IRS Ruling Impacts Yuba County (Calif.) Flood Victims

February 8, 2006

The Internal Revenue Service, Franchise Tax Board, and California Society of Enrolled Agents are offering two tax workshops in Marysville to present updated information and answer questions about the tax ramifications of the recent Yuba County flood settlements.

In 2005, after nearly two decades of wrangling and court battles, the state agreed to pay $428 million dollars to homeowners who lost homes and land in the 1986 flood.

Unfortunately, the tax implications of the settlement checks were reportedly not adequately understood by most of the recipients. With tax season underway, the California Society of Enrolled Agents (CSEA), an association of federally-licensed tax professionals, and U.S. Congressman Wally Herger (2nd District) asked the IRS for clarification of a number of areas of concern, including the tax implications of prejudgment interest, attorneys’ fees, casualty loss deductions for destroyed property, and potential Form 1099-Miscellaneous audit issues.

An official response from Donald Korb, chief counsel of the Internal Revenue Service has been received by Congressman Herger and CSEA. The key points:

— The prejudgment interest portion of the settlement is taxable as
ordinary income to taxpayers, and is not part of the property recovery.
— Attorneys’ fees are allocable to the capital recovery, and therefore
are nondeductible capital expenditures.
— Casualty losses must be treated on a case by case basis.
— A separate letter will be issued to address the Form 1099-Miscellaneous audit concerns.

According to David Shaw, EA, of Yuba City, “Because the IRS has decided that attorneys’ fees are allocable to the capital recovery and are nondeductible capital expenditures, this letter greatly reduces the chances of alternative minimum tax affecting the flood settlement recipients, thus decreasing their overall tax liability.”

The workshops will be held on Feb. 13 and Feb. 16, from 6 p.m.-9 p.m. at the Yuba County Government Center, Board of Supervisors Room, 915 8th Street, Marysville. Representatives of the IRS, FTB and CSEA will attend; Congressman Herger will be at the Feb. 13 workshop.

Reservations for the workshops are not being accepted, and seating will be on a first-come, first-serve basis.

Enrolled Agents are tax professionals licensed by the federal government to represent taxpayers and assist them with tax planning and the preparation of tax returns. You can locate an Enrolled Agent in your area online at www.csea.org or by calling toll-free 1-800-TAXPRO-5. Outside California, the Enrolled Agent referral number is 1-800-424-4339.

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