI rate for 2024 is 1.1%. Because Aldrich was terminated on October 14, 2022, and has not received any wages from AMA during 2023 or 2024, no SDI has been withheld from Aldrich's wages during 2024. AMA must therefore withhold SDI at 1.1% on the first $153,164 of the $1,057,500 wage payment, resulting in SDI withholding of $1,684.80. No SDI is required on wages above the $153,164 ceiling.

California Employment Training Tax ("ETT") and State Unemployment Insurance ("SUI"). ETT and SUI are employer-side obligations. ETT is assessed at 0.1% on the first $7,000 of wages per employee per year. SUI rates vary by employer; AMA's payroll department should compute the applicable SUI rate and contribution based on AMA's current EDD rate schedule. These amounts are relatively small and should be calculated as part of normal payroll processing.

D. Reporting

AMA must report the $1,057,500 wage component on a Form W-2 (Wage and Tax Statement) issued to Gavin Aldrich for tax year 2024. The W-2 should reflect the following:

• box 1 (Wages, tips, other compensation): $1,057,500

• box 2 (Federal income tax withheld): Actual amount withheld (calculated per Section III.B above)

• box 3 (Social Security wages): $168,600 (the 2024 wage base)

• box 4 (Social Security tax withheld): $10,453.20

• box 5 (Medicare wages and tips): $1,057,500

• box 6 (Medicare tax withheld): $15,333.75 (basic) + $7,717.50 (additional) = $23,051.25

• boxes 15–17 (State/employer's state ID/state wages, tips, etc.): California wages and withholding

• box 18 and 19 (Local wages and local income tax): As applicable

The W-2 should be issued by Aurelius Media Americas Inc. using its Employer Identification Number (EIN: 83-2194067) under its regular payroll processing through NovaPay Solutions Inc. AMA's payroll team should ensure that the settlement wage payment is processed as a supplemental wage payment, distinct from regular payroll, and that the appropriate withholding rates are applied as described above.

The Form W-2 must be furnished to Aldrich no later than January 31, 2025, and filed with the Social Security Administration by the same date (or by February 28, 2025, if filing on paper, or March 31, 2025, if filing electronically).

IV. Analysis of the Non-Wage Component ($1,292,500)

A. Characterization

The non-wage component of $1,292,500 represents damages and settlement consideration that are not in the nature of compensation for services rendered by Aldrich to AMA. Rather, this component reflects the resolution of tort-based and contract-based claims, emotional distress damages, and general consideration for the broad mutual release of all claims between the parties. The non-wage component corresponds to the following elements:

Emotional distress damages ($500,000 claimed). Aldrich's complaint alleged that AMA's wrongful termination and the public characterization of his departure as being "for cause" caused him severe emotional distress, including anxiety, depression, insomnia, and damage to his professional reputation within the entertainment industry. Aldrich claimed $500,000 in emotional distress damages. While the full $500,000 claimed amount is not separately allocated in the settlement, the emotional distress claim is a substantial basis for the non-wage component.

General settlement consideration. The non-wage component also includes consideration for Aldrich's release of all claims against AMA, its parent, subsidiaries, affiliates, officers, directors, employees, and agents. This release encompasses Aldrich's claims for: (i) wrongful termination in violation of public policy (Labor Code § 1102.5 retaliation theory); (ii) breach of the implied covenant of good faith and fair dealing; (iii) declaratory relief regarding the enforceability of the 18-month post-employment restrictive covenant set forth in Section 10.3 of the Employment Agreement; and (iv) a claim for unreimbursed business expenses in the amount of $28,400 (comprising travel, entertainment, and equipment expenses allegedly incurred by Aldrich during his final months of employment and not reimbursed by AMA). The value of Aldrich's release of these disparate claims — particularly the declaratory relief claim, which, if successful, would have invalidated a restrictive covenant that AMA considers valuable — is reflected in the non-wage component.

Lost future compensation ($1,200,000 claimed). Aldrich asserted in mediation that, as a result of AMA's wrongful termination and the "for cause" designation, he suffered $1,200,000 in lost future compensation over a two-year horizon, reflecting the diminution in his earning capacity and the difficulty of obtaining comparable employment in the entertainment industry while bearing the stigma of a "for cause" termination. While lost future earnings are generally taxable as ordinary income to the recipient (whether or not characterized as wages), the parties have agreed to treat a portion of the lost future compensation claim as non-wage settlement consideration in the overall allocation. This treatment reflects the settlement's compromise nature: the $1,200,000 claimed amount was disputed by AMA, Aldrich's mitigation efforts were contested, and the parties agreed to resolve the claim as part of a global settlement rather than separately valuing each component with precision. The characterization of a portion of lost future earnings as non-wage settlement consideration, rather than as wages, is supportable because the amounts are not attributable to services actually performed for AMA and are not severance or back pay in the traditional sense, but rather represent damages for the harm caused by the allegedly wrongful termination.

Attorneys' fees component. Aldrich claimed $750,000 in attorneys' fees incurred in prosecuting his claims against AMA. Under IRC § 62(a)(20), an above-the-line deduction is available for attorneys' fees and court costs paid by a taxpayer in connection with certain employment-related claims, including claims of unlawful discrimination and certain whistleblower claims. To the extent Aldrich's claims fall within the scope of § 62(a)(20), he may deduct attorneys' fees on his individual tax return regardless of how the settlement payment is characterized. The Settlement Agreement does not separately allocate attorneys' fees; rather, they are subsumed in the non-wage component. Aldrich's counsel, Cameron Whitfield, has indicated that Whitfield & Associates' fee arrangement with Aldrich is a 33.3% contingency fee, and that Whitfield & Associates intends to issue a Form 1099 to Aldrich for the portion of the settlement allocable to attorneys' fees if required. AMA's reporting obligations with respect to the attorneys' fees component are limited to accurately reporting the non-wage component on Form 1099-MISC.

B. IRC § 104(a)(2) Analysis — Excludability of Damages

A threshold question is whether any portion of the non-wage component is excludable from Aldrich's gross income under IRC § 104(a)(2). Under that provision, gross income does not include "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness."

The scope of the § 104(a)(2) exclusion has been construed narrowly by the courts and the IRS. In Commissioner v. Schleier, 515 U.S. 323 (1995), the United States Supreme Court held that the exclusion applies only to damages received "on account of" personal physical injuries or physical sickness, and established a two-prong test: (1) the taxpayer must have suffered a personal physical injury or physical sickness, and (2) the damages must have been received on account of that physical injury or physical sickness. The Court emphasized that emotional distress damages, standing alone, do not qualify for the § 104(a)(2) exclusion.

Congress codified this interpretation in the Small Business Job Protection Act of 1996, amending § 104(a)(2) to add the word "physical" before "injuries" and "sickness." The legislative history confirms that emotional distress is not treated as a physical injury or physical sickness and that damages for emotional distress are excludable only if the emotional distress is attributable to a physical injury or physical sickness. See H.R. Rep. No. 104-586, at 143–44 (1996).

Application to Aldrich. Aldrich has not alleged any physical injury in connection with his claims against AMA. His complaint — which this office reviewed in detail in connection with the preparation of AMA's cross-complaint and motion for summary adjudication — asserts wrongful termination, breach of contract, and related claims. Aldrich's emotional distress claim is based on the psychological and reputational harm of the "for cause" termination, including anxiety, depression, insomnia, and damage to his standing in the entertainment industry. While these are genuine harms, they are not "physical injuries" or "physical sickness" within the meaning of § 104(a)(2). Aldrich's medical records — to the extent reviewed in discovery — reflect treatment for anxiety and sleep disturbance but do not document any physical injury caused by AMA's conduct.

Conclusion. The non-wage component ($1,292,500) does not qualify for exclusion from gross income under IRC § 104(a)(2). The entire $1,292,500 is taxable income to Aldrich as ordinary income. This conclusion does not affect AMA's withholding obligations, as the non-wage component is not subject to withholding regardless of its taxability to Aldrich (see Section IV.C below).

C. Withholding and Reporting

Because the non-wage component is not in the nature of "wages" as defined in IRC § 3401(a), it is not subject to federal income tax withholding or FICA taxes. The withholding obligation under IRC § 3402 applies only to "wages" — that is, amounts paid for services rendered in an employer-employee relationship. Settlement payments that are in the nature of damages, general settlement consideration, or non-compensatory payments do not fall within the definition of wages, even if they are taxable income to the recipient. See Rev. Rul. 80-364, 1980-2 C.B. 294 (distinguishing between settlement payments that are wages subject to withholding and those that are not).

Similarly, FICA taxes under IRC §§ 3101 and 3121 apply only to "wages" as defined in § 3121(a), which tracks the § 3401(a) definition with certain modifications. Because the non-wage component does not represent remuneration for services, it is not subject to FICA.

AMA must report the $1,292,500 non-wage component on a Form 1099-MISC (Miscellaneous Information). The payment should be reported in box 3 ("Other income") of Form 1099-MISC. Box 3 is the appropriate reporting box for settlement payments that constitute taxable income to the recipient but are not wages, nonemployee compensation, rents, royalties, or other specifically categorized income. The payment should not be reported on Form 1099-NEC (Nonemployee Compensation), as Aldrich is not providing services to AMA in connection with the settlement, and characterization of the non-wage component as "nonemployee compensation" would be inaccurate and could subject AMA to penalties for incorrect information reporting.

