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CRS Releases Report on Tax Relief Provisions for Disaster Victims

SEP. 12, 2006

RL33642

DATED SEP. 12, 2006

DOCUMENT ATTRIBUTES

Authors
Teefy, Jennifer
Institutional Authors
Congressional Research Service
Subject Area/Tax Topics
Individual income taxation
Jurisdictions
United States
Language
English
Tax Analysts Document Number
Doc 2006-19474
Tax Analysts Electronic Citation
2006 TNT 180-64

Citations: RL33642

CRS Report for Congress

Received through the CRS Web

Order Code RL33642

September 12, 2006

Jennifer Teefy

Information Research Specialist

Knowledge Services Group

Permanent Tax Relief Provisions for Disaster Victims

as Presented in the Internal Revenue Code

Summary

When natural or man-made disasters occur, there are several tax relief provisions that apply to affected taxpayers. This report focuses on permanent tax relief laws that are intended to benefit victims of both presidentially and nonpresidentially declared disasters such as hurricanes, floods, earthquakes, tornadoes, droughts, wildfires, wars, and terrorist attacks. The selected laws are summarized in table format and are arranged by different categories, including "losses," "gains exempted from income," and "postponements." For each law summarized, the table contains the corresponding Internal Revenue Code (IRC) section citation and a brief description of the provision. The descriptions are combinations of verbatim and summarized IRC text.

Contents

Introduction

Permanent Tax Relief Provisions for Victims of Presidentially Declared

Disasters

Losses

Net Operating Losses -- Businesses

Gains Exempted from Income

Postponements

Tax Reimbursements

Selected Permanent Tax Relief Provisions for Individual Victims of

Non-Presidentially Declared Disasters

Net Operating Losses -- Individuals

Gains Exempted from Income

Retirement Plans -- Rollovers

Underpayment of Income Tax

Additional Resources

Permanent Tax Relief Provisions for

Disaster Victims as Presented

in the Internal Revenue Code

Introduction

When natural or man-made disasters occur, there are several tax relief provisions that apply to affected taxpayers. This report focuses on permanent tax relief laws that are intended to benefit victims of disasters such as hurricanes, floods, earthquakes, tornadoes, droughts, wildfires, wars, and terrorist attacks. The selected laws are summarized in table format and are arranged by different categories, including "losses," "gains exempted from income," and "postponements." For each law summarized, the table contains the corresponding Internal Revenue Code (IRC) section citation and a brief description of the provision. The descriptions are combinations of verbatim and summarized IRC text.

There are two main parts to this report; the first contains a list of permanent tax provisions for affected victims of disasters that are referred to in the IRC as having been "presidentially declared." A presidentially declared disaster is defined in IRC Section 1033(h)(3) to mean "any disaster which, with respect to the area in which the property is located, resulted in a subsequent determination by the President that the area warrants assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act" (Stafford Act). Taxpayers affected by presidentially declared disasters can take advantage of certain tax relief provisions that are not available to those affected by non-presidentially declared disasters. The second part of this report contains selected tax provisions that are broadly available to individuals affected by disasters in general, not only those disasters that are presidentially declared.

In response to Hurricanes Katrina, Rita, and Wilma, Congress passed temporary enhancements to existing tax laws to provide extra tax relief to victims of these hurricanes. These modifications were part of the Katrina Emergency Tax Relief Act of 2005 (P.L. 109-73) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). Table notes indicate where the permanent laws described in this report were enhanced by either P.L. 109-73 or P.L. 109-135.¹

This report focuses solely on provisions for tax relief from disasters. It does not cover legislative actions that have created tax incentives to encourage redevelopment in disaster-affected areas, nor does it discuss tax incentives for charitable giving. Measures providing for direct funding to victims of disasters are also not included in this report. This report will be updated as warranted by legislative events.

