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Tax Bulletin (May 2002)

Victims of Terrorism Tax Relief
Act Encourages Disaster Relief
by Employers and Charities




By Carol S. Boulanger, a tax partner, and Michael Burnstein, formerly a senior attorney, in our New York office and by Brian Wainwright, a tax partner in the firm's Palo Alto office. If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our May 2002 Tax Bulletin (a 487K pdf file), containing a printed version of this article and also available via ftp at ftp.pmstax.com/gen/bull0205.pdf.

See Material Available On-Line for links to and summaries of legislative material regarding the Act and other legislative and administrative relief measures for victims of the September 11, 2001 terrorist attack.

This bulletin concerning state and local tax matters is part of the Pillsbury Winthrop Shaw Pittman Tax Page, a World Wide Web demonstration project, no portion of which is intended and cannot be construed as legal or tax advice. Comments are welcome on the design or content of this material.


On January 23, 2002, President George W. Bush signed into law the Victims of Terrorism Tax Relief Act of 2001 (the "Act," P.L. 107-134), providing sweeping tax relief in a variety of forms to aid terrorism victims and their families. This bulletin focuses on the provisions of the Act that enhance the ability of employers and charities to provide disaster relief and provides a summary of other legislative and administrative relief measures for victims of the September 11, 2001 terrorist attack.

Qualifying Disaster Relief Payments Exempt from Income Tax

The Act establishes new section 139 of the Internal Revenue Code (the "Code"), effective for taxable years ending on or after September 11, 2001. This new section provides that qualifying payments from any source, including employers, reimbursing individuals for specified disaster-related expenses are not taxable as income and are not subject to employment taxes or withholding. Nonetheless, such payments remain deductible to the payor to the extent they would have been deductible were the payments not exempted from tax.

To qualify, payments must meet two requirements. First, they must be made to an individual in connection with "qualified disasters," including those resulting from terrorist or military action or those declared catastrophic by the President or the Secretary of the Treasury. Second, they must be made for personal, family, living or funeral expenses resulting from the disaster or for the repair or rehabilitation of a personal residence or its contents attributable to the disaster. Payments do not qualify, however, to the extent the recipient is also compensated (by insurance or otherwise) for the reimbursed expenses.

These provisions of the Act mean that employers need not "gross up" qualifying payments in order to provide a minimum amount of after-tax relief to each employee. Moreover, the provisions allow all employees of a particular employer to receive equal benefits, since the amounts received will not be reduced by the individuals' income tax liability.

Certain Death Benefits Not Taxable as Income

The Act amends section 101 of the Code to provide that amounts paid by an employer due to the death of an employee will not be taxable as income if the death was a result of the Oklahoma City bombing, the September 11, 2001 attacks, or an anthrax-related attack between September 11, 2001 and January 1, 2002.

The Act does not specify the recipients to whom the tax exclusion applies, and thus appears to extend the exclusion to any person who would otherwise have income as a result of the payment (e.g., the individual's estate or survivors). The exclusion does not apply, however, to any payment that would have been made had the employee died other than as a specified terrorist victim or to victims of other disasters.

Tax Rules Relaxed for September 11th and Anthrax Disaster Relief Charities

Generally, organizations described in section 501(c)(3) of the Code and engaged in disaster relief efforts must make a formal determination of the needs of their grantees prior to distributing funds to them. This requirement was partly responsible for the delays (widely reported in the news media) in distributing the unprecedented level of funds raised by charities in response to the September 11th attacks.

Frustration with this slow distribution of funds led to the enactment of an exception, first announced by the Internal Revenue Service (IRS) in November and now endorsed and expanded by the Act, to the rules requiring a specific determination of need. Payments by qualified charitable organizations occurring by reason of individual death or injury connected with the September 11th attacks or anthrax-related attacks between September 11, 2001 and January 1, 2002 will be deemed consistent with the organization's exempt status, provided the payments are made in good faith and using a reasonable, objective and consistently applied formula. Furthermore, such payments by private foundations will not be treated as made to a disqualified person for purposes of self-dealing penalties under section 4941 of the Code.

IRS Directed to Allow Company Foundations to Benefit Employees

In addition to the actual provisions of the Act, the Joint Committee on Taxation technical explanation of the Act states that it is intended that the IRS will provide guidance on the circumstances under which employer-controlled private foundations may provide qualified disaster assistance specifically to the employer's employees.

The Joint Committee technical explanation describes payments based on objective determinations of need (i.e., by an independent selection committee or an adequate substitute procedure), made by employer-controlled foundations to employees affected by a qualified disaster and who are selected from a large and indefinite class of potential beneficiaries. The report also notes that it is intended that for payments meeting all such conditions, (i) no private inurement should result, (ii) no self-dealing penalties should be incurred, (iii) no taxable expenditure penalties should be incurred and (iv) the distributions should count toward the foundation's minimum annual distributions. Further, the Joint Committee technical explanation indicates that section 102(c) of the Code, which provides that gifts from employers to employees are taxable to the employee, should not apply to payments made by employer-controlled foundations to employees of the employer.