The Form 1099-MISC should be issued by Aurelius Media Americas Inc. (EIN: 83-2194067) for tax year 2024. The form must be furnished to Aldrich no later than January 31, 2025, and filed with the IRS by February 28, 2025 (or March 31, 2025, if filing electronically).

Aldrich is solely responsible for making estimated tax payments on the non-wage component, as no withholding will be applied by AMA. AMA has no obligation to advise Aldrich regarding estimated tax payments, and the Settlement Agreement should include a provision acknowledging this fact.

Additionally, if any portion of the non-wage component is paid to Aldrich's counsel (Whitfield & Associates) — for example, if the settlement payment is directed to Whitfield & Associates' client trust account — AMA may be required to issue a separate Form 1099-MISC to Whitfield & Associates for the portion of the payment received by the law firm. Under Treas. Reg. § 1.6045-5(a), the payor of a settlement payment must generally report the payment to the attorney if the payment is made to the attorney's trust account or if the attorney's name is on the settlement check. AMA should confirm the payment arrangements and issue 1099s accordingly.

V. Tax Treatment of RSU Acceleration

A. Background

During his tenure as Senior Vice President of Original Content & Executive Producer at AMA, Aldrich was granted a total of 42,500 restricted stock units ("RSUs") in Aurelius Global Media Group PLC ("AGMG"), the London Stock Exchange-listed parent company of AMA (ticker: AGMG). The RSUs were granted under the AGMG 2018 Long-Term Incentive Plan (the "Equity Plan") and were subject to time-based vesting over a four-year period, with 25% vesting on each anniversary of the grant date.

At the time of Aldrich's termination on October 14, 2022, a total of 27,200 RSUs had vested, and 15,300 RSUs remained unvested. Under the terms of the Equity Plan and Aldrich's RSU award agreements, unvested RSUs would ordinarily be forfeited upon termination of employment, subject to the plan administrator's discretion to accelerate vesting in limited circumstances (including settlement of employment-related disputes, with the approval of the AGMG Compensation Committee).

As part of the settlement negotiations, the parties agreed that 10,200 of the 15,300 unvested RSUs will be accelerated (i.e., vested) upon the occurrence of the later of: (a) execution of the Settlement Agreement by both parties, and (b) filing of the Stipulation for Dismissal with Prejudice in Aldrich v. AMA, LASC Case No. 22STCV41087. The remaining 5,100 unvested RSUs will be forfeited by Aldrich and will be cancelled by AGMG.

B. Tax Treatment

Applicable law. Under IRC § 83(a), if property is transferred to any person in connection with the performance of services, the excess of the fair market value of the property (determined without regard to any restriction other than a restriction which by its terms will never lapse) over the amount paid for the property is included in the gross income of the person who performed the services at the first time the rights of the person having the beneficial interest in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. In the case of RSUs, the "transfer" of property occurs at the time the RSUs vest — that is, when the underlying shares are delivered to the employee and the employee's rights are no longer subject to a substantial risk of forfeiture.

Taxable event. Upon acceleration of the 10,200 RSUs, the fair market value of the underlying AGMG shares at the vesting date will be includable in Aldrich's gross income as ordinary compensation income. The settlement-driven acceleration does not change the character of the income; it remains ordinary income from the performance of services, taxable under § 83(a).

Estimated value. Based on the closing price of AGMG ordinary shares on the London Stock Exchange as of November 30, 2023, of approximately £19.50 per share, and using the then-current GBP/USD exchange rate of approximately $1.24 per £1.00, the estimated U.S. dollar value per share is approximately $24.18. The estimated aggregate value of 10,200 RSUs is therefore approximately $246,636 (10,200 × $24.18). The actual taxable amount will depend on the AGMG share price and the applicable exchange rate on the vesting date, which is expected to occur in late January or early February 2024.

Withholding obligations. RSU vesting is subject to income tax withholding (federal and state) and FICA, in the same manner as cash wages. Under IRC § 3402(a) and Treas. Reg. § 31.3402(a)-1, the employer is required to withhold federal income tax on the fair market value of shares delivered upon RSU vesting. Similarly, the vesting is subject to Social Security tax (up to the wage base), Medicare tax, and Additional Medicare tax.

The withholding obligation with respect to the RSU acceleration is allocated to the entity that administers the equity compensation plan. Because the RSUs are AGMG shares granted under the AGMG 2018 Long-Term Incentive Plan, the plan is administered by AGMG (or its designated plan administrator), not by AMA. However, because Aldrich performed the services for which the RSUs were granted as an employee of AMA — a U.S. subsidiary of AGMG — the withholding and reporting obligations under U.S. tax law must be coordinated between AMA and AGMG.

Coordination with AGMG. AMA should promptly coordinate with AGMG to ensure proper tax compliance in connection with the RSU acceleration. Specifically, AMA should engage with AGMG's Chief Financial Officer, Malcolm Dunmore, and AGMG's equity compensation plan administrator to address the following:

1. Withholding method. The Equity Plan and Aldrich's RSU award agreements should specify the method for satisfying withholding obligations upon vesting. Common methods include "sell-to-cover" (in which a portion of the vested shares is sold on the open market to generate cash for withholding) and "cash withholding" (in which the employee remits cash to the employer to cover withholding, or the employer nets shares). AMA should confirm which method will be used and ensure that the withholding amount is calculated based on the fair market value of the shares on the vesting date using the applicable exchange rate.

2. Reporting. The RSU income should be reported on Aldrich's Form W-2 for tax year 2024. If AGMG administers the plan through a U.S. payroll entity (such as AMA), the income should appear on the W-2 issued by AMA. If AGMG administers the plan through a separate payroll or equity compensation platform, AMA should confirm that the income is reported on a U.S. Form W-2 (rather than a UK payroll mechanism such as a P60 or P45), because Aldrich is a U.S. taxpayer and the services giving rise to the RSU grants were performed in the United States.

3. Plan terms. AMA should ensure that the Settlement Agreement references the RSU acceleration in a manner consistent with the Equity Plan's terms, including any required consent from the AGMG Compensation Committee or the plan administrator. If the plan requires board-level or committee-level approval for accelerated vesting in the context of a legal settlement, AMA should confirm that such approval has been obtained or is being sought concurrently with the execution of the Settlement Agreement.

Forfeited RSUs (5,100). The forfeiture of the remaining 5,100 unvested RSUs has no tax consequence to either Aldrich or AMA. Aldrich never recognized income with respect to these RSUs because they had not vested and no § 83(b) election was made at the time of grant. AMA, for its part, does not recognize a deduction for the forfeiture of unvested RSUs; under IRC § 83(h), the employer's deduction for property transferred in connection with services corresponds to the amount included in the service provider's income, and since no income was included, no deduction is available. The forfeited RSUs will simply be cancelled by AGMG under the terms of the Equity Plan.

VI. Allocation Reasonableness and IRS Risk

A. Standards for Reviewing Allocation

The IRS retains the authority to challenge the tax allocation of settlement payments if it determines that the allocation does not reflect the economic substance of the settlement. While the IRS generally respects an allocation agreed upon by adverse parties in an arm's-length negotiation, it is not bound by the parties' characterization if the allocation is inconsistent with the substance of the underlying claims. See Robinson v. Commissioner, 102 T.C. 116, 130–31 (1994) (holding that the Tax Court will look to the "nature of the claim that was the actual basis for settlement" to determine the tax treatment of settlement proceeds, and that while an express allocation in a settlement agreement is "strong evidence" of the parties' intent, the IRS may look behind the allocation if it is inconsistent with the economic substance).

In Bagley v. Commissioner, T.C. Memo 2014-30, the Tax Court reiterated the principle that the tax treatment of settlement payments is determined by the nature and basis of the underlying claims, and that the parties' allocation will be respected if it reflects a genuine, arm's-length negotiation and is consistent with the damages theories advanced in the litigation. The Tax Court identified several factors relevant to its analysis:

1. Arm's-length negotiation. Whether the allocation was negotiated between adverse parties, each represented by independent counsel, with competing tax interests. An allocation agreed upon in a friendly or collusive manner — for example, where the payor is indifferent to the allocation, or where both parties benefit from the same tax treatment — is more likely to be challenged.

2. Consistency with underlying claims. Whether the allocation is consistent with the damages theories and amounts asserted in the pleadings, mediation briefs, or settlement negotiations. An allocation that attributes a disproportionate share of the settlement to a category of damages that was not meaningfully litigated or claimed is vulnerable to challenge.

3. Consistent reporting. Whether both parties report the settlement payments consistently with the agreed allocation on their respective tax returns. Inconsistent reporting — for example, where the payor deducts the full amount as wages but the payee reports it as non-wage income — is a red flag for the IRS.

4. Express allocation in the settlement agreement. Whether the settlement agreement contains a specific, written allocation and the basis for each component. A settlement agreement that is silent on the allocation leaves both parties vulnerable to competing characterizations by the IRS.

B. Assessment of the 45/55 Allocation

Applying the standards described above, the 45% wage / 55% non-wage allocation of the $2,350,000 Aldrich settlement payment is defensible on each relevant factor:

Arm's-length negotiation. The allocation was negotiated between AMA (represented by Devon Archer of Calderwood & Harkness LLP) and Aldrich (represented by Cameron Whitfield of Whitfield & Associates). The two parties are genuinely adverse: AMA is the defendant in a wrongful termination action, and Aldrich is the plaintiff; AMA has also asserted counterclaims against Aldrich for breach of contract, trade secret misappropriation, and related claims. The parties had competing tax interests in the allocation: Aldrich preferred a higher non-wage allocation to minimize immediate withholding and defer tax payments, while AMA preferred a higher wage allocation to bolster its withholding compliance position and to strengthen its § 162(a) deduction for compensation. The 45/55 split represents a genuine compromise between the parties' initial proposals (40/60 by Aldrich and 50/50 by AMA), and neither party obtained its preferred allocation.

