David Muñoz | February 20, 2023
Many victims of California wildfires were surprised to find out that the settlements were considered taxable income by the Internal Revenue Service and the State of California. However, lawmakers have introduced new legislation on the state and federal levels that would make Fire Victims Trust (FVT) payments non-taxable.
The federal bill to amend the Internal Revenue Code was introduced in the House of Representatives by Congressmen Mike Thompson and Doug LaMalfa of California. The proposed legislation would exempt thousands of dollars in compensation received from the Fire Victim Trust. The bill is pending in Congress.
In June of 2022, Congressman LaMalfa received a letter from the Internal Revenue Service addressing some issues regarding FVT payments. The letter stated that some of the payments from the Fire Victims Trust might be exempt from federal taxes. However, the letter failed to provide comprehensive and conclusive answers to the tax questions.
A similar state bill (AB 1249) was proposed by Assemblyman James Gallagher that would add a similar tax exemption at the state level. The bill was presented to the California Governor on September 13, 2022. Since the bill has significant support from bi-partisan co-authors and other lawmakers, it is expected to be signed into law.
Are Court Settlements Generally Considered Taxable Income?
Personal injury settlements compensate victims for their financial losses and other damages. The settlements are intended to make the victims “whole” after a catastrophic loss. However, many victims do not realize that some of the money they receive for a claim is considered taxable income at the state and federal levels.
Generally, reimbursement for medical expenses and property damage is not considered taxable income. However, compensation for punitive damages and lost wages are taxable at the state and federal levels. Pain and suffering damages are generally not taxable unless payment for emotional distress is made without any physical injury.
Tax laws are complex, and there are usually exceptions to every rule. Therefore, a wildfire victim should seek assistance with tax questions from a lawyer or tax professional.
What Is the Fire Victims Trust?
The PG&E “Fire Victims Trust” was created in response to several California wildfires caused by PG&E equipment. The court-ordered trust compensates victims of the Butte wildfire in 2015, the North Bay wildfire in 2017, and the Camp wildfire in 2018.
The three wildfires burned more than 400,000 acres in California. The fires destroyed tens of thousands of homes and other structures while causing personal injuries and loss of life. Thousands of residents were forced to live in FEMA (Federal Emergency Management Agency) Camps, their vehicles, or emergency tent communities.
The PG&E Fire Victim Trust was created from PG&E’s Chapter 11 bankruptcy case. The FVT was established to pay all of the fire victims’ claims. Unfortunately, many victims continue to seek compensation for their claims from the FVT.
What Does the Fire Victim Trust Pay?
The FVT reviews and pays claims filed by victims of the North Bay, Camp, and Butt wildfires. Fire victims can file claims for economic and non-economic damages that include:
- Damage or destruction to real estate
- Damage or destruction of personal property
- Medical bills
- Loss of earnings and wages
- Business losses
- Emotional distress
- Living expenses
- Personal injuries
- Wrongful death
Claimants must meet specific criteria to receive funds from the FVT. The criteria include:
- Must have a claim related to the 2015 Butte wildfire, 2019 Camp wildfire, or 2017 North Bay wildfires
- Filed proof of claim before December 19, 2019
- Submitted supporting documentation as required by the procedures or the claims administrator
In some cases, a person might be able to file a claim after the deadline if they obtained relief from the bankruptcy court. If you are unsure of your options for receiving compensation for California wildfire damages, you can discuss your case with a California wildfire lawyer.
Continuing Problems With the Fire Victim Trust
Unfortunately, payments for claims have been slow. As a result, many wildfire victims have hired California wildfire attorneys to assist them in filing claims and obtaining compensation for their losses and damages.
Recently, a wildfire survivor filed a motion asking the bankruptcy court to force the FVT to be more transparent regarding trust management. The trust should have had a value of $13.5 billion, but the present value is much lower. Therefore, questions have arisen regarding administrative functions and costs.
The trust is paying victims less than their claims are worth and making payments very slowly. It remains to be seen whether disclosures will assist victims in determining whether the trust is using the funds appropriately.