Question

An oil tanker collided with a ship in Tampa Bay. The resulting oil spill severely curtailed the fishing business for two months. The Franklin Fishing Boat Co. made a claim against the tanker’s owner for impairment of Franklin’s revenue during the two-month period. Mr. Franklin received an initial payment of $50,000 from the tanker’s owner, $20,000 of which was for lost revenue and $30,000 of which was for punitive damages allowed by state law from a handler of hazardous substances. How much of the award, if any, is taxable?

Answer 1

1. Taxability of Compensatory Damage - $20000 = Not taxable

Claim received against loss of revenue that amounts to $20000 is exempt from tax.As this is the claim paid by oil company to fishing co. who is the victim of the oil spoilage.The type of compensatory damage – economic or non-economic – does not affect the taxability of the award.

2. Punitive Damage = $30000 = Taxable

Punitive damages are not to compensate for any loss, be it economical or emotional, they are taxable under all conditions. So, $30000 is taxable in hands of Franklin fishing Company.