Consistency with underlying claims. The allocation is closely tied to the economic substance of the claims and settlement components:

• The wage component ($1,057,500) corresponds to amounts that would unambiguously have been treated as wages had they been paid during the normal course of Aldrich's employment: severance of $970,000 (24 months' base salary under the Employment Agreement) and a partial pro-rata bonus of $87,500. These are the types of payments that the IRS consistently treats as wages, and the allocation does not overstate or understate the wage component relative to the underlying contractual entitlements.

• The non-wage component ($1,292,500) corresponds to the remaining elements of Aldrich's claims: emotional distress damages ($500,000 claimed), lost future compensation ($1,200,000 claimed, only a portion of which is allocated to the non-wage component), attorneys' fees ($750,000 claimed), unreimbursed business expenses ($28,400 claimed), and the general consideration for Aldrich's release of all claims, including his declaratory relief claim regarding the restrictive covenant. These are the types of damages that are properly characterized as non-wage settlement consideration.

• The allocation does not attribute 100% of the payment to either the wage or non-wage category, which would invite heightened scrutiny. The split falls within the range of allocations that have been approved or sustained in comparable employment settlement cases. See, e.g., Rivera v. Tarvick West, Inc., 430 F.3d 1253, 1256 (9th Cir. 2005) (upholding negotiated allocation between wage and non-wage components of an employment settlement); Pipitone v. United States, 180 F.3d 859, 864–65 (7th Cir. 1999) (holding that an express allocation in a settlement agreement should be respected unless the government can demonstrate that it is inconsistent with the substance of the claims).

AMA's deduction. The allocation also has implications for AMA's tax deductions. AMA may deduct the wage component ($1,057,500) as an ordinary and necessary business expense under IRC § 162(a), as compensation paid to an employee (or former employee) in connection with the resolution of employment-related claims. The non-wage component ($1,292,500) may also be deductible under IRC § 162(a) as a settlement payment arising from AMA's business operations, provided the settlement is not characterized as a penalty or fine within the meaning of IRC § 162(f). Section 162(f) denies a deduction for any amount paid or incurred to or at the direction of a government (or specified nongovernmental entity) in relation to the violation of any law or the investigation or inquiry by a governmental entity into the potential violation of any law. Because the Aldrich settlement is a private settlement between AMA and a former employee, and does not involve any government-directed payment, the § 162(f) limitation does not apply. The full $2,350,000 cash settlement payment should therefore be deductible by AMA as an ordinary and necessary business expense under § 162(a).

C. Risk Assessment

Based on the analysis above, the risk of an IRS challenge to the 45/55 allocation is assessed as low. The allocation is defensible on each of the factors identified in Robinson, Bagley, and related authority, and is consistent with the economic substance of the settlement. The IRS is unlikely to challenge the allocation provided that the following conditions are met:

1. The Settlement Agreement clearly specifies the allocation and identifies the wage component ($1,057,500) and the non-wage component ($1,292,500) with specificity, including the basis for each component (severance equivalent, partial pro-rata bonus, emotional distress damages, general settlement consideration, etc.).

2. Both AMA and Aldrich report the settlement payments consistently with the agreed allocation on their respective tax returns. AMA should report the wage component on Aldrich's Form W-2 and the non-wage component on a Form 1099-MISC, and should deduct the settlement payments on its corporate tax return in a manner consistent with the allocation.

3. AMA properly withholds federal and California income taxes, FICA, and SDI from the wage component, and does not withhold on the non-wage component.

4. The Settlement Agreement includes provisions requiring consistent reporting by both parties and acknowledging that each party will bear the consequences of any adverse tax determination relating to its own tax obligations.

VII. Recommendations

Based on the analysis set forth above, the following actions are recommended:

A. Settlement Agreement Language

1. Tax allocation provision. The Settlement Agreement should include a specific provision setting forth the 45% wage / 55% non-wage allocation, identifying the wage component ($1,057,500) and the non-wage component ($1,292,500) with specificity. The provision should describe the basis for each component — e.g., stating that the wage component represents severance-equivalent pay and a partial pro-rata bonus, and that the non-wage component represents emotional distress damages, general settlement consideration, and other non-wage damages. This level of specificity will provide the strongest evidentiary support for the allocation in the event of an IRS inquiry.

2. Consistent reporting provision. The Settlement Agreement should include a provision requiring both AMA and Aldrich to report the settlement payments consistently with the agreed allocation for all federal and state tax purposes, including on IRS Forms W-2, 1099-MISC, and their respective income tax returns. The provision should state that neither party will take a position on any tax return, amended return, or in any proceeding before the IRS or any state taxing authority that is inconsistent with the agreed allocation, unless required to do so by a final determination of a court of competent jurisdiction or by a binding written agreement with the IRS.

3. No tax advice disclaimer. The Settlement Agreement should include a provision acknowledging that neither AMA nor its counsel (Calderwood & Harkness LLP) has provided tax advice to Aldrich and that Aldrich has been advised to consult his own tax advisor regarding the federal, state, and local tax consequences of the settlement payments, including the tax treatment of the wage and non-wage components and the RSU acceleration. This provision is important to protect AMA from any future claim by Aldrich that he relied on AMA's or Calderwood & Harkness's characterization of the tax treatment.

4. Withholding and tax responsibility provision. The Settlement Agreement should specify that AMA will withhold applicable federal and state income taxes, FICA contributions (employee share), and California SDI from the wage component, and that the net amount (after withholding) will be paid to Aldrich. The provision should further state that Aldrich is solely responsible for any additional tax liability arising from the settlement payments, including any federal or state income taxes, estimated tax payments, interest, or penalties attributable to the non-wage component or to any underwitholding on the wage component.

B. RSU Coordination

1. Notification to AGMG. AMA should promptly notify AGMG's equity compensation team of the RSU acceleration provision in the Settlement Agreement. The primary contact is Malcolm Dunmore, Chief Financial Officer, Aurelius Global Media Group PLC, 34 Kingsway, London WC2B 6EX, United Kingdom. Notification should be made by email and followed by formal written correspondence, with a copy to AGMG's General Counsel.

2. Confirmation of vesting mechanics. AMA should confirm with AGMG and the plan administrator: (a) the vesting date for the 10,200 accelerated RSUs (which should be the later of execution of the Settlement Agreement and filing of the Stipulation for Dismissal); (b) the applicable withholding method (sell-to-cover, net share settlement, or cash withholding); and (c) the reporting mechanism (U.S. Form W-2 issued by AMA, or alternative reporting through AGMG's equity platform). AMA should ensure that the withholding amount is calculated based on the AGMG share price and GBP/USD exchange rate on the vesting date.

3. Plan compliance. AMA should ensure that the Settlement Agreement references the RSU acceleration in a manner consistent with the AGMG 2018 Long-Term Incentive Plan's terms, including any required consent from the AGMG Compensation Committee, the plan administrator, or any other governing body. If such consent has not yet been obtained, AMA should make the RSU acceleration provision in the Settlement Agreement contingent upon receipt of the required consent and should promptly initiate the consent process.

C. Payroll Processing

1. Wage component processing. The wage component ($1,057,500) should be processed through AMA's payroll system (NovaPay Solutions Inc.) as a supplemental wage payment. AMA's Payroll Manager, Karen Fong, should be notified of the forthcoming settlement payment and provided with a copy of the executed Settlement Agreement and this memorandum (subject to privilege protections). Karen Fong should ensure that the settlement wage payment is coded as a supplemental wage payment, that the appropriate federal and California withholding rates are applied (including the mandatory 37% federal supplemental rate on amounts exceeding $1 million and the 10.23% California supplemental rate on amounts exceeding $1 million), and that FICA and SDI contributions are properly calculated and remitted.

2. Non-wage component payment. The non-wage component ($1,292,500) should be paid by AMA directly — not through the NovaPay payroll system — via wire transfer to Gavin Aldrich or to his counsel's client trust account (Whitfield & Associates IOLTA Account), as specified in the Settlement Agreement. No withholding should be applied to this payment. AMA's Treasury or Finance department should process the wire transfer and retain documentation of the payment for tax reporting and record-retention purposes.

3. Tax form deadlines. AMA should issue the Form W-2 and Form 1099-MISC to Aldrich by January 31, 2025, for tax year 2024 payments. AMA should file copies of the W-2 with the Social Security Administration and the 1099-MISC with the IRS by the applicable deadlines (February 28, 2025, for paper filings; March 31, 2025, for electronic filings). California state copies (DE 6 and related filings) should be filed with the EDD in accordance with California requirements.

D. Record Retention

1. AMA should retain the following documents in connection with the Aldrich settlement for a minimum of seven (7) years from the date of the last tax filing to which the settlement relates:

(a) The executed Settlement Agreement and Mutual Release;

(b) This tax allocation memorandum and any supplements or updates thereto;

(d) Payroll records reflecting the processing of the wage component through NovaPay Solutions Inc.;

(e) Wire transfer confirmations and bank records for the non-wage component payment;

(f) All correspondence between Devon Archer and Cameron Whitfield regarding the tax allocation, including the January 10, 2024 email confirming the 45/55 split;

(g) Records of RSU acceleration, including correspondence with AGMG, vesting date documentation, and withholding calculations;

(h) Any other documents related to the tax treatment or reporting of the settlement payments.

