Tuesday, November 6, 2012

News Release 2012-18 - Qualified Disaster Treatment of Payments to Victims of Hurricane Sandy


News Release 2012-84, 11/02/2012

IRS Announces Qualified Disaster Treatment of Payments to Victims of Hurricane Sandy
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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