Domenici Asks Treasury to Make Determination on Fire Compensation Payments

[2] Last year in New Mexico, the National Park Service began a forest-thinning prescribed burn in Bandelier National Monument that raged out of control and burned over 400 homes and businesses in the Los Alamos area. Legislation to compensate victims who lost their homes and businesses was signed into law on July 13, 2000. This legislation made up to $455 million available to fire victims so they would be quickly compensated for their losses and could begin rebuilding their lives.

[3] The Federal Emergency Management Agency (FEMA) has issued and will continue to issue hundreds of payments in response to filed claims for compensation. There are several unresolved questions regarding these compensation payments. As the April tax-filing deadline quickly approaches, taxpayers need to know the appropriate tax treatment of these payments. In spite of repeated requests from the New Mexico congressional delegation, the Internal Revenue Service (IRS) has still not issued a written decision. These taxpayers deserve answers now.

[4] These payments are intended to replace property destroyed as a result of the gross negligence of the federal government. It is my understanding of current law that insurance settlements are not taxable income. These payments should be treated as insurance settlements, which would be consistent with the tax treatment of other FEMA payments. Nonetheless, there are those in the bowels of the IRS who are hinting that the payments should be characterized as a lawsuit settlement, so that they would be subject to federal taxation. It is incomprehensible to me that the federal government would start a fire, burn your home, and then distort the tax code to demand the payment of federal income tax on the payments that it made to you for the favor of burning your home and neighborhood.

[5] Therefore, it would seem to me that the appropriate tax treatment, not to mention the fair thing to do, would be to exclude these FEMA payments from taxable income. If it is determined that the IRS does not have the statutory authority to rule that these payments are not subject to federal income tax, I would ask your assistance and support for an expedited change of law.

[6] Since April 15 is near, your prompt attention to this matter is greatly appreciated.

Sincerely,