Assuming the 2024 tax returns are filed in April 2025, the minimum retention period extends through approximately April 2032 (2025 filing date + 7 years). AMA should calendar this retention deadline and ensure that the documents are stored in a manner consistent with AMA's document retention policies and accessible in the event of an IRS audit.

VIII. Conclusion

The 45% wage / 55% non-wage allocation of the $2,350,000 Aldrich settlement cash payment is defensible and consistent with the economic substance of the underlying claims resolved by the Settlement Agreement. The allocation reflects a genuine, arm's-length negotiation between adverse parties with competing tax interests, and is supported by the specific contractual entitlements and damages theories at issue in the litigation.

AMA should withhold applicable federal and California income taxes, FICA, and SDI from the wage component ($1,057,500) and report it on a Form W-2 for tax year 2024. AMA should issue a Form 1099-MISC (Box 3) for the non-wage component ($1,292,500) without withholding. The RSU acceleration (10,200 RSUs, estimated value approximately $246,636) should be coordinated with AGMG's equity compensation team to ensure proper withholding and reporting. The full $2,350,000 cash payment and the value of the accelerated RSUs should be deductible by AMA under IRC § 162(a).

Both AMA and Aldrich should report the settlement payments consistently with the agreed allocation on their respective tax returns. The Settlement Agreement should include the specific provisions described in Section VII above to memorialize the allocation, ensure consistent reporting, and protect AMA from future claims regarding the tax treatment of the settlement.

Please do not hesitate to contact me if you have any questions regarding the analysis in this memorandum or if you would like to discuss any aspect of the recommended tax treatment.

This memorandum addresses federal and California state income and employment tax treatment only. If Aldrich has relocated to another state, maintains a residence or domicile in another jurisdiction, or otherwise has income tax obligations in jurisdictions other than California, additional analysis may be required to determine withholding and reporting obligations under the laws of those jurisdictions. This memorandum does not address potential international tax implications, including any UK tax obligations that may arise in connection with the AGMG RSU acceleration.

CALDERWOOD & HARKNESS LLP

By: ________

Nadia Petrov Associate, Tax & Employment Practice Group Calderwood & Harkness LLP 1900 Avenue of the Stars, Suite 2800 Los Angeles, California 90067 Telephone: (310) 555-4200

Email: npetrov@calderwoodharkness.com

cc: Devon Archer, Calderwood & Harkness LLP (via email, privileged) File: Matter No. 1017-00004

Category	Percentage	Amount	Tax Treatment
Wages (back pay, severance equivalent)	45%	$1,057,500	Subject to federal and state income tax withholding and FICA; reported on Form W-2
Non-wage damages (emotional distress, general damages, settlement consideration)	55%	$1,292,500	Not subject to withholding; reported on Form 1099-MISC (Box 3)
Total	100%	$2,350,000

