Paul L. Caron

Friday, June 28, 2019

Kahn: The Tax Treatment Of Liability Insurance Coverage

Jeffrey H. Kahn (Florida State), The Tax Treatment of Liability Insurance Coverage, 163 Tax Notes 1381 (May 27, 2019):

If a taxpayer purchases automobile liability insurance and causes an accident that the insurer must cover, does the taxpayer have income in the amount of the coverage? The current law is clear that the taxpayer does not have income from the insurer’s payment or reimbursement of the insured. In a previous article [Hedging the IRS — A Policy Justification for Excluding Liability and Insurance Proceeds, 26 Yale J. Reg. 1 (2009)], I concluded that there was a policy justification for that treatment. Sachin S. Pandya and Stephen Utz have published an article [Designing the Tax Treatment of Litigation-Related Costs, 21 Fla. Tax Rev. 533 (2018)] in which they maintain that my prior conclusion and analysis are incorrect and that the proceeds are taxable to the insured. They base their conclusion on the assertion that an insurer’s payment or reimbursement is not excludable unless the expense involved would have been deductible if paid by the insured and not reimbursed. I contend that their conclusion is based on a premise that is inconsistent with and contradicted by the long-standing application of the tax law.

... This article reviews the policy justification for liability insurance tax treatment.

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