Permanent Tax Relief Provisions for Victims

of Presidentially Declared Disasters

A presidentially declared disaster is defined in Internal Revenue Code Section 1033(h)(3) to mean "any disaster which, with respect to the area in which the property is located, resulted in a subsequent determination by the President that the area warrants assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act" (Stafford Act).

Losses

Internal Revenue Description

Code Section

Sec. 165^a Sec. 165 establishes the general rule

Losses that taxpayers may deduct losses for

which they are not compensated or

reimbursed by insurance or otherwise.

See Sec. 165(i) and Sec. 165(k) below for

specific provisions relating to disasters.

Sec. 165(i) A taxpayer who sustains a loss due

Disaster Losses to a presidentially declared

(also known as "Casualty disaster may elect to deduct the

Losses") loss on his or her return for the

immediately preceding tax year in

order to receive an expedited tax

benefit. For example, a taxpayer who

suffers a disaster loss any time

during 2006 may elect to deduct it

on his or her 2005 return; if the

2005 return has already been filed,

the taxpayer may file an amended 2005

return. Otherwise, the taxpayer may

wait and deduct it on his or her 2006

return in the regular manner.

Applies to individuals and businesses.

Sec. 165(k) In the case of a taxpayer whose

Demolition or Relocation of residence is located in an area which

Residence has been determined by the President

to warrant assistance under the Stafford

Act, if,

o not later than the 120th day

after the date of such

determination the taxpayer

is ordered, by the state or

local government in which the

residence is located, to

demolish or relocate the

residence,

and if

o the residence has been

rendered unsafe for use as a

residence by reason of the

disaster,

then the loss shall be treated as

a casualty loss, as described in

Sec. 165(i).

Applies to individuals.

FOOTNOTE TO TABLE

^a Secs. 165(h)(1) and 165(h)(2) place limitations on the amount

of the unreimbursed losses that can be deducted. Ordinarily, to figure a

deduction for a casualty or theft loss of personal-use property resulting from

a particular disaster, taxpayers must reduce the loss by $100 and also reduce

their total casualty and theft losses by 10% of their adjusted gross income.

Only the excess over these $100 and 10% limits is deductible. The Katrina

Emergency Tax Relief Act of 2005 (P.L. 109-73) removes these limits for

victims of Hurricanes Katrina, Rita, and Wilma on losses of personal-use

property, so that the entire amount of unreimbursed losses is deductible.

END OF FOOTNOTE TO TABLE

Net Operating Losses -- Businesses

Internal Revenue Description

Code Section

Sec. 172 A net operating loss (NOL) occurs

Net Operating Loss Deduction when, during a tax year, a business'

for Businesses allowable tax deductions are greater

than the taxable income, resulting in a

(see also "Net Operating Loss negative taxable income. This generally

Deduction for Individuals" in occurs when the business has incurred

the second part of this report, more expenses than revenues during the

"Selected Tax Relief and year.

Assistance for Victims of

Disasters (Non-Presidentially Generally, a NOL may be carried back and

Declared).") deducted against taxable income in the

two^a tax years before the NOL year, and

then carried forward and applied against

taxable income for up to 20 years after

the NOL year. These methods are known as

"carrybacks" and "carryovers,"

respectively.

A three-year carryback for a NOL is

allowed for small businesses and farms

that sustained NOLs due to

presidentially declared disasters.

FOOTNOTE TO TABLE

^a Gulf Opportunity Zone Act of 2005 (P.L. 109-135): The portion

of a net operating loss that is a qualified Gulf Opportunity Zone loss can be

carried back to the five tax years before the net operating loss year. See the

Internal Revenue Service (IRS) publication 4492, Information for Taxpayers

affected by Hurricanes Katrina, Rita, and Wilma for more information.

END OF FOOTNOTE TO TABLE

Gains Exempted from Income

Internal Revenue Description

Code Section

Sec. 139 This provision provides for the

Disaster Relief and Mitigation exemption from income of any payments

Payments Exempted from Income taxpayers receive as qualified disaster

relief payments^a or make in the case

of certain disaster mitigation payments^b.