CALDERWOOD & HARKNESS LLP 1900 Avenue of the Stars, Suite 2800 Los Angeles, California 90067
CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Gregory Tanaka, Vice President, Legal & Compliance, Aurelius Media Americas Inc.
FROM: Nadia Petrov
DATE: January 12, 2024
RE: Tax Treatment of Aldrich Settlement Payments — Wage vs. Non-Wage Allocation
Matter No.: 1017-00004
I. Purpose and Background
This memorandum analyzes the federal and California state income tax treatment of the $2,350,000 lump-sum settlement payment to Gavin Aldrich, former Senior Vice President of Original Content & Executive Producer of Aurelius Media Americas Inc. ("AMA"), and the agreed allocation between wage and non-wage components. This memorandum is intended to guide AMA's compliance with its withholding, reporting, and deduction obligations in connection with the settlement, and to assess the defensibility of the agreed allocation in the event of an IRS examination.
The Aldrich Settlement Agreement and Mutual Release (the "Settlement Agreement") is expected to be executed on or about January 19, 2024. The Settlement Agreement will resolve all claims and counterclaims in Aldrich v. Aurelius Media Americas Inc., Los Angeles Superior Court Case No. 22STCV41087, including Aldrich's claims for wrongful termination in violation of public policy, breach of the implied covenant of good faith and fair dealing, declaratory relief regarding the enforceability of a post-employment restrictive covenant, and unreimbursed business expense claims, as well as AMA's cross-complaint against Aldrich for breach of the Employment Agreement dated September 5, 2017 (as amended August 1, 2020), misappropriation of trade secrets under the California Uniform Trade Secrets Act ("CUTSA"), breach of fiduciary duty, and conversion.
In addition to the $2,350,000 lump-sum cash payment, the Settlement Agreement provides for the acceleration of 10,200 of Aldrich's 15,300 unvested restricted stock units ("RSUs") in Aurelius Global Media Group PLC ("AGMG"), the publicly traded parent company of AMA. The remaining 5,100 unvested RSUs will be forfeited by Aldrich as part of the settlement consideration.
During mediation and subsequent settlement negotiations, the parties — through their respective counsel, Devon Archer of Calderwood & Harkness LLP on behalf of AMA, and Cameron Whitfield of Whitfield & Associates on behalf of Aldrich — addressed the question of how the lump-sum cash payment should be allocated between wage and non-wage components for tax purposes. On January 10, 2024, the parties confirmed by email their agreement to a 45% wage / 55% non-wage allocation of the $2,350,000 cash settlement payment. This memorandum analyzes the propriety and defensibility of that allocation, identifies AMA's withholding and reporting obligations, and provides recommendations for implementation.
This memorandum does not constitute tax advice to Gavin Aldrich, and AMA has not undertaken any obligation to advise Aldrich regarding the tax consequences of the settlement. Aldrich has been advised through his counsel to consult his own tax advisor concerning the federal, state, and any other tax implications of the settlement payments he will receive. AMA's sole obligation is to properly withhold and report on its side in accordance with applicable law.
II. Agreed Allocation
A. Summary Table
The parties have agreed to the following allocation of the $2,350,000 cash settlement payment:
The RSU acceleration (10,200 RSUs) is treated separately from the cash settlement payment and is addressed in Section V below.
B. Basis for the 45/55 Split
The allocation reflected above is the product of arm's-length negotiations between adverse parties, each represented by independent legal counsel. The parties originally proposed competing allocations that reflected their respective tax interests:
• Aldrich's initial position: Through Whitfield & Associates, Aldrich proposed a 40% wage / 60% non-wage allocation. This position reflected Aldrich's preference to minimize the amount subject to immediate withholding and payroll taxes, thereby retaining more cash at the time of payment and deferring tax obligations on the non-wage component to the filing of his individual tax return.
• AMA's initial position: AMA proposed a 50% wage / 50% non-wage allocation. AMA's preference for a higher wage allocation was driven in part by the desire to ensure that any IRS challenge to the allocation would be resolved in AMA's favor. Additionally, a higher wage allocation provides stronger support for AMA's deduction of the wage component as ordinary and necessary compensation expense under Internal Revenue Code ("IRC") § 162(a), and ensures that AMA has fulfilled its withholding obligations under IRC §§ 3401 and 3402.
The agreed 45% wage / 55% non-wage split was a negotiated compromise confirmed by email between Devon Archer and Cameron Whitfield on January 10, 2024. The allocation reflects the economic substance of the underlying claims and settlement components, as detailed in Sections III and IV below. The fact that both parties made concessions from their initial positions, and that the final allocation falls between the two opening positions, is evidence of genuine arm's-length bargaining — a factor that the IRS and the Tax Court consider highly relevant in determining whether to respect a negotiated allocation. See Section VI below.
III. Analysis of the Wage Component ($1,057,500)
A. Characterization
The wage component of $1,057,500 represents compensation that Aldrich would have received from AMA had his employment not been terminated "for cause" under Section 7.2(b) of the Employment Agreement dated September 5, 2017 (as amended August 1, 2020) (the "Employment Agreement"). As background, AMA terminated Aldrich's employment on October 14, 2022, citing multiple grounds under the Employment Agreement's "for cause" provision, including alleged misuse of company resources, failure to comply with content development approval protocols, and unauthorized disclosure of confidential project information. Aldrich contested the validity of the "for cause" termination and asserted that the true reason for his termination was his refusal to acquiesce in management decisions that he believed violated AMA's internal content standards policies.
Specifically, the $1,057,500 wage component corresponds to the following amounts:
Severance equivalent: Under Section 8.1 of the Employment Agreement, Aldrich was entitled to severance of twenty-four (24) months' base salary if terminated without cause or if he resigned for "good reason" (as defined in Section 8.1(c) of the Employment Agreement). Aldrich's base salary at the time of termination was $485,000 per annum. Accordingly, the severance equivalent is $485,000 × 2 = $970,000. Because the settlement effectively resolves Aldrich's claim that his termination was not validly "for cause" — and thus that he was entitled to severance — this amount represents the largest component of the wage allocation. It is in the nature of wages because it substitutes for salary that Aldrich would have received over a 24-month period had AMA honored its severance obligations under the Employment Agreement.
Partial pro-rata bonus: Under Section 4.2 of the Employment Agreement, Aldrich was eligible for an annual discretionary performance bonus of up to 50% of base salary. Aldrich's last actual annual bonus was $225,000 for fiscal year 2021 (paid in Q1 2022). For fiscal year 2022, Aldrich worked approximately 9.5 months (from January 1, 2022, through his October 14, 2022 termination) before being terminated. His pro-rata bonus for FY 2022, based on his FY 2021 bonus, would have been approximately $225,000 × (9.5/12) = $178,125, although the parties agreed to use the round figure of approximately $168,750 as a reasonable estimate given the discretionary nature of the bonus. Of this amount, $87,500 has been allocated to the wage component; the remainder is subsumed in the non-wage component as general settlement consideration, reflecting the inherent uncertainty as to whether a discretionary bonus would have been awarded at all for FY 2022 and, if so, in what amount.
The total wage-related amounts are: $970,000 (severance equivalent) + $87,500 (partial pro-rata bonus) = $1,057,500, which equals 45% of the $2,350,000 total cash settlement payment.
B. Federal Tax Treatment
The $1,057,500 wage component is subject to federal income tax withholding and employment taxes under the following provisions of the Internal Revenue Code:
Federal income tax withholding. Under IRC § 3401(a), the term "wages" includes all remuneration for services performed by an employee for an employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The term encompasses back pay, severance pay, and amounts paid in settlement of employment-related claims that are in the nature of compensation for services. See Treas. Reg. § 31.3401(a)-1(a)(5). The settlement payment's wage component — which substitutes for severance and bonus compensation — falls squarely within this definition.
Under IRC § 3402, AMA is required to withhold federal income tax from the wage component at the time of payment. The applicable withholding rate depends on the method used:
If AMA uses the percentage method, withholding is computed based on Aldrich's most recent Form W-4 on file with AMA. However, because Aldrich's employment was terminated on October 14, 2022, and more than one year will have elapsed before the settlement payment is made, AMA should confirm whether it has a valid W-4 on file or whether Aldrich should be asked to submit a new W-4 in connection with the settlement payment.
If AMA uses the supplemental wage flat rate method, the applicable rate is 22% for supplemental wages of $1 million or less, and 37% for supplemental wages in excess of $1 million during the calendar year. Because the $1,057,500 wage payment alone exceeds $1 million, AMA must withhold at 37% on the amount exceeding $1 million — i.e., 22% on the first $1,000,000 ($220,000) and 37% on the remaining $57,500 ($21,275), for total federal income tax withholding of $241,275. However, if Aldrich receives any other supplemental wages from AMA during 2024 (which is unlikely given his termination), the $1 million threshold would be computed on an aggregate basis across all supplemental wage payments.
FICA taxes. Under IRC §§ 3101 (employee share) and 3111 (employer share), the wage component is subject to the Federal Insurance Contributions Act ("FICA") taxes, which consist of the following:
Social Security tax (Old-Age, Survivors, and Disability Insurance — "OASDI"): The employee share is 6.2% on wages up to the Social Security wage base, which is $168,600 for 2024. AMA must also pay the employer share of 6.2% on wages up to the same threshold. Because Aldrich has not earned any wages from AMA (or, to our knowledge, from any other employer) during 2024, the full $1,057,500 wage payment will be subject to Social Security tax, but only on the first $168,600. The employee Social Security tax on $168,600 is $10,453.20, and the employer Social Security tax is the same amount.
Medicare tax (Hospital Insurance — "HI"): The employee share is 1.45% on all wages, with no wage ceiling. AMA must also pay the employer share of 1.45%. The employee Medicare tax on $1,057,500 is $15,333.75, and the employer Medicare tax is the same amount.
Additional Medicare tax: Under IRC § 3101(b)(2), an additional 0.9% employee-side Medicare tax applies to wages exceeding $200,000 (for single filers; $250,000 for married filing jointly). There is no employer match for the additional Medicare tax. Under IRC § 3102(f), AMA is required to withhold the additional 0.9% Medicare tax on wages paid to Aldrich in excess of $200,000 during the 2024 calendar year, without regard to Aldrich's filing status or wages received from other employers. Because the $1,057,500 wage payment exceeds $200,000, AMA must withhold the additional 0.9% on $857,500 ($1,057,500 − $200,000), resulting in additional Medicare tax withholding of $7,717.50.
Federal Unemployment Tax Act ("FUTA"). Under IRC § 3301, AMA is liable for FUTA tax at a rate of 6.0% (before credit for state unemployment taxes) on the first $7,000 of wages paid to each employee during the calendar year. Because Aldrich has not received wages from AMA in 2024, the first $7,000 of the settlement wage payment is subject to FUTA. Given AMA's compliance with California's state unemployment insurance program, AMA should be eligible for the maximum FUTA credit of 5.4%, resulting in a net FUTA rate of 0.6% and a maximum FUTA liability of $42.00. This is an employer-side obligation only.
C. California State Tax Treatment
California imposes state income tax withholding and employment taxes on amounts constituting wages under state law, which generally conforms to the federal definition of wages for withholding purposes:
