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Fire victims shocked by taxes levied on PG&E settlements

Legislation may protect payout settlements
Fire victims shocked by taxes levied on PG&E settlements
A property on Bennett Ridge burned in the 2017 Nuns Fire.Photo by Chris Rooney

 

By Chris Rooney

“Is this a slap in the face or what? It’s more like a double slap in the face.”

What has Glen Ellen resident Cheri Burgi fuming is also infuriating many other wildfire victims who are awaiting or have received partial Pacific Gas & Electric (PG& E) settlements — those funds are subject to both federal and state taxes.

“I’m relying on that money,” Burgi said. “I don’t know if I can afford to live here without it.”

The fact that settlement funds are taxable is bad enough, but the matter turned worse when it came as an utter surprise to many wildfire victims filing their taxes this year. Not only were settlement recipients unaware their payouts were taxable, but law firms involved in pursuing PG& E settlements were also in the dark, as were some tax preparers.

“It’s a confusing situation,” said one Sonoma County enrolled agent (tax preparer). “It’s been a real big scramble.”

Apparently, the Fire Victim Trust (FVT), which is responsible for disbursing settlements from the PG& E fund, provides 1099 tax forms to payees, but law firms making payments to clients do not, leaving recipients confused when it came time to file taxes.

As payments trickle forth from the FVT, it’s possible for recipients to extend their tax due date to Oct. 15, but they will be responsible for both taxes and interest if they don’t pay on their settlements by Tax Day, April 18.

While it won’t help those filing taxes right now, there may be hope on the horizon.

Earlier this month, Rep. Mike Thompson co-authored legislation to ensure fire survivors are not taxed on funds received from the PG& E Fire Victim Trust.

“I’m hopeful we’ll make headway with it,” Thompson said in a conference call with the Kenwood Press. He added that he wished the settlement plans had addressed the tax situation from the beginning. “If it could be redone, I’d get lawyers who pay attention to detail.”

Following fires in 2015, 2017, and 2018, PG& E established a courtordered trust of more than $13 billion for survivors.

“This trust was set up to help people get back on their feet and recover after a destructive fire. They should not have to pay taxes on these payouts,” Thompson said in a prepared statement.

As of March 31, the trust had paid out $3.2 billion in preliminary and pro-rata payments and awarded $7.7 billion in determination notices.

The Butte Fire, North Bay Fires, and Camp Fire burned 400,000 acres, destroying tens of thousands of homes and other structures. The North Bay Fires of 2017 alone claimed 44 lives, burned more than 200,000 acres, and destroyed 5,300 homes in Napa, Sonoma, Lake, Mendocino, and Solano Counties. In the aftermath of each fire, thousands of people sought refuge in their vehicles, emergency tent communities, or Federal Emergency Management Agency (FEMA) camps.

Another piece of legislation, AB 1249, is being put forth to offset state taxes on the very same settlement funds.

Both proposed laws are awaiting approval from state and federal leaders. Neither seem to have vocal opposition, but for any fire victims trying to file taxes or just make life plans based on the PG& E settlements, things remain in a state of flux.

Dale McCoy lost the Kenwood home where he’d lived for 30 years and now lives in Oakmont. He has received a pro rata (partial) payment from the FVT but was unaware of the tax ramifications.

“This is double taxation,” he stated. “All my [personal] items [lost in the fire] were paid for with taxed dollars. Plus my home. Any taxes that the feds and state want from fire victims should be paid for by PG& E.”

He said his lawyers led him to believe the funds were non-taxable, so he did not declare them.

“The cost to rebuild was far beyond the PG& E settlement, which won’t be paid out in full until who knows when,” McCoy said. “Even when combined with insurance claim payments, I was unable to rebuild an equivalent home. The additional costs for permits, new PG& E hookup, new well and storage tank, clearing of the land, environmental impact, hazardous waste and disposal, let alone cost of an architect, made it impossible.”

Above and beyond being responsible for taxes, McCoy said the FVT’s slow pace has also hurt victims.

“It’s been four-plus years and we survivors still don’t have full payment from the PG& E trust,” he said. “You can’t pay a builder if you lack the funds. To then have to face a tax burden is beyond the pale. These payments from the settlement are not ‘earned income’ nor a ‘gift’ to a retiree like myself, nor do they replace the loss of life, family memories, and the displacement and mental anguish we have incurred.”

Another local resident who preferred anonymity said he felt “utter disbelief, after all the fire survivors have experienced and still are going through, and now they had to worry about paying taxes. Those monies could be used in the rebuild or finding a new home.”

Burgi, who called it a slap in the face, has felt personal loss. Her daughter, who helped her evacuate the night of the Nuns Fire, used to be her next-door neighbor. She couldn’t afford to rebuild in Glen Ellen next to her mom, so now lives in American Canyon.

Once they realized the tax ramifications, members of the Bennett Ridge neighborhood began a letterwriting campaign to elected officials. About 80 percent of the homes on Bennett Ridge were destroyed in the Nuns Fire; the residents have remained in contact during the rebuilding process via a neighborhood email list. They have successfully campaigned for fire safety grants and worked on an emergency evacuation route, as there is only one access road into the hillside tract, located about six miles outside Santa Rosa city limits off Bennett Valley Road.

During a plea to elected officials, Helen Sedwick, one of the leaders of the Bennett Ridge campaign, said, “We are here to ask your help in lightening the tax burden. Due to the haircut we took in the bankruptcy plan, attorneys’ fees, trust administration costs, and now taxes, the typical victim will receive far less than half their actual damages. Plus, we were forced to become investors in PG& E and accept those risks. Yet tax law treats much of our recoveries as a windfall. Our focus is on recoveries for the emotional distress of escaping the fire and losing our homes. Under current law, these recoveries are treated as ordinary income unless directly related to bodily injury. Outside of bankruptcy, we could have received hundreds of thousands for these traumas. Instead, we are receiving between $10,000 and $165,000 in the most extreme cases.”

Her statement also scrutinized the fire victims’ unwanted link to PG& E.

“I’d also like to point out again that fire victims were forced to become investors in PG& E stock,” she stated. “Investment gains are taxed at capital gains rates. However, we are not given this tax break.”

Sedwick also noted that “the complexity of these tax issues is an unmeasurable burden on taxpayers. Those who can afford it can engage someone to help. But most victims, and their tax preparers, will get this wrong. All these burdens fall hardest on those least able to shoulder them.”

While people rebuilding after the wildfires are dismayed and surprised by the potential taxes levied on their settlements, it’s not as if it’s a new law — it just wasn’t brought to anyone’s attention until now.

Forbes magazine, in 2019, took a look at the situation: “Do wildfire victims worry about their taxes? You bet. How fire victims are taxed depends on what they collect, what they claim on their taxes, if they are rebuilding their property, their insurance, and more. Another big variable is whether they sue PG& E. It can build out a complex tax picture, especially now that there is a new tax on litigation settlements, as many legal fees can no longer be deducted … Understandably, most fire victims hope not to face any tax hit at all. That is possible in some cases, but it can involve scrupulous attention to timing and details. When it comes to taxes or fire, be careful out there.”

And, perhaps, lobby your elected officials to pass those two tax-relief pieces of legislation.

Fire victims shocked by taxes levied on PG&E settlements
A property on Bennett Ridge burned in the 2017 Nuns Fire. Photo by Chris Rooney

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