The provision is intended to ease the

burden on individuals affected by

terrorist attacks, specific military

actions, presidentially declared

disasters, common carrier accidents, and

other disasters determined by the

Secretary of the Treasury to be of a

catastrophic nature, or disasters

determined to warrant federal, state,

or local government assistance.

Applies to individuals.

Sec. 1033 An involuntary conversion occurs

Involuntary Conversions when one's property is destroyed,

stolen, condemned, or disposed of

under the threat of condemnation and

he or she receives other property or

money in payment, such as insurance

or a condemnation award.

Gain realized from involuntary

conversions is deferred if property is

compulsorily or involuntarily disposed

of, and reinvested in a timely manner in

property similar or related in service

or use to the converted property.

See Sec. 1033(h) below for special rules

for both residential and business

property damaged by presidentially

declared disasters.

Sec. 1033(h) Taxpayers whose principal residence (or

Involuntary Conversions: Special any of its contents) is involuntarily

Rules for Personal Property converted as a result of a presidentially

Damaged by Presidentially declared disaster qualify for three tax

Declared Disasters breaks regarding certain insurance

proceeds:

(1) Gain realized from the receipt of

insurance proceeds for unscheduled

personal property (property in the home

that is not listed as being covered under

the insurance policy) is not recognized.

(2) Any other insurance proceeds received

for the residence or its contents may be

treated as a common fund. If the fund is

used to purchase property that is similar

or related in service or use to the

converted residence (or its contents), the

owner may elect to recognize gain only to

the extent that the common fund exceeds

the cost of the replacement property.

(3) The replacement period for property

involuntarily converted as a result of a

presidentially declared disaster is four

years after the close of the first tax

year in which any part of the conversion

gain is realized.

Sec. 1033(h) If a taxpayer's business property is

Involuntary Conversions: Special involuntarily converted as a result of

Rule for Business Property a presidentially declared disaster, the

Damaged by Presidentially taxpayer is not required to replace it

Declared Disasters with property that is similar or related

in service to the original property in

order to avoid having to recognize gain

on the conversion, as long as the

replacement property is still held for

a type of business purpose and it is

acquired within the appropriate period.

FOOTNOTES TO TABLE

^a A qualified disaster relief payment includes any amount paid

to or for the benefit of an individual, where the payment is not compensated

by insurance or by any other means:

(1) to reimburse or pay for reasonable and necessary personal, family,

living, or funeral expenses incurred due to a qualified disaster;

(2) to reimburse or pay for reasonable and necessary expenses incurred to

repair or rehabilitate a personal residence, to repair or replace its

contents to the extent that the need for such repair, rehabilitation, or

replacement is due to a qualified disaster;

(3) by a person engaged in the furnishing or sale of transportation as a

common carrier, due to the death or personal physical injuries resulting

from a qualified disaster; or

(4) if such amount is paid by a Federal, State, local government, agency,

or instrumentality thereof, in connection with a qualified disaster in

order to promote the general welfare.

^b A qualified disaster mitigation payment is any amount paid

pursuant to the Stafford Act or the National Flood Insurance Act. The payments

must be made to or for the benefit of the owner of the property for hazard

mitigation.

END OF FOOTNOTES TO TABLE

Postponements

Internal Revenue Description

Code Section

Sec. 7508A^a The IRS is permitted to postpone any

Authority to Postpone Certain deadline or statute of limitations

Deadlines and Abate Interest imposed under federal tax laws for up

and/or Fees by Reason of to one year for taxpayers affected by

Presidentially Declared Disaster a presidentially declared disaster or

or Terrorist or Military Actions by terrorist or military actions. The

taxpayer actions that may be postponed

include (per Reg. § 301.7508A-1,

"Postponement of certain tax-related

deadlines by reason of presidentially

declared disaster"):

(1) the filing of any return of income,

estate, gift, employment, or excise tax,

(2) the payment of any income, estate,

gift tax, generation-skipping transfer

tax, excise tax, or employment tax

(including income tax withholding),

(3) the making of contributions to a

qualified retirement plan (including

required distributions,

recharacterization of contributions or

the rollover^b of plan assets),

(4) the filing of a Tax Court petition

for redetermination of a deficiency or

review of a Tax Court decision,

(5) the filing of a claim for credit or

refund,

(6) the filing of any suit on such claim

for credit or refund, or

(7) any other act required or permitted

under the internal revenue laws.