California income tax withholding. Under California Revenue and Taxation Code ("R&TC") § 13009, employers are required to withhold California personal income tax from wages paid to employees. For purposes of California withholding, "wages" has the same meaning as under IRC § 3401(a), with certain modifications not relevant here. The $1,057,500 wage component is therefore subject to California income tax withholding.
California does not conform to the federal supplemental wage flat rate of 22%/37%. Instead, California withholding on supplemental wages is calculated either using the employee's filing status and applicable tax brackets (the "method A" approach) or at the flat supplemental wage rate specified by the Employment Development Department ("EDD"). For 2024, the California supplemental wage flat rate is 6.6%, except that for bonuses and supplemental wage payments exceeding $1,000,000 in a calendar year, the rate is 10.23%. Because the $1,057,500 wage payment exceeds $1,000,000, AMA should apply the 10.23% rate to the amount exceeding $1,000,000 — i.e., 6.6% on the first $1,000,000 ($66,000) and 10.23% on the remaining $57,500 ($5,882.25), for total California income tax withholding of approximately $71,882.25. Alternatively, AMA may calculate withholding using the method A approach if Aldrich's California DE 4 (Employee's Withholding Allowance Certificate) is on file and indicates that the method A approach would result in more accurate withholding.
California State Disability Insurance ("SDI"). SDI contributions are required on wages up to the SDI taxable wage limit, which is $153,164 for 2024. The SDI rate for 2024 is 1.1%. Because Aldrich was terminated on October 14, 2022, and has not received any wages from AMA during 2023 or 2024, no SDI has been withheld from Aldrich's wages during 2024. AMA must therefore withhold SDI at 1.1% on the first $153,164 of the $1,057,500 wage payment, resulting in SDI withholding of $1,684.80. No SDI is required on wages above the $153,164 ceiling.
California Employment Training Tax ("ETT") and State Unemployment Insurance ("SUI"). ETT and SUI are employer-side obligations. ETT is assessed at 0.1% on the first $7,000 of wages per employee per year. SUI rates vary by employer; AMA's payroll department should compute the applicable SUI rate and contribution based on AMA's current EDD rate schedule. These amounts are relatively small and should be calculated as part of normal payroll processing.
D. Reporting
AMA must report the $1,057,500 wage component on a Form W-2 (Wage and Tax Statement) issued to Gavin Aldrich for tax year 2024. The W-2 should reflect the following:
• box 1 (Wages, tips, other compensation): $1,057,500
• box 2 (Federal income tax withheld): Actual amount withheld (calculated per Section III.B above)
• box 3 (Social Security wages): $168,600 (the 2024 wage base)
• box 4 (Social Security tax withheld): $10,453.20
• box 5 (Medicare wages and tips): $1,057,500
• box 6 (Medicare tax withheld): $15,333.75 (basic) + $7,717.50 (additional) = $23,051.25
• boxes 15–17 (State/employer's state ID/state wages, tips, etc.): California wages and withholding
• box 18 and 19 (Local wages and local income tax): As applicable
The W-2 should be issued by Aurelius Media Americas Inc. using its Employer Identification Number (EIN: 83-2194067) under its regular payroll processing through NovaPay Solutions Inc. AMA's payroll team should ensure that the settlement wage payment is processed as a supplemental wage payment, distinct from regular payroll, and that the appropriate withholding rates are applied as described above.
The Form W-2 must be furnished to Aldrich no later than January 31, 2025, and filed with the Social Security Administration by the same date (or by February 28, 2025, if filing on paper, or March 31, 2025, if filing electronically).
IV. Analysis of the Non-Wage Component ($1,292,500)
A. Characterization
The non-wage component of $1,292,500 represents damages and settlement consideration that are not in the nature of compensation for services rendered by Aldrich to AMA. Rather, this component reflects the resolution of tort-based and contract-based claims, emotional distress damages, and general consideration for the broad mutual release of all claims between the parties. The non-wage component corresponds to the following elements:
Emotional distress damages ($500,000 claimed). Aldrich's complaint alleged that AMA's wrongful termination and the public characterization of his departure as being "for cause" caused him severe emotional distress, including anxiety, depression, insomnia, and damage to his professional reputation within the entertainment industry. Aldrich claimed $500,000 in emotional distress damages. While the full $500,000 claimed amount is not separately allocated in the settlement, the emotional distress claim is a substantial basis for the non-wage component.
General settlement consideration. The non-wage component also includes consideration for Aldrich's release of all claims against AMA, its parent, subsidiaries, affiliates, officers, directors, employees, and agents. This release encompasses Aldrich's claims for: (i) wrongful termination in violation of public policy (Labor Code § 1102.5 retaliation theory); (ii) breach of the implied covenant of good faith and fair dealing; (iii) declaratory relief regarding the enforceability of the 18-month post-employment restrictive covenant set forth in Section 10.3 of the Employment Agreement; and (iv) a claim for unreimbursed business expenses in the amount of $28,400 (comprising travel, entertainment, and equipment expenses allegedly incurred by Aldrich during his final months of employment and not reimbursed by AMA). The value of Aldrich's release of these disparate claims — particularly the declaratory relief claim, which, if successful, would have invalidated a restrictive covenant that AMA considers valuable — is reflected in the non-wage component.
Lost future compensation ($1,200,000 claimed). Aldrich asserted in mediation that, as a result of AMA's wrongful termination and the "for cause" designation, he suffered $1,200,000 in lost future compensation over a two-year horizon, reflecting the diminution in his earning capacity and the difficulty of obtaining comparable employment in the entertainment industry while bearing the stigma of a "for cause" termination. While lost future earnings are generally taxable as ordinary income to the recipient (whether or not characterized as wages), the parties have agreed to treat a portion of the lost future compensation claim as non-wage settlement consideration in the overall allocation. This treatment reflects the settlement's compromise nature: the $1,200,000 claimed amount was disputed by AMA, Aldrich's mitigation efforts were contested, and the parties agreed to resolve the claim as part of a global settlement rather than separately valuing each component with precision. The characterization of a portion of lost future earnings as non-wage settlement consideration, rather than as wages, is supportable because the amounts are not attributable to services actually performed for AMA and are not severance or back pay in the traditional sense, but rather represent damages for the harm caused by the allegedly wrongful termination.
Attorneys' fees component. Aldrich claimed $750,000 in attorneys' fees incurred in prosecuting his claims against AMA. Under IRC § 62(a)(20), an above-the-line deduction is available for attorneys' fees and court costs paid by a taxpayer in connection with certain employment-related claims, including claims of unlawful discrimination and certain whistleblower claims. To the extent Aldrich's claims fall within the scope of § 62(a)(20), he may deduct attorneys' fees on his individual tax return regardless of how the settlement payment is characterized. The Settlement Agreement does not separately allocate attorneys' fees; rather, they are subsumed in the non-wage component. Aldrich's counsel, Cameron Whitfield, has indicated that Whitfield & Associates' fee arrangement with Aldrich is a 33.3% contingency fee, and that Whitfield & Associates intends to issue a Form 1099 to Aldrich for the portion of the settlement allocable to attorneys' fees if required. AMA's reporting obligations with respect to the attorneys' fees component are limited to accurately reporting the non-wage component on Form 1099-MISC.
B. IRC § 104(a)(2) Analysis — Excludability of Damages
A threshold question is whether any portion of the non-wage component is excludable from Aldrich's gross income under IRC § 104(a)(2). Under that provision, gross income does not include "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness."
The scope of the § 104(a)(2) exclusion has been construed narrowly by the courts and the IRS. In Commissioner v. Schleier, 515 U.S. 323 (1995), the United States Supreme Court held that the exclusion applies only to damages received "on account of" personal physical injuries or physical sickness, and established a two-prong test: (1) the taxpayer must have suffered a personal physical injury or physical sickness, and (2) the damages must have been received on account of that physical injury or physical sickness. The Court emphasized that emotional distress damages, standing alone, do not qualify for the § 104(a)(2) exclusion.
Congress codified this interpretation in the Small Business Job Protection Act of 1996, amending § 104(a)(2) to add the word "physical" before "injuries" and "sickness." The legislative history confirms that emotional distress is not treated as a physical injury or physical sickness and that damages for emotional distress are excludable only if the emotional distress is attributable to a physical injury or physical sickness. See H.R. Rep. No. 104-586, at 143–44 (1996).
Application to Aldrich. Aldrich has not alleged any physical injury in connection with his claims against AMA. His complaint — which this office reviewed in detail in connection with the preparation of AMA's cross-complaint and motion for summary adjudication — asserts wrongful termination, breach of contract, and related claims. Aldrich's emotional distress claim is based on the psychological and reputational harm of the "for cause" termination, including anxiety, depression, insomnia, and damage to his standing in the entertainment industry. While these are genuine harms, they are not "physical injuries" or "physical sickness" within the meaning of § 104(a)(2). Aldrich's medical records — to the extent reviewed in discovery — reflect treatment for anxiety and sleep disturbance but do not document any physical injury caused by AMA's conduct.
Conclusion. The non-wage component ($1,292,500) does not qualify for exclusion from gross income under IRC § 104(a)(2). The entire $1,292,500 is taxable income to Aldrich as ordinary income. This conclusion does not affect AMA's withholding obligations, as the non-wage component is not subject to withholding regardless of its taxability to Aldrich (see Section IV.C below).
C. Withholding and Reporting
Because the non-wage component is not in the nature of "wages" as defined in IRC § 3401(a), it is not subject to federal income tax withholding or FICA taxes. The withholding obligation under IRC § 3402 applies only to "wages" — that is, amounts paid for services rendered in an employer-employee relationship. Settlement payments that are in the nature of damages, general settlement consideration, or non-compensatory payments do not fall within the definition of wages, even if they are taxable income to the recipient. See Rev. Rul. 80-364, 1980-2 C.B. 294 (distinguishing between settlement payments that are wages subject to withholding and those that are not).
Similarly, FICA taxes under IRC §§ 3101 and 3121 apply only to "wages" as defined in § 3121(a), which tracks the § 3401(a) definition with certain modifications. Because the non-wage component does not represent remuneration for services, it is not subject to FICA.
AMA must report the $1,292,500 non-wage component on a Form 1099-MISC (Miscellaneous Information). The payment should be reported in box 3 ("Other income") of Form 1099-MISC. Box 3 is the appropriate reporting box for settlement payments that constitute taxable income to the recipient but are not wages, nonemployee compensation, rents, royalties, or other specifically categorized income. The payment should not be reported on Form 1099-NEC (Nonemployee Compensation), as Aldrich is not providing services to AMA in connection with the settlement, and characterization of the non-wage component as "nonemployee compensation" would be inaccurate and could subject AMA to penalties for incorrect information reporting.
The Form 1099-MISC should be issued by Aurelius Media Americas Inc. (EIN: 83-2194067) for tax year 2024. The form must be furnished to Aldrich no later than January 31, 2025, and filed with the IRS by February 28, 2025 (or March 31, 2025, if filing electronically).
Aldrich is solely responsible for making estimated tax payments on the non-wage component, as no withholding will be applied by AMA. AMA has no obligation to advise Aldrich regarding estimated tax payments, and the Settlement Agreement should include a provision acknowledging this fact.
