Taxation of proceeds of contract to not complain........

Technical topics regarding tax preparation.
#21
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Exactly. No different than the county building a highway off the back of your property. Or a skyscraper going up that blocks the sun...etc.


The problem with that logic, based on what we know, is that some of the potential “injuries” don’t *just* devalue the property. They might also cause personal discomfort…especially the one that OP has cited, about all that flickering.

Picture This: It’s 3pm on Tuesday and you just sat down in front of your TV to watch your favorite show, The Tax Show, on Channel 1221. Every 2-seconds a flicker of light comes through the window. What an annoyance! In legal jargon, I might label it a “Nuisance.”

While that flicker might reduce the market value of my home, I’d also want to be paid for my personal discomfort. I have a Right-to-Light, right?
 

#22
keiser  
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Many people mistakenly assume that "tort" damages are not taxable.
This is not true. Read section 104.
Compensation for emotional distress is taxable.
Compensation for physical injuries are not taxable.
Rather than speculate what was purportedly compensated, a copy of the contract would help.
 

#23
Dennis2  
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Further thoughts suggest that any loss in property value occurred when windmill company got approval to build.
 

#24
Nilodop  
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Maybe but the 45000 dollars happened now.
 

#25
Dennis2  
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irrelevant. Company can't have liability for value decline. System doesn't work that way. All sorts of hoops in application process where property owner can be bought off to shut up, but after actual construction game over.
 

#26
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Keiser, I would like to say you’re on a roll, but, as to these comments…

Compensation for emotional distress is taxable.
Compensation for physical injuries are not taxable

…the actual language in Sec 104 is “on account of” (not “for”). So, it is quite possible that someone who sustains a physical injury and because of that, also suffers emotional distress, might get an award that covers all of that stuff and all of it would indeed be excludible. In fact, someone might sustain a physical injury, and a mere onlooker, who witnesses the injury, might himself suffer from emotional distress. If that onlooker receives a sum for his distress, it too would be “on account of” a physical injury, even though it was not his own physical injury.
 

#27
keiser  
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Barbato, TC Memo 2016-23 provides a recent discussion of taxablity of pure emotional distress damages.
 

#28
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Barbato, TC Memo 2016-23 provides a recent discussion of taxablity of pure emotional distress damages.

Key word being “pure,” meaning there was no correlative physical injury. There’s hundreds of cases like this one…and maybe this case is why postage prices keep going up!
 

#29
keiser  
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Jeff, you make a valid point.
Not all jurisdictions allow recoveries for emotional distress to bystanders.
For such jurisdictions, a 2018 Law Review says: "It is not clear whether damages would be excluded in bystander claims where the link between the damages and the physical injury is more tenuous. For example, in California a plaintiff may recover for the emotional disturbance of witnessing an accident that causes physical harm to a close relative. Arguably, such a claim is "an action [that] has its origin in a physical injury" and the damages "flow therefrom," as required by the legislative history quoted above. However, there are no tax cases or rulings that address this specific situation." 22 Fla. Tax Rev. 120, 126 (2018-2019) Taxing Litigation: Federal Tax Concerns of Personal Injury Plaintiffs and Their Lawyers.
Who knows what the contract actually purports to compensate?
 

#30
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The Shadow knows. And jakescia.
 

#31
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My conclusion..........

I finally received a copy of the agreement. Such is labeled "(Wind mill owner) Neighbor Easement Agreement".

Pertinent item..........Grant of Effects, Sound and Shadow Easements. Owner hereby grants and conveys to Developer an exclusive easement on, over, and across all of the Owner's Property to permit (Wind Tower) and other project facilities on adjacent property or elsewhere to: cast shadows or flicker onto the Owners Property, cause or emit noise, cause air turbulence, and to cast light from the FAA required lighting and also safety and security lighting relating to the Project (collectively the "Easements".

Length of time.........40 years.

Applies to successors.

My determination re taxes.............return of basis, applied against entire property. Excess over cost is capital gain.

Rev Rul 59-121, as clarified by 68-291.

The court cases I read for pipeline easements indicated that the basis of the land is allocated to the area of the easement. In the case of a pipeline, that easement area would be, say, 100ft wide by length of run.

In this case, since the easement is on the whole property, then the entire property's basis would be available to absorb the easement proceeds.

Being a non-attorney, it took me a little time to absorb the concept that the "easement" was on the property, but really prevented the occupant from hollering foul, since the nuisance items were allowed to be there by contract.....hence the client's description of the agreement being one of preventing him from suing.

In addition, to me the contract/easement makes a big deal of the easement running with the property. Looking at an illogical but possible situation--------I wonder if that would mean that the land owner could buy additional property "up the road", which is not covered by any easement at time of purchase, change his residence to that property (ie establishing residence so that there would be ample time to show the long-term effects of damage from such items as the "light flickering from the blades"), and sue for the effects of "light flickering" etc etc, without being bound by the easement.

In summary, after vacating the "personal injury" concept...........the conclusion became relatively obvious.

Thanks, All.
 

#32
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Apparently the wind mill owner knows what evil lurks in the hearts of men too!
 

#33
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As to your paragraph about the possible but illogical situation, wouldn't you expect that the power co. obtained similar easements on all the surrounding properties that might be affected?

To me the intriguing thing is the 40-year duration of the easement. Maybe there's case law to the effect that after that amount of time, any buyer of the affected property should know what he's buying, including the flicker, etc.

But as to the tax result, maybe I'm just connecting OP's facts with deducting a conservation easement, the latter requiring that the easement be perpetual. Maybe that's where the rental notion comes in. Anyone feel like looking up the legislative or rgulatory discussion as to why the consrvation easement has to be perpetual?