In addition, this provision allows the

IRS to waive or abate interest,

penalties, and additions to taxes for

periods after the date of the disaster,

terrorist or military action.

Applies to individuals and businesses.

FOOTNOTES TO TABLE

^a The Katrina Emergency Relief Act of 2005 (P.L. 109-73) allows

the IRS to extend deadlines that applied to filing returns, paying taxes, and

performing certain other time-sensitive acts for certain taxpayers affected by

Hurricanes Katrina, Rita, or Wilma, ending no earlier than February 28, 2006.

^b A rollover is the process of transferring the funds in one

retirement plan to another without incurring income and penalty taxes.

END OF FOOTNOTES TO TABLE

Tax Reimbursements

Internal Revenue Description

Code Section

Sec. 5708 In the case of a presidentially declared

Tax Reimbursement for Loss of disaster, the Secretary of the Treasury

Tobacco Products shall reimburse (without interest) the

amount of the internal revenue taxes

previously paid or determined and

customs duties paid on tobacco products,

cigarette papers, and tubes removed,

which were lost, rendered unmarketable,

or condemned by a duly authorized

official by reason of such disaster.

Reimbursements are made only if such

tobacco products or cigarette papers

or tubes were held and intended for sale

at the time of such disaster. The

payments authorized by this section

shall be made to the person holding such

tobacco products or cigarette papers or

tubes for sale at the time of

such disaster.

Applies to businesses.

Selected Permanent Tax Relief Provisions

for Individual Victims of Non-Presidentially

Declared Disasters

These provisions are broadly available to individual victims of both presidentially and non-presidentially declared disasters.

Net Operating Losses -- Individuals

Internal Revenue Description

Code Section

Sec. 172 A net operating loss (NOL) occurs when,

Net Operating Loss Deduction for during a tax year, an individual's

Individuals allowable tax deductions are greater than

the taxable income, resulting in a

(see also "Net Operating Loss negative taxable income. This generally

Deduction for Businesses" in the occurs when the individual has incurred

first part of this report, more expenses than income during the year.

"Available Tax Relief and

Assistance for Victims of Generally, a NOL may be carried back and

Presidentially Declared deducted against taxable income in the

Disasters.") two^a tax years before the NOL year, and

then carried forward and applied against

taxable income for up to 20 years after

the NOL year. These methods are known as

"carrybacks" and "carryovers,"

respectively.

A three-year carryback for a NOL is

allowed when an individual taxpayer

sustains a loss of property from fire,

storm, shipwreck or other casualty, or

from theft.

FOOTNOTE TO TABLE

^a Gulf Opportunity Zone Act of 2005 (P.L. 109-135): The portion

of a NOL that is a qualified Gulf Opportunity Zone loss can be carried back to

the five tax years before the NOL year. See the IRS publication 4492,

Information for Taxpayers affected by Hurricanes Katrina, Rita, and

Wilma for more information.

END OF FOOTNOTE TO TABLE

Gains Exempted from Income

Internal Revenue Description

Code Section

Sec. 121 When an individual sells a personal

Exclusion of Gain from Sale of residence, the excess of the sale price

Principal Residence in the Event over the original cost, plus home

of an Unforeseen Circumstance improvements, is a capital gain and is

subject to tax. Gain of up to $250,000

for single taxpayers and $500,000 for

married couples filing joint returns is

excluded if the taxpayer meets a use

test (has lived in the house for at

least two years out of the last five

years) and an ownership test (has owned

the house, also for two years out of

the last five).