Additionally, if any portion of the non-wage component is paid to Aldrich's counsel (Whitfield & Associates) — for example, if the settlement payment is directed to Whitfield & Associates' client trust account — AMA may be required to issue a separate Form 1099-MISC to Whitfield & Associates for the portion of the payment received by the law firm. Under Treas. Reg. § 1.6045-5(a), the payor of a settlement payment must generally report the payment to the attorney if the payment is made to the attorney's trust account or if the attorney's name is on the settlement check. AMA should confirm the payment arrangements and issue 1099s accordingly.
V. Tax Treatment of RSU Acceleration
A. Background
During his tenure as Senior Vice President of Original Content & Executive Producer at AMA, Aldrich was granted a total of 42,500 restricted stock units ("RSUs") in Aurelius Global Media Group PLC ("AGMG"), the London Stock Exchange-listed parent company of AMA (ticker: AGMG). The RSUs were granted under the AGMG 2018 Long-Term Incentive Plan (the "Equity Plan") and were subject to time-based vesting over a four-year period, with 25% vesting on each anniversary of the grant date.
At the time of Aldrich's termination on October 14, 2022, a total of 27,200 RSUs had vested, and 15,300 RSUs remained unvested. Under the terms of the Equity Plan and Aldrich's RSU award agreements, unvested RSUs would ordinarily be forfeited upon termination of employment, subject to the plan administrator's discretion to accelerate vesting in limited circumstances (including settlement of employment-related disputes, with the approval of the AGMG Compensation Committee).
As part of the settlement negotiations, the parties agreed that 10,200 of the 15,300 unvested RSUs will be accelerated (i.e., vested) upon the occurrence of the later of: (a) execution of the Settlement Agreement by both parties, and (b) filing of the Stipulation for Dismissal with Prejudice in Aldrich v. AMA, LASC Case No. 22STCV41087. The remaining 5,100 unvested RSUs will be forfeited by Aldrich and will be cancelled by AGMG.
B. Tax Treatment
Applicable law. Under IRC § 83(a), if property is transferred to any person in connection with the performance of services, the excess of the fair market value of the property (determined without regard to any restriction other than a restriction which by its terms will never lapse) over the amount paid for the property is included in the gross income of the person who performed the services at the first time the rights of the person having the beneficial interest in the property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. In the case of RSUs, the "transfer" of property occurs at the time the RSUs vest — that is, when the underlying shares are delivered to the employee and the employee's rights are no longer subject to a substantial risk of forfeiture.
Taxable event. Upon acceleration of the 10,200 RSUs, the fair market value of the underlying AGMG shares at the vesting date will be includable in Aldrich's gross income as ordinary compensation income. The settlement-driven acceleration does not change the character of the income; it remains ordinary income from the performance of services, taxable under § 83(a).
Estimated value. Based on the closing price of AGMG ordinary shares on the London Stock Exchange as of November 30, 2023, of approximately £19.50 per share, and using the then-current GBP/USD exchange rate of approximately $1.24 per £1.00, the estimated U.S. dollar value per share is approximately $24.18. The estimated aggregate value of 10,200 RSUs is therefore approximately $246,636 (10,200 × $24.18). The actual taxable amount will depend on the AGMG share price and the applicable exchange rate on the vesting date, which is expected to occur in late January or early February 2024.
Withholding obligations. RSU vesting is subject to income tax withholding (federal and state) and FICA, in the same manner as cash wages. Under IRC § 3402(a) and Treas. Reg. § 31.3402(a)-1, the employer is required to withhold federal income tax on the fair market value of shares delivered upon RSU vesting. Similarly, the vesting is subject to Social Security tax (up to the wage base), Medicare tax, and Additional Medicare tax.
The withholding obligation with respect to the RSU acceleration is allocated to the entity that administers the equity compensation plan. Because the RSUs are AGMG shares granted under the AGMG 2018 Long-Term Incentive Plan, the plan is administered by AGMG (or its designated plan administrator), not by AMA. However, because Aldrich performed the services for which the RSUs were granted as an employee of AMA — a U.S. subsidiary of AGMG — the withholding and reporting obligations under U.S. tax law must be coordinated between AMA and AGMG.
Coordination with AGMG. AMA should promptly coordinate with AGMG to ensure proper tax compliance in connection with the RSU acceleration. Specifically, AMA should engage with AGMG's Chief Financial Officer, Malcolm Dunmore, and AGMG's equity compensation plan administrator to address the following:
1. Withholding method. The Equity Plan and Aldrich's RSU award agreements should specify the method for satisfying withholding obligations upon vesting. Common methods include "sell-to-cover" (in which a portion of the vested shares is sold on the open market to generate cash for withholding) and "cash withholding" (in which the employee remits cash to the employer to cover withholding, or the employer nets shares). AMA should confirm which method will be used and ensure that the withholding amount is calculated based on the fair market value of the shares on the vesting date using the applicable exchange rate.
2. Reporting. The RSU income should be reported on Aldrich's Form W-2 for tax year 2024. If AGMG administers the plan through a U.S. payroll entity (such as AMA), the income should appear on the W-2 issued by AMA. If AGMG administers the plan through a separate payroll or equity compensation platform, AMA should confirm that the income is reported on a U.S. Form W-2 (rather than a UK payroll mechanism such as a P60 or P45), because Aldrich is a U.S. taxpayer and the services giving rise to the RSU grants were performed in the United States.
3. Plan terms. AMA should ensure that the Settlement Agreement references the RSU acceleration in a manner consistent with the Equity Plan's terms, including any required consent from the AGMG Compensation Committee or the plan administrator. If the plan requires board-level or committee-level approval for accelerated vesting in the context of a legal settlement, AMA should confirm that such approval has been obtained or is being sought concurrently with the execution of the Settlement Agreement.
Forfeited RSUs (5,100). The forfeiture of the remaining 5,100 unvested RSUs has no tax consequence to either Aldrich or AMA. Aldrich never recognized income with respect to these RSUs because they had not vested and no § 83(b) election was made at the time of grant. AMA, for its part, does not recognize a deduction for the forfeiture of unvested RSUs; under IRC § 83(h), the employer's deduction for property transferred in connection with services corresponds to the amount included in the service provider's income, and since no income was included, no deduction is available. The forfeited RSUs will simply be cancelled by AGMG under the terms of the Equity Plan.
VI. Allocation Reasonableness and IRS Risk
A. Standards for Reviewing Allocation
The IRS retains the authority to challenge the tax allocation of settlement payments if it determines that the allocation does not reflect the economic substance of the settlement. While the IRS generally respects an allocation agreed upon by adverse parties in an arm's-length negotiation, it is not bound by the parties' characterization if the allocation is inconsistent with the substance of the underlying claims. See Robinson v. Commissioner, 102 T.C. 116, 130–31 (1994) (holding that the Tax Court will look to the "nature of the claim that was the actual basis for settlement" to determine the tax treatment of settlement proceeds, and that while an express allocation in a settlement agreement is "strong evidence" of the parties' intent, the IRS may look behind the allocation if it is inconsistent with the economic substance).
In Bagley v. Commissioner, T.C. Memo 2014-30, the Tax Court reiterated the principle that the tax treatment of settlement payments is determined by the nature and basis of the underlying claims, and that the parties' allocation will be respected if it reflects a genuine, arm's-length negotiation and is consistent with the damages theories advanced in the litigation. The Tax Court identified several factors relevant to its analysis:
1. Arm's-length negotiation. Whether the allocation was negotiated between adverse parties, each represented by independent counsel, with competing tax interests. An allocation agreed upon in a friendly or collusive manner — for example, where the payor is indifferent to the allocation, or where both parties benefit from the same tax treatment — is more likely to be challenged.
2. Consistency with underlying claims. Whether the allocation is consistent with the damages theories and amounts asserted in the pleadings, mediation briefs, or settlement negotiations. An allocation that attributes a disproportionate share of the settlement to a category of damages that was not meaningfully litigated or claimed is vulnerable to challenge.
3. Consistent reporting. Whether both parties report the settlement payments consistently with the agreed allocation on their respective tax returns. Inconsistent reporting — for example, where the payor deducts the full amount as wages but the payee reports it as non-wage income — is a red flag for the IRS.
4. Express allocation in the settlement agreement. Whether the settlement agreement contains a specific, written allocation and the basis for each component. A settlement agreement that is silent on the allocation leaves both parties vulnerable to competing characterizations by the IRS.
B. Assessment of the 45/55 Allocation
Applying the standards described above, the 45% wage / 55% non-wage allocation of the $2,350,000 Aldrich settlement payment is defensible on each relevant factor:
Arm's-length negotiation. The allocation was negotiated between AMA (represented by Devon Archer of Calderwood & Harkness LLP) and Aldrich (represented by Cameron Whitfield of Whitfield & Associates). The two parties are genuinely adverse: AMA is the defendant in a wrongful termination action, and Aldrich is the plaintiff; AMA has also asserted counterclaims against Aldrich for breach of contract, trade secret misappropriation, and related claims. The parties had competing tax interests in the allocation: Aldrich preferred a higher non-wage allocation to minimize immediate withholding and defer tax payments, while AMA preferred a higher wage allocation to bolster its withholding compliance position and to strengthen its § 162(a) deduction for compensation. The 45/55 split represents a genuine compromise between the parties' initial proposals (40/60 by Aldrich and 50/50 by AMA), and neither party obtained its preferred allocation.
Consistency with underlying claims. The allocation is closely tied to the economic substance of the claims and settlement components:
• The wage component ($1,057,500) corresponds to amounts that would unambiguously have been treated as wages had they been paid during the normal course of Aldrich's employment: severance of $970,000 (24 months' base salary under the Employment Agreement) and a partial pro-rata bonus of $87,500. These are the types of payments that the IRS consistently treats as wages, and the allocation does not overstate or understate the wage component relative to the underlying contractual entitlements.
• The non-wage component ($1,292,500) corresponds to the remaining elements of Aldrich's claims: emotional distress damages ($500,000 claimed), lost future compensation ($1,200,000 claimed, only a portion of which is allocated to the non-wage component), attorneys' fees ($750,000 claimed), unreimbursed business expenses ($28,400 claimed), and the general consideration for Aldrich's release of all claims, including his declaratory relief claim regarding the restrictive covenant. These are the types of damages that are properly characterized as non-wage settlement consideration.
• The allocation does not attribute 100% of the payment to either the wage or non-wage category, which would invite heightened scrutiny. The split falls within the range of allocations that have been approved or sustained in comparable employment settlement cases. See, e.g., Rivera v. Tarvick West, Inc., 430 F.3d 1253, 1256 (9th Cir. 2005) (upholding negotiated allocation between wage and non-wage components of an employment settlement); Pipitone v. United States, 180 F.3d 859, 864–65 (7th Cir. 1999) (holding that an express allocation in a settlement agreement should be respected unless the government can demonstrate that it is inconsistent with the substance of the claims).
