Tax Relief for Victims of Hurricane Harvey Tax-Law-in-a-Day Jeffry Blair February 9, 2018 Hunton & Williams LLP
View of Hurricane Harvey from Space Measured approximately 350 miles across when it made landfall on August 29 th as a category 3
Hurricane Harvey Flooding in Port Arthur on August 31, 2017
Hurricane Harve y National Hurricane Center Report (released January 26, 2018) • Ended a 12 year drought for major land-falling hurricanes (last was Wilma in 2005) o 3 separate landfalls in 6 days • One of the most expensive hurricanes on record o Estimated Damage -- $125 billion (ranging from $90 billion to $160 billion) o Katrina Damage -- $125 billion • Broke all records for most rainfall in any tropical system o Large sections of Southeastern Texas receiving 3 feet or more of rainfall from August 17 to September 1) o Some receiving over 5 feet (highest was near Nederland, Texas receiving 60.58 inches) o One third of Houston was underwater.
Hurricane Harve y National Hurricane Center Report (released January 26, 2018) • Accounted for over 100 deaths (68 direct and 35 indirect) • Over 300,000 structures flooded • Over 500,000 cars flooded • 336,000 customers lost power • Estimated 40,000 flood victims were evacuated to or took refuge in shelters across Texas or Louisiana • FEMA reported about 30,000 water rescues were conducted during Harvey
Tax Relief General Overview
Disaster Declaration Process • All emergency and major disaster declarations are made solely at the discretion of the President of the United States. • All requests for a declaration by the President that a major disaster exists shall be made by the Governor of the affected State. The Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§5121- 5207 (the “Stafford Act”), §401. – “State” includes the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa and the Commonwealth of the Northern Mariana Islands. – The Republic of the Marshall Islands and the Federated States of Micronesia are also eligible.
Recent Major Disasters in Texas • Hurricane Harvey (multiple counties – throughout much of Eastern Texas) – Incident Period - August 23, 2017 – September 15, 2017 – Major Disaster Declaration – August 25, 2017 • Severe Storms and Flooding (multiple counties – mostly in Houston area) – Incident Period -- May 22, 2016 – June 24, 2016 – Major Disaster Declaration – June 11, 2016 • Severe Storms and Flooding (multiple counties – mostly close to Texas – LA border) – Incident Period - April 17, 2016 to April 30, 2016 – Major Disaster Declaration declared on April 25, 2016 • Severe Storms and Flooding (multiple counties – mostly close to Texas – LA border) – Incident Period – March 7, 2016 to March 29, 2016 – Major Disaster Declaration declared on March 19, 2016 • Severe Winter Storms, Tornadoes, Straight-line Winds and Flooding (multiple counties – Panhandle and Northern Texas) – Incident Period – December 26, 2015 to January 22, 2016 – Major Disaster Declaration declared on February 9, 2016
Presidential Declaration • Friday, August 25, 2017 – Governor Greg Abbott of Texas sent a letter to President Donald Trump requesting a Presidential Disaster Declaration as Hurricane Harvey was set to make landfall. • Friday, August 25, 2017 -- President Donald Trump signed a disaster declaration with respect to certain areas within the State of Texas.
FEMA Designations • FEMA initially designated 8 Texas counties as federal disaster areas qualifying for individual assistance. 21 other counties were later added to the list: – Initially designated - Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton – Added – Austin, Bastrop, Colorado, DeWitt, Fayette, Gonzales, Hardin, Jasper, Jefferson, Karnes, Lavaca, Lee, Montgomery, Newton, Orange, Polk, Sabine, San Jacinto, Tyler, Walker and Waller. • FEMA also designated the following Texas counties for public assistance: – Bexar, Burleson, Dallas, Grimes, Tarrant, Travis and Washington.
Volunteers and officers from the neighborhood security patrol help to rescue residents in the upscale River Oaks neighborhood after it was inundated with flooding from Hurricane Harvey on August 27, 2017, in Houston
Tax Relief
Exclusion of Certain Items from Income
Disaster Loans • Most federal assistance to individual disaster victims comes through low interest, federally subsidized loans. • IRC Section 7872 imposes additional income and additional interest expense on certain low interest loans. • Proposed Treasury Regulation §1.7872-5(b)(5) exempts from IRC Section 7872 loans subsidized by the federal, state, and municipal governments that are made under a program of general application to the public.
Gifts – General Rule General rule – Gross income does not include the value of property received by gift. IRC Section 102(a). To be a gift, a payment “must proceed from a detached and disinterested generosity …. out of affection, respect, admiration, charity or like impulses.” Commissioner v. Duberstein , 363 U.S. 278, 285 (1960).
Gifts – Charities • Payments to disaster victims for medical, temporary housing and transportation expenses incurred by individuals as a result of a flood are generally gifts because such payments: – do not proceed from any moral or legal duty – are motivated by detached and disinterested generosity. Rev. Rul. 2003-12, 2003-1 C.B. 283.
Gifts – Third Parties • Payments from a fund formed with public donations in response to the outpouring of public support for victims of a tragedy and their families treated as gifts to recipients because: – payment made out of concern for the victims’ needs – payments not from any moral or legal duty. Information Letter 2013-0020 (May 22, 2013)
Exceptions -- Not Gifts • Government grants will not qualify as gifts: – Government is acting out of duty rather than generosity. See, e.g. , Rev. Rul. 2005-45, 2005-2 C.B. 120; Rev. Rul. 2003-12, 2003-1 C.B. 283. • Employer payments to employees in connection with a disaster: – Payments do not proceed from a detached and uninterested generosity. Rev. Rul. 2003-12, 2003-1 C.B. 283. • To be excluded from income, government and employer payments must qualify under IRC Section 139.
IRC Section 139 • Excludes “qualified disaster relief payments” from the taxable income of individuals. • In general, government grants and payments from employers must meet the requirements of IRC Section 139 to be excluded from an individual’s taxable income.
Qualified Disaster Relief Payments The term “qualified disaster relief payment” is defined as any amount paid to for the benefit of an individual: • to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; • to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster; • by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster; or • if such amount is paid by a Federal, State or local government or agency or instrumentality thereof, in connection with a qualified disaster in order to promote general welfare. But only to the extent that any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.
Qualified Disaster • The term “qualified disaster” includes any disaster determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. IRC Section 139(c)(2). • Hurricane Harvey qualifies as a “qualified disaster” under this definition .
Tax Consequences of Qualifying under IRC Section 139 • Individuals – Reimbursements or payments received by individuals who are victims of Hurricane Harvey are exempt from taxation to the extent that such payments are not otherwise compensated by insurance or otherwise. • Employers – Permitted a deduction for these payments even though the employee does not recognize as income. See Joint Committee on Taxation Staff, Technical Explanation of Victims of Terrorism Tax Relief Act of 2001 (JCX-93-01), Dec. 21, 2001, p.16.
Limitations and Exceptions -- IRC Section 139 • Only applies to individuals. • Excludes only the portion of any such payment that represents the reimbursement of covered expenses that are not reimbursed by insurance or otherwise. • Individuals cannot claim a tax deduction or tax credit for, or by reason of, an expenditure to the extent of the amount excluded from income under IRC Section 139. • Excludes payments received in lieu of lost compensation or lost profits.
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