News
Release 2012-84, 11/02/2012
The Internal Revenue Service today alerted
employers and other taxpayers that because Hurricane Sandy is designated as a
qualified disaster for federal tax purposes, qualified disaster relief payments
made to individuals by their employer or any person can be excluded from those
individuals' taxable income.
Qualified disaster relief payments include
amounts to cover necessary personal, family, living or funeral expenses that
were not covered by insurance. They also include expenses to repair or
rehabilitate personal residences or repair or replace the contents to the
extent that they were not covered by insurance. Again, these payments would not
be included in the individual recipient's gross income.
The IRS also announced that the designation of
Hurricane Sandy as a qualified disaster means that employer-sponsored private
foundations may provide disaster relief to employee-victims in areas affected
by the hurricane without affecting their tax-exempt status. Like all charitable
organizations, employer-sponsored private foundations should follow the
guidance in Publication 3833, Disaster Relief: Providing
Assistance Through Charitable Organizations, in providing assistance to employees or their family members
affected by Hurricane Sandy.
Background. Gross income doesn't include any amount
received by an individual as a qualified disaster relief payment. (Code Sec. 139(a)) A qualified
disaster relief payment includes any amount paid to or for the benefit of an
individual to reimburse or pay: (1) reasonable and necessary personal, family,
living, or funeral expenses (not otherwise compensated for by insurance or
otherwise) incurred as a result of a qualified disaster; or (2) expenses (not
otherwise compensated for by insurance or otherwise) for the repair or
rehabilitation of a personal residence, or repair or replacement of its
contents, to the extent that the work is needed because of a qualified
disaster. (Code Sec. 139(b)) The term
“qualified disaster” includes a disaster resulting from an event that is
determined by IRS to be of a catastrophic nature. (Code Sec. 139(c)(3))
Disaster designation. IRS has determined that Hurricane Sandy is a
catastrophic event under Code Sec. 139(c)(3).
Impact of the designation. Because of the disaster designation,
employer-sponsored private foundations may choose to provide disaster relief to
employee victims of Hurricane Sandy and their families. Notice 2011-32, 2011-18 IRB 737, points out that private foundations, like
all organizations described in Code Sec. 501(c)(3), should exercise due diligence when providing
disaster relief as set forth in IRS Publication 3833, Disaster Relief:
Providing Assistance Through Charitable Organizations. Presumably, the due diligence refers to that
portion of Publication 3833 which states that IRS will presume that qualified
disaster payments made by a private foundation to employees (or their family
members) of an employer that is a disqualified person (such as a company that
is a substantial contributor) are consistent with the foundation's charitable
purposes if:
... the class of beneficiaries is large or
indefinite (a “charitable class”),
... the recipients are selected based on an
objective determination of need, and
... the selection is
made using either an independent selection committee or adequate substitute
procedures to ensure that any benefit to the employer is incidental and
tenuous.
Publication 3833 says that if these
requirements are met, then the foundation's payments in response to a qualified
disaster: (1) are treated as made for charitable purposes; (2) do not result in
prohibited self-dealing merely because the recipient is an employee (or family
member of an employee) of the employer-sponsor; and (3) do not result in
taxable compensation to the employees.
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