Hurricanes, Tornados, and Other Disasters: Relief Under the Tax Code

Following 9/11, the Victims of Terrorism Tax Relief Act of 2001 (the "Act") was passed and became law. Although the Act was principally aimed at disasters resulting from a terrorist attack or military action, it also applies to other "qualified disasters." Following the recent hurricanes in the Southeast, employers may want to consider the application of the Act and Section 139 of the Internal Revenue Code (the "Code").

Under Section 139 of the Code, gross income does not include any amount received by an individual as a qualified disaster relief payment. A qualified disaster relief payment is any amount paid to or 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 that repair, rehabilitation, or replacement results from a qualified disaster;
• by a person who provides or sells transportation as a common carrier because of the death or personal physical injuries arising from a qualified disaster; or
• if the amount is paid by a federal, state, or local government, or an agency or instrumentality of those governments, in connection with a qualified disaster in order to promote the general welfare.

These items will be qualified disaster relief payments only to the extent any expense compensated by them is not also compensated by insurance or otherwise.

A qualified disaster includes the following:

• a disaster which results from a terroristic or military action;
• a presidentially declared disaster (as declared by the President under the Disaster Relief and Emergency Assistance Act);
• a disaster resulting from an accident involving a common carrier, or from any other event, which is determined by the IRS to be of a catastrophic nature; or
• for payments by a federal, state, or local government, or an agency or instrumentality of those governments, a disaster that is determined by the appropriate federal, state, or local authority (as determined by the IRS) to warrant assistance from the federal, state, or local government or their agencies. A qualified disaster relief payment also is not treated as earnings for self-employment tax purposes or as wages or compensation for employment tax purposes. Therefore, no withholding applies to qualified disaster relief payments.

Due to the circumstances surrounding a qualified disaster, it is not anticipated that individuals will be required to account for actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be in line with the expenses actually incurred, or that employers will be required to provide special substantiation for the exclusion from withholding. However, employers may want to consider adopting a policy consistent with the requirements under Code Section 139 and having a written representation from the employee that the payment will be used for the purposes provided for under the Code.