You negotiate your contract for a ROW and pipeline to cross your land. The land agent tells you that the money you receive can be considered payment for damages. The document from the midstream company lists the payment as damages. Tax time arrives....how do you proceed? The midstream company sent you a 1099-misc showing the amount they reported to the IRS. The confusion soon follows. Is this money taxable or not? Ask 5 "tax professionals" and you'll get 5 different answers.
Is there such a thing as damages. Tell your accountant or local H&R Block tax person that these damages aren't taxable and they'll look at you like you're crazy.
Let's settle this once and for all. Let's hear your comments. Are damages taxable???
Ask them to define "damages" and if he is using damages as the same definition as an easement from an eminent domain company, then he is wrong. This is true of any easement money accepted from an eminent domain payment, you can discount the money based upon the number of years from the payment to when you sell the property, less any capital gains on the value of the property increase. All other payments, especially from a non-eminent domain agreement/contract/lease, according to the IRS folks we had at our meeting, would be taxable as income. No different than any rental or lease. Again, unless you can show and document that there is a "damage", if you get audited, I would bet money on the IRS sticking it to you for all undocumented damages. BTW, if your CPA is wrong, you still pay the penalty and interest, no worries for him.
"Many people mistakenly assume that if their oil or gas company sends them a 1099 for payments they received, the amount shown on the 1099 must be fully taxable. But this is not always the case. Payments received from oil and gas companies that are for damages to land or for an easement that reduces the fair market value of land* may not be subject to tax. Landowners who receive a nontaxable payment instead may reduce the basis in their property by the amount of the payment." __Ken Flint, certified public accountant and former IRS agent [*emphasis added]
The article read in its entirety is even more helpful: http://www.mysanantonio.com/business/business_columnists/article/Oi...
Reduction of land values from the pipeline has never been proven. I have seen numerous appraisals tried by landowners thinking they had lost a lot of value due to a pipeline, but has never been proven in courts. On the other hand, I have also never seen a landowner sell their property and have it discounted to a potential buyer saying there is a pipeline on the property and therefore it's not worth as much as my neighbors.
That is a good argument.
Unfortunately, if the potential Row lessee takes you to court. they'll ask a judge for, and the judge will grant an appraisal of the property as it stands today, it's valuation having nothing to do with what the landowner "could do" or "might do" with the property or its potential for anything other than what it typically is: Farmland or forest or other wasteland.
There is, unfortunately, much precedent for this type of behavior in condemnation actions.
That should be taken into account when you ne