AMA's deduction. The allocation also has implications for AMA's tax deductions. AMA may deduct the wage component ($1,057,500) as an ordinary and necessary business expense under IRC § 162(a), as compensation paid to an employee (or former employee) in connection with the resolution of employment-related claims. The non-wage component ($1,292,500) may also be deductible under IRC § 162(a) as a settlement payment arising from AMA's business operations, provided the settlement is not characterized as a penalty or fine within the meaning of IRC § 162(f). Section 162(f) denies a deduction for any amount paid or incurred to or at the direction of a government (or specified nongovernmental entity) in relation to the violation of any law or the investigation or inquiry by a governmental entity into the potential violation of any law. Because the Aldrich settlement is a private settlement between AMA and a former employee, and does not involve any government-directed payment, the § 162(f) limitation does not apply. The full $2,350,000 cash settlement payment should therefore be deductible by AMA as an ordinary and necessary business expense under § 162(a).
C. Risk Assessment
Based on the analysis above, the risk of an IRS challenge to the 45/55 allocation is assessed as low. The allocation is defensible on each of the factors identified in Robinson, Bagley, and related authority, and is consistent with the economic substance of the settlement. The IRS is unlikely to challenge the allocation provided that the following conditions are met:
1. The Settlement Agreement clearly specifies the allocation and identifies the wage component ($1,057,500) and the non-wage component ($1,292,500) with specificity, including the basis for each component (severance equivalent, partial pro-rata bonus, emotional distress damages, general settlement consideration, etc.).
2. Both AMA and Aldrich report the settlement payments consistently with the agreed allocation on their respective tax returns. AMA should report the wage component on Aldrich's Form W-2 and the non-wage component on a Form 1099-MISC, and should deduct the settlement payments on its corporate tax return in a manner consistent with the allocation.
3. AMA properly withholds federal and California income taxes, FICA, and SDI from the wage component, and does not withhold on the non-wage component.
4. The Settlement Agreement includes provisions requiring consistent reporting by both parties and acknowledging that each party will bear the consequences of any adverse tax determination relating to its own tax obligations.
VII. Recommendations
Based on the analysis set forth above, the following actions are recommended:
A. Settlement Agreement Language
1. Tax allocation provision. The Settlement Agreement should include a specific provision setting forth the 45% wage / 55% non-wage allocation, identifying the wage component ($1,057,500) and the non-wage component ($1,292,500) with specificity. The provision should describe the basis for each component — e.g., stating that the wage component represents severance-equivalent pay and a partial pro-rata bonus, and that the non-wage component represents emotional distress damages, general settlement consideration, and other non-wage damages. This level of specificity will provide the strongest evidentiary support for the allocation in the event of an IRS inquiry.
2. Consistent reporting provision. The Settlement Agreement should include a provision requiring both AMA and Aldrich to report the settlement payments consistently with the agreed allocation for all federal and state tax purposes, including on IRS Forms W-2, 1099-MISC, and their respective income tax returns. The provision should state that neither party will take a position on any tax return, amended return, or in any proceeding before the IRS or any state taxing authority that is inconsistent with the agreed allocation, unless required to do so by a final determination of a court of competent jurisdiction or by a binding written agreement with the IRS.
3. No tax advice disclaimer. The Settlement Agreement should include a provision acknowledging that neither AMA nor its counsel (Calderwood & Harkness LLP) has provided tax advice to Aldrich and that Aldrich has been advised to consult his own tax advisor regarding the federal, state, and local tax consequences of the settlement payments, including the tax treatment of the wage and non-wage components and the RSU acceleration. This provision is important to protect AMA from any future claim by Aldrich that he relied on AMA's or Calderwood & Harkness's characterization of the tax treatment.
4. Withholding and tax responsibility provision. The Settlement Agreement should specify that AMA will withhold applicable federal and state income taxes, FICA contributions (employee share), and California SDI from the wage component, and that the net amount (after withholding) will be paid to Aldrich. The provision should further state that Aldrich is solely responsible for any additional tax liability arising from the settlement payments, including any federal or state income taxes, estimated tax payments, interest, or penalties attributable to the non-wage component or to any underwitholding on the wage component.
B. RSU Coordination
1. Notification to AGMG. AMA should promptly notify AGMG's equity compensation team of the RSU acceleration provision in the Settlement Agreement. The primary contact is Malcolm Dunmore, Chief Financial Officer, Aurelius Global Media Group PLC, 34 Kingsway, London WC2B 6EX, United Kingdom. Notification should be made by email and followed by formal written correspondence, with a copy to AGMG's General Counsel.
2. Confirmation of vesting mechanics. AMA should confirm with AGMG and the plan administrator: (a) the vesting date for the 10,200 accelerated RSUs (which should be the later of execution of the Settlement Agreement and filing of the Stipulation for Dismissal); (b) the applicable withholding method (sell-to-cover, net share settlement, or cash withholding); and (c) the reporting mechanism (U.S. Form W-2 issued by AMA, or alternative reporting through AGMG's equity platform). AMA should ensure that the withholding amount is calculated based on the AGMG share price and GBP/USD exchange rate on the vesting date.
3. Plan compliance. AMA should ensure that the Settlement Agreement references the RSU acceleration in a manner consistent with the AGMG 2018 Long-Term Incentive Plan's terms, including any required consent from the AGMG Compensation Committee, the plan administrator, or any other governing body. If such consent has not yet been obtained, AMA should make the RSU acceleration provision in the Settlement Agreement contingent upon receipt of the required consent and should promptly initiate the consent process.
C. Payroll Processing
1. Wage component processing. The wage component ($1,057,500) should be processed through AMA's payroll system (NovaPay Solutions Inc.) as a supplemental wage payment. AMA's Payroll Manager, Karen Fong, should be notified of the forthcoming settlement payment and provided with a copy of the executed Settlement Agreement and this memorandum (subject to privilege protections). Karen Fong should ensure that the settlement wage payment is coded as a supplemental wage payment, that the appropriate federal and California withholding rates are applied (including the mandatory 37% federal supplemental rate on amounts exceeding $1 million and the 10.23% California supplemental rate on amounts exceeding $1 million), and that FICA and SDI contributions are properly calculated and remitted.
2. Non-wage component payment. The non-wage component ($1,292,500) should be paid by AMA directly — not through the NovaPay payroll system — via wire transfer to Gavin Aldrich or to his counsel's client trust account (Whitfield & Associates IOLTA Account), as specified in the Settlement Agreement. No withholding should be applied to this payment. AMA's Treasury or Finance department should process the wire transfer and retain documentation of the payment for tax reporting and record-retention purposes.
3. Tax form deadlines. AMA should issue the Form W-2 and Form 1099-MISC to Aldrich by January 31, 2025, for tax year 2024 payments. AMA should file copies of the W-2 with the Social Security Administration and the 1099-MISC with the IRS by the applicable deadlines (February 28, 2025, for paper filings; March 31, 2025, for electronic filings). California state copies (DE 6 and related filings) should be filed with the EDD in accordance with California requirements.
D. Record Retention
1. AMA should retain the following documents in connection with the Aldrich settlement for a minimum of seven (7) years from the date of the last tax filing to which the settlement relates:
(a) The executed Settlement Agreement and Mutual Release;
(b) This tax allocation memorandum and any supplements or updates thereto;
(c) All Forms W-2 and 1099-MISC issued in connection with the settlement;
(d) Payroll records reflecting the processing of the wage component through NovaPay Solutions Inc.;
(e) Wire transfer confirmations and bank records for the non-wage component payment;
(f) All correspondence between Devon Archer and Cameron Whitfield regarding the tax allocation, including the January 10, 2024 email confirming the 45/55 split;
(g) Records of RSU acceleration, including correspondence with AGMG, vesting date documentation, and withholding calculations;
(h) Any other documents related to the tax treatment or reporting of the settlement payments.
Assuming the 2024 tax returns are filed in April 2025, the minimum retention period extends through approximately April 2032 (2025 filing date + 7 years). AMA should calendar this retention deadline and ensure that the documents are stored in a manner consistent with AMA's document retention policies and accessible in the event of an IRS audit.
VIII. Conclusion
The 45% wage / 55% non-wage allocation of the $2,350,000 Aldrich settlement cash payment is defensible and consistent with the economic substance of the underlying claims resolved by the Settlement Agreement. The allocation reflects a genuine, arm's-length negotiation between adverse parties with competing tax interests, and is supported by the specific contractual entitlements and damages theories at issue in the litigation.
AMA should withhold applicable federal and California income taxes, FICA, and SDI from the wage component ($1,057,500) and report it on a Form W-2 for tax year 2024. AMA should issue a Form 1099-MISC (Box 3) for the non-wage component ($1,292,500) without withholding. The RSU acceleration (10,200 RSUs, estimated value approximately $246,636) should be coordinated with AGMG's equity compensation team to ensure proper withholding and reporting. The full $2,350,000 cash payment and the value of the accelerated RSUs should be deductible by AMA under IRC § 162(a).
Both AMA and Aldrich should report the settlement payments consistently with the agreed allocation on their respective tax returns. The Settlement Agreement should include the specific provisions described in Section VII above to memorialize the allocation, ensure consistent reporting, and protect AMA from future claims regarding the tax treatment of the settlement.
Please do not hesitate to contact me if you have any questions regarding the analysis in this memorandum or if you would like to discuss any aspect of the recommended tax treatment.
This memorandum addresses federal and California state income and employment tax treatment only. If Aldrich has relocated to another state, maintains a residence or domicile in another jurisdiction, or otherwise has income tax obligations in jurisdictions other than California, additional analysis may be required to determine withholding and reporting obligations under the laws of those jurisdictions. This memorandum does not address potential international tax implications, including any UK tax obligations that may arise in connection with the AGMG RSU acceleration.
CALDERWOOD & HARKNESS LLP
By: ________
Nadia Petrov Associate, Tax & Employment Practice Group Calderwood & Harkness LLP 1900 Avenue of the Stars, Suite 2800 Los Angeles, California 90067 Telephone: (310) 555-4200
Email: npetrov@calderwoodharkness.com
cc: Devon Archer, Calderwood & Harkness LLP (via email, privileged) File: Matter No. 1017-00004
Category | Percentage | Amount | Tax Treatment
Wages (back pay, severance equivalent) | 45% | $1,057,500 | Subject to federal and state income tax withholding and FICA; reported on Form W-2
Non-wage damages (emotional distress, general damages, settlement consideration) | 55% | $1,292,500 | Not subject to withholding; reported on Form 1099-MISC (Box 3)
Total | 100% | $2,350,000

CALDERWOOD & HARKNESS LLP 1900 Avenue of the Stars, Suite 2800 Los Angeles, California 90067

MEMORANDUM

CALDERWOOD & HARKNESS LLP

Record

Parties

Dates

Amounts