What method is going to be used to reimburse the taxpayer for the excess real estate taxes? Ten year's worth in a lump sum now?...or on a yearly basis over ten years if the party retains ownership for the full ten years?...or some other method?
Lump sum last year.
Then I can only see it as income now, fully deductible expense as actually paid out. In this instance if the house is sold in less than 10 years the taxpayer will actually have a profit on the settlement.
The reason for the problem is that the property is in a LLP and not personally. (A direct transfer would have maintained the value in assessment because of property tax law for transfers between parent and child.) Yet, there cannot be an actual profit unless the settlement goes to basis unless the whole amount is taxed up front. Certainly, I will deduct the payment of the full amount of property taxes when they are paid. Taking the income now and the additional expenses through the years (including those past payment theory fulfillment) is easy. My goal, which I am less and less inclined to do, is to not take the settlement into income or to take it in as a wash over time.
The problem with your ideal scenario is that the settlement amount would never truly match the damages. In the case you referenced regarding tax benefit earlier, you can calculate with specificity what the tax benefit was. In your case, your client could extend the damages across their lifetime (or beyond I suppose with an LLP) or end it tomorrow by selling the property. How do you match up the settlement over time? Actuarial calc?
Tax benefit rule.