I.R.S. Duns Bass Cash

". . .in this world nothing is certain but death and taxes."

Benjamin Franklin

Fishermen who thought they had escaped income taxes on their shares of a $7 million settlement with the General Electric company three years ago learned otherwise three weeks ago. The settlement ended a suit over the company's responsibility for the decline of the lucrative striped bass fishery in New York State.

The Internal Revenue Service has begun sending notices to the more than 400 individuals who settled with the manufacturer, informing them of amounts past due on 1994 taxes, along with interest and penalties that have accrued.

As much as $4 million of the $7 million settlement went to East End fishermen, baymen, charter boat captains, and draggermen, and some whopping tax bills are likely to be on the way. Over 100 of the fishermen who settled live on the South Fork.

Big Liabilities

Arnold Leo, secretary of the East Hampton Town Baymen's Association, said on Monday that relatively few of those who benefited from the settlement paid taxes on the money. Many used it to get out of financial holes, to pay off loans, to make mortgage payments, or to buy new fishing gear, he said. Two fishermen, Mr. Leo added, spent their entire awards on new boats in order to enter new fisheries.

"This could be a major disaster on a par with the original P.C.B. disaster," Mr. Leo said. "The bigger fishermen could be liable for $30,000, $40,000, $50,000," not including interest and penalties, he said.

In August of 1993, G.E. agreed to compensate fishermen who lost income during the seven years striped bass could not be sold because of polychlorinated biphenyl (P.C.B.) contamination.

Got No 1099s

The company had dumped tons of the suspected carcinogen into the Hudson River over a 30-year period, contaminating striped bass and other species. Fishermen began suing the manufacturing giant in 1985 and won the right to sue as a class in December of 1988.

Originally, fishermen put in claims for a share of the settlement money for a total of $3 million more than the $7 million set aside by G.E. As a result, fishermen were awarded about 70 percent of their total claim. Many still wound up with sizable checks; the biggest was reportedly more than $200,000.

Fishermen began receiving their checks in September of 1994.

Mr. Leo said the I.R.S. viewed the money as income, pure and simple, while most of the recipients assumed it represented a nontaxable award for damages. Reinforcing that belief was the fact that none of the recipients received 1099 income tax forms from General Electric, he added.

Damages

According to Mr. Leo, "the suit was never about lost income, but about damages which included social disruption, displacement, depression. And there was capital damage. People had to buy new boats and gear. A moderate bass fisherman lost more in nets than he did in lost income. The point is, we were told by attorneys that you never pay taxes on a tort [wrongful act or injury], so everyone felt assured."

"There was no question that it was money for damages, and no taxes," Mr. Leo, who acted as claims coordinator between the fishermen and G.E., said.

He added that although the tax question had been raised at the time of settlement G.E. officials had assured him tax forms would be sent out if it appeared they were required.

Economic Damage

Sidney B. Silverman, a lawyer with a house in Amagansett who handled the class action suit for the fishermen along with Joseph Carlino of Mineola, and brokered the agreement, explained that "the question was open at the time, but the Supreme Court resolved the issue in 1995. It ruled that, yes, such cases are torts, but the damage is economic, not physical."

East Hampton Town Councilman Thomas Knobel, himself a party to the settlement, said, "How else do you measure damage. Do you weigh a bucket of tears? It's bad enough if we have to pay the tax. If interest and penalties are added, it's punitive," Mr. Knobel said.

In order to participate in the settlement fishermen had to produce records showing the income they earned from striped bass during any or all of the years from 1982 through 1985.

Each fisherman was eligible for seven times the amount earned from striped bass during their most productive year. The multiplier, seven, represented the number of years bass fishermen were crippled. There was a separate formula for those who earned $50,000 or more.

Two Precedents

Mr. Leo said the directors of the Baymen's Association had met with a tax attorney in New York City last week who cited two cases as precedents. In both, compensation received, even for punitive damages, was considered taxable income, not a nontaxable personal injury award.

William Bernstein of the Patchogue firm of Cartier, Hogan, Sullivan & Bernstein, another tax specialist, is scheduled to be in Amagansett on Feb. 26 to discuss individual tax problems with interested fishermen. The session will begin at 7 p.m. in Scoville Hall of the Presbyterian Church.

He held out little hope, however, that taxes could be avoided. He said that in suits against the I.R.S. brought by fishermen put out of business by the Exxon Valdez spill in Alaska "the Supreme Court found that the amount of damages was calculated on income replacement. Personal injury is not calculated that way."

Case-By-Cash

The fact that bass fishermen did not receive 1099 forms from General Electric was not likely to be seen as significant, he added.

"I would be surprised if they negotiated. They have a Supreme Court decision. They might be willing to compromise on penalties, but the I.R.S. has no authority to compromise on interest," Mr. Bernstein said. The general schedule for penalties on late taxes is 5 percent per month for up to five months, or 25 percent.

"Even though we could fight, it's probably most sensible to deal with the I.R.S. on a case-by-case basis," Mr. Leo said earlier this week.