We own a home in Brooklyn, NY. The lot next door was bought by a non-profit who tore down the existing warehouse and is building a school.

To tear down the old building they had to destroy our garden, so we made an agreement that they would pay us for the loss of the plants, and the destruction of and loss of use of the garden. What they paid us is less than the value of the property, and is meant just to make us whole.

They sent a 1099-MISC for the amount they paid us in 2008 for the garden. They had the amount in box 7, and I asked them to move it to box 3, which they did.

Everyone we talk to at the IRS says the money they gave us is not taxable, and they shouldn't have sent the 1099, but when the IRS technical people sent an email, it said *if* the payment was for damages or interest then we had to pay taxes. It is for damage, but not "damages" in the legal sense, I think. We have no choice but to pay taxes on the compensation, or get into a fight with the IRS.

Our neighbor said they will reimburse us for the taxes we have to pay, since they never intended for us to pay taxes.

Then they flooded our basement and we had to rip up the kitchen and carpet, tear down sheetrock, etc. They agreed to compensate us for the damage. They put in industrial dehumidifiers and blowers to dry out the basement, and agreed to pay our electricity bills.

Now they are saying they *will* send a 1099 for 2009 as well. This means we will have to pay taxes on compensation for destroying our basement, reimbursement for electric bills, and reimbursement for taxes for 2008!

Our understanding is still that we shouldn't be issued a 1099 for this type of payment. I think I'll ask them to pay our future electric bills directly (make the check out to ConEdison), but what would be the best way to deal with this? Thanks very much. --E.