The explosion of the Deepwater Horizon oil rig and subsequent oil spill in the Gulf of Mexico have led to substantial damages, particularly in the form of lost wages and income. Furthermore, given the magnitude of the economic disruption resulting from the spill, policymakers have begun to explore possible alternative mechanisms for providing relief to the affected region. We will then provide an analysis of the tax treatment of the BP payments to the individuals and businesses impacted by the oil spill as well as various policy options for providing tax relief to oil spill victims, highlighting the circumstantial differences between previous natural disasters and the current oil spill. For example, taxpayers are allowed a deduction for casualty losses. The oil spill in the Gulf of Mexico presents lawmakers with unique challenges in using the tax code to provide relief. First, unlike other recent disasters, such as the 2005 hurricanes in the Gulf, the oil spill is not a natural disaster. The oil spill is the result of human action, where unlike a natural disaster, there may be a liable party. Second, the nature of the damages is different from those typically borne by victims of natural disasters. Specifically, damages are more likely to be in the form of lost business income and employment, rather than direct property loss. Certain relief that has been awarded in the past, such as tax filing extensions to assist with the destruction of taxpayer records, is not likely to be an issue. As of August 23, 2010, all claims are to be filed with the Gulf Coast Claims Facility (GCCF), an independent entity that is administering the claims, with payments coming from an escrow account funded by BP. For example, payments received by individuals due to physical injury or sickness arising from the oil spill may qualify for exclusion under IRC § 104. Specifically, the loss to business and individuals may exceed insurance or the claims compensation. Tax Treatment of Claims Payments

As discussed above, unless Congress enacts legislation, the payments for lost income will generally be included in recipients' gross income. Charitable Relief

As a response to past disasters, Congress has adopted legislation to promote charitable assistance to disaster victims. Legislative Response

A number of bills have been introduced in both the House and the Senate that would provide tax relief to victims of the oil spill. The Oil Spill Tax Relief Act of 2010 ( H.R. 5598 ) would require that any compensation provided by BP to an oil spill victim be treated as a qualified disaster payment, and thereby excluded from gross income for tax purposes. The Gulf Coast Access to Savings Act of 2010 ( H.R. The Gulf Oil Spill Recovery Act of 2010 ( H.R. 5699 ) would make various tax relief measures available for oil spill victims. H.R. 5699 has been referred to the House Committee on Ways and Means. In the Senate, the Gulf Coast Oil Recovery Zone Tax Relief and Economic Recovery Act ( S. 3934 ), would provide various forms of tax relief for Gulf oil spill victims.
The explosion of the Deepwater Horizon oil rig and subsequent oil spill into the Gulf of Mexico has led to substantial damages, particularly in the form of lost wages and income. BP has begun to make interim payments to compensate for lost income resulting from the oil spill. Individuals and businesses impacted by the oil spill may file a claim with the Gulf Coast Claims Facility, an independent entity established to administer the claims, with payments coming from an escrow account funded by BP. The tax consequences of these payments to the recipients will depend on the nature of the underlying claim. Payments received for lost wages or income will generally be taxable, while payments for other types of claims, such as physical injury or damage of property, may qualify for exclusion or deferral.
Given the magnitude of the economic disruption resulting from the spill, however, policymakers may consider exploring alternative mechanisms for providing relief to the affected region. In the past, Congress has used the tax code as a tool to provide relief to disaster victims. While the Gulf of Mexico oil spill has not been classified as a federally declared disaster, the tax code could be used as a mechanism for delivering additional relief. Tax policy options that could be explored include added casualty loss deductions, an extended net operating loss (NOL) period, employment incentives, enhanced access to retirement savings, and incentives for charitable relief.
Similar policies were adopted following past disasters. However, the oil spill in the Gulf of Mexico presents lawmakers with unique challenges in using the tax code to provide relief. First, the oil spill is not a natural disaster. The oil spill is the result of human action where, unlike a natural disaster, compensation may be recovered from a financially responsible party. Second, the nature of the damages is different from those typically borne by victims of natural disasters. Specifically, damages may primarily be in the form of lost business income and employment, rather than direct property loss. Relief that has been awarded in the past, such as tax filing extensions to assist with the destruction of taxpayer records, is not likely to be an issue. Finally, if the goal is to provide relief or assistance to the poor, the tax code may not be the best policy instrument.
Legislation has been introduced in the House and Senate that would provide tax relief to the Gulf Coast oil spill victims. The Oil Spill Tax Relief Act of 2010 (H.R. 5598) would require that any compensation provided by BP to an oil spill victim be treated as a qualified disaster payment, and thereby excluded from gross income for tax purposes. The Gulf Coast Access to Savings Act of 2010 (H.R. 5602) would allow for enhanced access to retirement savings. The Gulf Oil Spill Recovery Act of 2010 (H.R. 5699) would make various tax relief measures available to businesses and individuals. Similar to H.R. 5699, the Gulf Coast Oil Recovery Zone Tax Relief and Economic Recovery Act (S. 3934) would provide various forms of tax relief for businesses and individuals in the affected region.