Tax Lawyer's Blog

A few days ago I wrote that the IRS considers BP payments to Gulf Coast fishermen who have suffered losses as a result of the oil spill to be taxable income:

This is not a difficult call. The tax code has long considered payments made to individuals in the form of  compensation for lost wages or as a substitute for what would have otherwise been taxable income to be taxable income.¹

BP is compensating Gulf Coast workers for the income they lost as a result of the oil spill. Consequently, the IRS is right in considering that compensation to be taxable income.

I also said,

I would not be surprised, however, if some congressman immediately proposes a bill that would amend the tax code to make these payments non-taxable.

Louisiana Senator, Democrat Mary Landrieu, has made me a prophet. Here’s an excerpt from a letter she sent to Secretary of Treasury, Timothy Geithner and Commissioner of Internal Revenue, Doug Shulman, scolding the IRS for being slow to issue guidance on the law (emphasis added):

As of June 22, 2010 — Day 63 of this tragedy — your agencies had yet to issue any guidance to advise recipients of BP payments on how they should treat these payments for federal tax purposes. While I share your goal of ensuring that U.S. tax laws are followed and I am aware that this situation has triggered some unprecedented questions of tax policy, this delay in action is unacceptable.

It is my strong belief that every relevant tax question triggered by this disaster cannot nor should not be answered immediately. I also appreciate that your agencies need sufficient time to develop sound tax policies on how these payments should be treated for tax purposes. However, as I write to you today, now is the time for impacted Gulf Coast residents to receive basic guidance on fundamental issues that have been triggered by the disaster such as:

1. Whether income replacement payments are taxable;
2. Whether property damage payments are taxable; and
3. And whether payments for personal injury claims are taxable.

Ms. Landrieu suggests that it is the IRS’s job to “develop sound tax policies,” but a first year student of American politics could tell you this is decidedly false.

Its the job of Congress, the body to which Ms. Landrieu belongs, to make tax policy.

In any event, Senator Landrieu doesn’t need specific guidance from either Geithner or Shulman because her questions are neither unprecedented nor difficult.

Here are the answers, each of which has been part of the tax code for decades:

1. Income replacement payments are taxable
2. Property damage payments are not taxable to the extent they do not exceed the amount of the loss suffered
3. Payments for personal (physical) injury are not taxable

Advice: Taxpayers should still seek the advice of a tax attorney or CPA before determining the proper treatment of BP payments on their income tax returns.

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