A class action settlement... Is it taxable

If the payment is for lost wages, profits and business income or any interest, it is taxable. If some part represents punitive damages, it is taxable. If the payment is to compensate you for damages to property, it is only taxable to the extent that the amount exceeds your actual damage. If you had filed a tax return in the earlier year and included a tax deduction for damages caused by the spill ( a casualty loss), see page 23 of IRS Pub 525 for how to report a recovery of a previously deducted itemized deduction.

If it is to compensate for property damage, wouldn't the excess over the actual damage be taxable (ordinary income), and the amount compensating for actual damage (reduction in value) be a reduction in basis?

In that case, if the property was already sold, that payment would be capital gains. (If the property was sold short-term, I don't know if the late payment would be long-term or short-term.)

Seth

will shortly receive about

It was not for lost wages. I don't know if any part of my share was for punitive damages. Were there damages to the property? Yes. The property became slightly less usable for a few months after the oil spill. But since the spill occurred in April, it had minimal effect on my summer season on Buzzards Bay. Did it have any long term effect on the property? Not that I can see, but I'm not an environmental expert. Did I claim any casualty loss on any tax return? No. The value of any loss would have been extremely hard to value and/or defend in an audit.

With nothing else to go on, I hereby declare that the oil spill did $7000 worth of damage to my property. When the check arrives in a few weeks, I will cash it.

I will shortly receive about

Just be aware that you will receive a 1099-MISC for the distribution that you will have to account for on your tax return.

The settlement agreement (Bouchard Litigation) provides no opinion on tax consequences and leaves it up to each class member to make the determination as each class member had different circumstances.

lawsuit, I will shortly receive about

OK. What do I do with a 1099 that represents a non-taxable event?

When the property was purchased, certain economic and enjoyment benefits were expected. Given interest, taxes, and upkeep, that figure far exceeds the $7000 settlement even for one year. I'm declaring that the entire $7000 represents a partial refund for loss of benefit/enjoyment. That's my position.

lawsuit, I will shortly receive about

OK, that would be taxable income since you have declared the payment to be compensation to you for your loss of personal pleasure rather than compensation for the decline in value of your property.

In my opinion, the best you can hope for is a reduction in the basis of your property but, I have NOT looked anything up.

lawsuit, I will shortly receive about

previously

Note first: This would be a reduction of the casualty loss you'd otherwise be entitied to claim in 2003. Since you did not claim the loss (expecting the compensation "by insurance or otherwise"), you have no taxable recovery -- assuming that the amount paid under the suit is not greater than your loss without regard to compensation.

lawsuit, I will shortly receive about

I'm sticking with my original reply. To the extent that the $7000 does not exceed your casualty loss, you have no income. Your temporary loss of "benefit/enjoyment" is not a casualty loss. A casualty loss is measured by the amount that the FMV of your property decreased immediately after the oil spill from the FMV immediately before the spill. (I assume that you have a cost basis in this property that is greater than the loss in FMV.) If the drop in FMV was at least $7000, then the payment is not taxable as it merely compensated you for your casualty loss.

lawsuit, I will shortly receive about

My "benefit/enjoyment" loss is equivalent to the benefit/enjoyment loss of a potential buyer and hence, equivalent to the loss in FMV of the property because of the oil spill.