FEDERAL DISASTER PAYMENTS QUALIFY AS CROP INSURANCE PROCEEDS.

Rev. Rul. 91-55

ISSUE

Whether section 451(d) of the Internal Revenue Code applies to disaster payments received under title I of the Disaster Assistance Act of 1989, Pub. L. No. 101-82, 103 Stat. 564 (the "Disaster Assistance Act").

FACTS

The taxpayer, a farmer, files federal income tax returns on the basis of a calendar year and reports income using the cash receipts and disbursements method of accounting. The taxpayer's crops were damaged in 1989 as a result of drought. In December 1989, the taxpayer received a payment from the Department of Agriculture pursuant to title I of Disaster Assistance Act, which provides for disaster payments to farmers whose production of 1989 crops was adversely affected by damaging weather or related conditions. Under the taxpayer's established business practice, the income from the damaged crops would have been reported in 1990.

LAW AND ANALYSIS

Section 451(d) of the Internal Revenue Code provides, in part, that in the case of insurance proceeds received as a result of destruction or damage to crops, a taxpayer reporting income on the cash receipts and disbursements method of accounting may elect to include such proceeds in income for the taxable year following the taxable year of destruction or damage if, under established business practice, the income from such crops would have been reported in a following taxable year. Section 451(d) was enacted in 1969 to ameliorate the tax burden on a farmer who, in the same year, would otherwise have to pay tax on both (1) the proceeds of crops grown during the previous year and sold during the current year, and (2) the insurance proceeds received during the current year with respect to the destruction of, or damage to, crops that would have been sold the following year.

Section 1.451-6T of the temporary Income Tax Regulations provides, in part, that federal payments received after December 31, 1973, as a result of (i) destruction or damage to crops caused by drought, flood, or any other natural disaster, or (ii) the inability to plant crops because of such a natural disaster, shall be treated as insurance proceeds received as a result of destruction or damage to crops for purposes of section 451(d) of the Code.

Section 1.451-6(b)(1) of the Income Tax Regulations provides that the section 451(d) election shall be made by means of a statement attached to the original or an amended return for the taxable year of destruction or damage.

Rev. Rul. 75-36, 1975-1 C.B. 143, concludes that disaster payments made by the Department of Agriculture pursuant to the Agricultural Act of 1949, as amended by the Agriculture and Consumer Protection Act of 1973, are in the nature of guaranteed income and are not insurance proceeds within the meaning of section 451(d) of the Code. The holding of the ruling is inconsistent with the position taken in section 1.451-6T of the temporary regulations which, based on the legislative intent underlying section 451(d), treats certain post-December 31, 1973, federal disaster payments as "insurance proceeds" in order to carry out the purpose of the statute. Thus, the Service no loner considers the result reached in Rev. Rul. 75-36 to be correct.

Accordingly, the taxpayer in the instant case, having satisfied the requirements of section 451(d), may elect under section 451(d) to include in income in 1990 the payment received in December 1989. Pursuant to section 1.451-6(b)(1) of the regulations, the taxpayer may make this election on either an original or an amended return for 1989.

HOLDING

Section 451(d) of the Code applies to payments received under title 1 of the Disaster Assistance Act.

EFFECTS ON OTHER REVENUE RULINGS

Rev. Rul. 75-36 is hereby revoked.

DRAFTING INFORMATION

The principal author of this revenue ruling is P. Va. Strehlow of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Strehlow on (202) 377-9586 (not a toll-free call).