(5) Exclusively for conservation purposesFor purposes of this subsection—
(A) Conservation purpose must be protected
A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.


(2) Qualified real property interestFor purposes of this subsection, the term “qualified real property interest” means any of the following interests in real property:
(A) the entire interest of the donor other than a qualified mineral interest,
(B) a remainder interest, and
(C) a restriction (granted in perpetuity) on the use which may be made of the real property.


Or why this provision exists.

(3) Denial of deduction in case of certain contributions of partial interests in property
(A) In general
In the case of a contribution (not made by a transfer in trust) of an interest in property which consists of less than the taxpayer’s entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowable as a deduction under this section if such interest had been transferred in trust. For purposes of this subparagraph, a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer’s entire interest in such property.
 

#34
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"As to your paragraph about the possible but illogical situation, wouldn't you expect that the power co. obtained similar easements on all the surrounding properties that might be affected?"

Nilodop, that is why I suggested "illogical".

But, given the farmers I typically deal with, it is not so "illogical" that one within "the affected area" might not be a holdout---------"just because".

And then, "reasonable distance from the offending windmill" would likely be a court-contentious topic also.......
 

#35
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The conservation easements language relates to charitable donations, not easements in this context. The IRS really doesn't like "syndicated" easements, and the regulations have been built around that where donations of building facades, swampland, old mines, etc. are extremely aggressive (and frankly over-valued most of the time). Perpetuity is required to meet the gift standard; likely no application in this context with an easement provided to a windmill owner.

Unless the windmill owner is a non-profit...then a whole other can of worms.
 

#36
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The easement "runs with the land" meaning that it transfers with any sale.

The easement is for the utility, not for conservation purposes, so I am not seeing why those sections would apply.

Per Pub 544:

Easement.
The amount received for granting an easement is subtracted from the basis of the property. If only a specific part of the entire tract of property is affected by the easement, only the basis of that part is reduced by the amount received. If it is impossible or impractical to separate the basis of the part of the property on which the easement is granted, the basis of the whole property is reduced by the amount received.

Any amount received that is more than the basis to be reduced is a taxable gain. The transaction is reported as a sale of property.

If you transfer a perpetual easement for consideration and do not keep any beneficial interest in the part of the property affected by the easement, the transaction will be treated as a sale of property. However, if you make a qualified conservation contribution of a restriction or easement granted in perpetuity, it is treated as a charitable contribution and not a sale or exchange, even though you keep a beneficial interest in the property affected by the easement.

If you grant an easement on your property (for example, a right-of-way over it) under condemnation or threat of condemnation, you are considered to have made a forced sale, even though you keep the legal title. Although you figure gain or loss on the easement in the same way as a sale of property, the gain or loss is treated as a gain or loss from a condemnation. See Gain or Loss From Condemnations, later.
 

#37
Nilodop  
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HenryDavid and keiser, I am aware of all you say, but I don't see where you've addressed my point. If the easemtn is less than perpetual, such as 40 years, is it a sle of property or is it akin to prepaid rent?
 

#38
Nilodop  
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This article by Mitch is interesting bit cites no authorities. https://www.bergankdv.com/resources/blo ... -of-way-2/

Temporary easements are generally treated as rental income, whereas perpetual easements involve a permanent impact to the land and thus are treated as an outright sale.


Examples of fixed-term easements which are reported as ordinary income or rent treatment include:

Coal mining surface rights granted under a 35 year easement.
Conveyance of easement limited to period required to remove minerals.
Easement right to use a road for ten year contractual period.


There are situations where long-term leasehold (easement) interests are treated as the equivalent of a real property interest:

Like-kind exchange regulations allow a leasehold interest of 30 or more years, to be eligible for exchange treatment.
In the information reporting requirements, regulations provide that a leasehold, easement or timeshare of a term of at least 30 years is subject to reporting as the gross proceeds from real estate transactions on Schedule 1099-S.
. Someone look this up. Maybe it's authority to say the 1099 for rent is incorrect.
 

#39
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Maybe that's where the rental notion comes in.

I was thinking the same thing when I saw the 40-year life. Some of these cases involve a permanent easement (basis reduction) vs. something less than permanent, which would be a lease.

Here’s a treatise on the conservation easements:

https://www.landcan.org/pdfs/perpetualisnotforever.pdf
 

#40
keiser  
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From a 12/2019 blog [https://www.wipfli.com/insights/blogs/ag-conversations/tax-sale-of-easement-tax-treatment-income-tax-ramifications], the issue may be unresolved:

"Sale of easement tax treatment
You probably know you’re required to report the sale of an easement for income tax purposes. If you’re granting the easement to a qualifying charitable organization, you can trigger a charitable deduction. But let’s focus on the other option, which is selling the easement, and go over some tax planning strategies.

It will depend on whether the easement is temporary or permanent.

Temporary easements exist only for a limited number of years. They are treated as rent or lease income.

Permanent easements are perpetual or don’t have a specified end date. They are treated as a property sale. This means you can treat the easement as a sale, which has multiple advantages:

The cost basis of the affected land can offset the sale amount. This reduces the income taxes on the deal.
Generally, the income will be taxed at favorable capital gains tax rates.
The sale could qualify for like kind exchange treatment.

IRS regulations allow the sale of a leasehold interest of 30 years of more to qualify for like kind exchange treatment. This causes a dilemma, however, because there is no authority to treat easements of this duration as a sale for tax calculation purposes. If the sale of a 30-year leasehold qualifies as a sale for like kind exchange purposes, then why would it not qualify for cost basis offset and capital gain treatment?

As the frequency of significant easements continues to grow, I suspect that the IRS and the courts will provide guidance in this area."
 

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