IRS Explains Tax Treatment of Settlement Payments to Some Carson Homeowners

Notice: Historical Content

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CA-2017-001, August 17, 2017

LOS ANGELES—The Internal Revenue Service today explained the tax treatment of settlement payments made to some homeowners in Carson, Calif. to remediate their homes from petroleum contamination.

Responding to a request for guidance, IRS Commissioner John Koskinen described how homeowners in the Carousel Tract should report payments they receive from the Shell Oil Company on their federal income tax return. While their homes are being remediated, these homeowners have been relocated to fully-furnished apartments with full kitchens, paid for by Shell. Additionally, they have received per-diem payments and inconvenience fees from the company.

In general, payments and awards are taxable. On the other hand, reimbursements for non-deducted extra expenses incurred due to the payer’s wrongdoing are generally not taxable. Based on these principles, the IRS provided examples of the kinds of reimbursements that would be taxable or not taxable.

For example, the portion of the per-diem payments used to pay food costs is taxable to a homeowner who has a full kitchen at the temporary location because the homeowner would pay those costs, regardless of the move to the temporary location.

On the other hand, the portion of the per-diem payment used to pay laundry fees, the extra cost of housewares and the extra cost for transportation to and from work or school is not taxable. Similarly, the portion of the inconvenience fees used to pay landscaping costs (such as replacing sod, planting trees and bushes and replacing walkways and sidewalks), and cleaning or repainting the home’s exterior, outdoor fixtures, furniture and appliances is not taxable.

In addition, the value of the temporary living facilities provided by Shell is not taxable.