If a taxpayer fails to meet the use

test but experiences an unforeseen

circumstance, the taxpayer may claim a

reduced exclusion. As listed under Reg.

§ 1.121-3(e)(2), unforeseen

circumstances include the involuntary

conversion of a residence and a natural

or man-made disaster (or act of war or

terrorism) resulting in a casualty to a

principal residence.

Sec. 123 For a taxpayer whose principal residence

Payments Received Under is damaged or destroyed by fire, storm,

Insurance Contracts for Certain or other casualty, or who is denied

Living Expenses access to his or her principal residence

by governmental authorities because of

the occurrence or threat of occurrence

of such a casualty, gross income does

not include payments made from an

insurance contract to compensate or

reimburse the individual and members of

the household for living expenses

incurred from the loss of use or

occupancy of the residence. This

exclusion is limited to expenses

incurred for basic survival, such as

housing, food, transportation, etc.

Retirement Plans -- Rollovers

Internal Revenue Description

Code Section

Rollovers of Tax-Deferred Secs. 402 and 408 dictate that rollover

Distributions into Retirement distributions from tax-deferred plans

Plans -- Deadline Extension received by the employee, participant,

or beneficiary, must be transferred to an

eligible plan within 60 days in order to

avoid incurring income and penalty taxes.

Applies to sections:

Sec. 402 Both sections also allow for the

Employer Retirement Plans Secretary of the Treasury to waive the

60-day period in hardship situations

and where failure to waive the deadline

would be against equity or good

Sec. 408 conscience. Events that could be

Individual Retirement Accounts considered hardships include casualty,

disaster, or other events beyond the

reasonable control of the individual

subject to the rollover deadline.

Underpayment of Income Tax

Internal Revenue Description

Code Section

Sec. 6654 An individual who underpays his or her

Failure by Individual to Pay estimated income tax is subject to a

Estimated Income Tax penalty equal to the interest that would

accrue on the underpayment, for the

period of the underpayment.

The IRS is authorized to waive the

underpayment penalty if the

underpayment is due to casualty,

disaster or other unusual circumstance

and the imposition of the penalty would

be inequitable and against good

conscience.

Additional Resources

The toll-free IRS disaster help line is (866) 562-5227.

IRS Publications

Tax Relief in Disaster Situations

[http://www.irs.gov/newsroom/article/0,,id=108362,00.html]

Publication 547, Casualties, Disasters and Thefts

[http://www.irs.gov/pub/irs-pdf/p547.pdf]

Publication 2194, Disaster Losses Kit for Individuals

[http://www.irs.gov/pub/irs-pdf/p2194.pdf]

Publication 2194B, Disaster Losses Kit for Businesses

[http://www.irs.gov/pub/irs-pdf/p2194b.pdf]

Publication 4492, Information for Taxpayers Affected by Hurricanes

Katrina, Rita, and Wilma

[http://www.irs.gov/pub/irs-pdf/p4492.pdf]

CRS Reports

CRS Report RS22249. Income Tax Relief in Times of Disaster, by

Pamela J. Jackson.

CRS Report RS22269. Katrina Emergency Tax Relief Act of 2005,

by Erika Lunder.

CRS Report RS22344. The Gulf Opportunity Zone Act of 2005, by

Erika Lunder.

FOOTNOTE

¹ See CRS Report RS22269, Katrina Emergency Tax Relief Act of 2005, and CRS Report RS22344, The Gulf Opportunity Zone Act of 2005, both by Erika Lunder, for information on additional provisions for victims of Hurricanes Katrina, Rita, and Wilma.

END OF FOOTNOTE

DOCUMENT ATTRIBUTES

Authors
Teefy, Jennifer
Institutional Authors
Congressional Research Service
Subject Area/Tax Topics
Individual income taxation
Jurisdictions
United States
Language
English
Tax Analysts Document Number
Doc 2006-19474
Tax Analysts Electronic Citation
2006 TNT 180-64

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