World Business

US oil spill compensation may be taxed

By Alan Sayre (China Daily)
Updated: 2010-06-23 11:52
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NEW ORLEANS - Out-of-work Gulf Coast shrimper Todd Pellegal spent his first $2,500 check from BP quickly, paying off bills and buying groceries for his family.

He never even considered putting some of it away for taxes.

Now he's among the people up and down the Gulf Coast reeling from the oil spill disaster who are surprised - and frustrated - to find out the Internal Revenue Service may take a chunk of the payments BP PLC is providing to help them stay afloat.

Many were already angry about how long the oil giant took to cut the checks. So when they got the money - generally about a few thousand dollars each so far - they spent it fast.

"If they're going to pay you a lump sum, like for a year, then bam, take the taxes out of the check," said Pellegal, of Boothville, La. "But a little bit at a time, they shouldn't."

Accountants have been trying to nail down the implications for thousands of taxpayers after President Barack Obama said BP would create a $20-billion disaster fund and provide another $100 million for oil workers who lost their jobs because of the six-month moratorium on deepwater drilling in the Gulf of Mexico.

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Tax experts said in general all income is taxable unless specific exemptions are approved by Congress or the Treasury Department - and neither has acted yet on oil spill damage claims.

It's not the first time the region has dealt with whether disaster money should be taxed. In the aftermath of Hurricane Katrina, Louisiana and Mississippi residents received federal money to rebuild their homes after many claimed a casualty loss for the damage on the 2005 tax returns.

The IRS initially required people who received the money and took the deduction to add the value of the deduction to their 2007 returns as taxable income.

Associated Press