In the aftermath of the attack on the World Trade Center (WTC) twin towers on September 11, 2001 (9/11), thousands of Americans and even foreign workers lay dead.
Soon after, a Victims’ Compensation Fund (VCF) was put up.
Since then, thousands of victims have lodged their claims to receive a portion of settlement. Among those who lodged their claims, many individuals received substantial awards from the fund.
Speaking of compensation, many of those who received victim’s compensation settlements are not quite sure if they’re liable to pay taxes to the Internal Revenue Service (IRS) for the sums of money that they received.
The WTC Victims’ Compensation Fund
The World Trade Center (WTC) Victims’ Compensation Fund was established and funded after September 11.
When it started, it was administered by a Special Master of the Department of Justice (DOJ) and catered mostly for those directly affected by the 9/11 terrorist attacks, as well as their families.
In essence, it’s a fund for restitution of the victims of 9/11 as that event is now infamously called.
There was a time when the VCF ran out of funds. Sometime in 2010, Congress passed a law to inject fresh funds into the VCF so that it can continue to help victims and survivors of 9/11 and their immediate families.
The scope of victims and beneficiaries of the VCF had changed since its inception. As of the present, the VCF is mandated to look into the claims of thousands of 9/11 victims.
It checks whether those who claim to have suffered severe losses, including those who claim to have lost wages and any meaningful livelihood as a result of that tragic attack, are, indeed, eligible to receive victims’ compensation.
Aside from the obvious victims of 9/11 and those who suffered injury and losses in its aftermath, the VCF also looks into cases of those who were indirectly affected by the incident.
These are people who claim to have suffered cancer, death, or other non-cancerous illnesses as a result of being exposed to the hazardous contaminants at Ground Zero.
Even the scope of the territorial area covered by the compensation now includes those who were living, working, or located in the areas surrounding Ground Zero.
Examples of these places are the Staten Island Landfill, lower Manhattan around the south of Canal Street, and some of the piers in New York City where debris fell.
Also included now among the potential beneficiaries are the families of people who died from events that were connected to the 9/11 terrorist attacks.
Basic Rules On Taxing Damages And Recoveries
In what might come as a surprise to a lot of people, some damages and compensation, and recoveries awarded by the court are considered included in the gross income and, therefore, included in the computation of tax.
It will be remembered that in 1955, the United States (U.S.) Supreme Court handed down the landmark decision in Commissioner v. Glenshaw Glass Co.
In this case, the Supreme Court held that punitive damages and other windfall recoveries are to be included in the concept of gross income.
This implies that they’re to be included in the computation of federal income tax.
Prior to this landmark decision, the rules for taxation of damages were already quite reasonable and clear. But, what the Glenshaw Glass case did was that it resolved a few unsettled areas.
Here are some of the prevailing rules:
- Damages for personal injuries are not taxable. This includes those damages which can be attributed to losing one’s profit or earnings;
- Punitive damages are taxable;
- Other windfall recoveries are also taxable.
- As to other kinds of recovery, there’s no fixed rule. It depends on what the recovered sum of money represents. If the recovery pertains to the award of damages as settlement for the loss of capital, then the recovered amount is taxable. However, this is limited only to the portion of the award in which the damages exceed the taxpayer’s share in the capital affected. If the recovery is payment for lost profit or earnings, then it’s fully taxable.
- If it’s a recovery which is treated as taxable, it should be included in the income of the taxpayer in the year that the recovery was obtained. It should not include the recovery in the year during which the taxpayer suffered or is expected to suffer the loss.
- Whether the recovery is the result of a judgment or a settlement, the same identical rules of taxation will apply.
WTC Victims’ Compensation Award Not Taxable
In general, those who received an award from the WTC Victims’ Compensation Fund are not legally obliged to report their victim compensation settlement as income on the federal income tax return.
As early as 2003, both the IRS and the Treasury Department confirmed that any payments issued to the victims are tax-free, especially those claims wherein the victims suffered physical injury or even death.
Those who receive a VCF settlement can opt to receive their compensation settlement either in a lump sum or in periodic payments as set forth under Revenue Ruling 2003-1115 (“Gross income; compensation for injuries or sickness; disaster relief payments”).
This won’t change their status. Their awards remain non-taxable.