The Joint Committee technical explanation states that it is also intended that the IRS will reconsider its current ruling position on the formation of company foundations that provide disaster relief to company employees. Assuming the IRS ultimately implements Congressional intent as described in the technical explanation, employers may wish to consider establishing a private foundation dedicated to providing disaster relief to employees.

Professional Advisors Should Be Consulted

Many provisions of the Act will present interpretive issues when applied to particular circumstances. Formal IRS guidance, while expected shortly, has not yet been issued. Moreover, the Act addresses many other provisions relating to September 11th in particular and to disaster relief in general that are not discussed in this bulletin. Employers and charities should consult with their professional advisers prior to making disaster relief payments.

Material Available On-Line

In addition to legislative material regarding the Act, there is also listed below other legislative and administrative relief measures concerning the September 11, 2001 terrorist attack. You'll need the Acrobat Reader, or its equivalent to review these files.

Legislative Material

H.R. 2884, Victims of Terrorism Tax Relief Act of 2001, which became P.L. 107-134 when signed by President Bush on January 23, 2002. [hr2884enr.pdf, 88K]

    Technical Explanation of the Victims of Terrorism Tax Relief Act of 2001 (as passed by the House and Senate on December 20, 2001) by the staff of the Joint Committee on Taxation. [jcx9301.pdf, 113K]

    Estimated Budget Effects of the Victims of Terrorism Tax Relief Act of 2001 (as passed by the House and Senate on December 20, 2001) by the staff of the Joint Committee on Taxation. [jcx9401.pdf, 17K]

    Comparison of the Victims of Terrorism Tax Relief Act of 2001 (as passed by the House on December 13, 2001 and as passed by the Senate) by the staff of the Joint Committee on Taxation. [jcx8701.pdf, 38K]

    Comparison of Estimated Budget Effects of the Victims of Terrorism Tax Relief Act of 2001 (as passed by the House on December 13, 2001 and as passed by the Senate) by the staff of the Joint Committee on Taxation. [jcx8801.pdf, 18K]

    Technical Explanation of the Victims of Terrorism Tax Relief Act of 2001 (as considered by the House on December 13, 2001) by the staff of the Joint Committee on Taxation. [jcx8601.pdf, 138K]

H.R. 2884, Victims of Terrorism Tax Relief Act of 2001, as passed by the Senate on November 16, 2001. [hr2884eas.pdf, 121K]

    Technical Explanation of the Victims of Terrorism Tax Relief Act of 2001 (as passed by the Senate on November 16, 2001) by the staff of the Joint Committee on Taxation. [jcx8301.pdf, 112K]

H.R. 2884, Victims of Terrorism Relief Act of 2001, as passed by the House of Representatives on September 13, 2001. [hr2884eh.pdf, 34K]

    Technical Explanation of the Victims of Terrorism Relief Act of 2001 (as passed by the House on September 13, 2001) by the staff of the Joint Committee on Taxation. [jcx6801.pdf, 35K]

H.R. 2926, the Air Transportation Safety and System Stabilization Act, which became P.L. 107-42 when signed by President Bush on September 22, 2001. Section 301(a) of this Act extends until November 15, 2001 the due date for the deposit of air transportation taxes and certain other withheld taxes originally due after September 10, 2001 and before November 15, 2001. In addition, the Secretary of the Treasury can extend the November 15th date to as late as January 15, 2002. [hr2926enr.pdf, 67K]

Internal Revenue Service Material

Revenue Procedure 2001-53, providing a list of time-sensitive acts which may be postponed under section 7508 or 7508A of the Code. [rp200153.pdf, 190K]

Notice 2001-61, extending the due date for the filing of certain returns and the making of estimated tax payments, tolling for certain periods failure to pay penalties and waiving penalties for certain failures to deposit federal taxes (as the IRS does not have the authority to extend the due date for those deposits) for a broad class of taxpayers affected by the September 11th terrorist attack. [n200161.pdf, 24K]

Notice 2001-63, extending until September 24, 2001 any due date from September 10, 2001 through September 23, 2001 for the filing of returns and claims for refund, the payment of tax (including estimated tax payments), making elections and filing any other federal tax documents for any taxpayer, wherever located, experiencing difficulties arising from the September 11th terrorist attack. [n200163.pdf, 14K]

Notice 2001-68, supplementing Notice 2001-61 by clarifying and expanding the definition of affected taxpayer, listing additional acts for which a postponement is granted and providing other relief. [n200168.pdf, 54K]

Notice 2001-69, in which the IRS states that it will not assert that payments made by an employer to an organization described in section 170(c) of the Code, in exchange for vacation, sick, or personal leave that the employee elects to forgo, constitute gross income or wages of an employee, provided that the payments are made to such organizations before January 1, 2003, and that it will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees. [n200169.pdf, 18K]

Notice 2001-70, taxpayer-elective relief from application of the "mid-quarter" convention under section 168(d)(3) of the Code for taxpayers whose third quarter of the 2001 taxable year includes September 11, 2001. [n200170.pdf, 17K]

Notice 2001-74, expanding the class of taxpayers granted relief from the mid-quarter convention under Notice 2001-70 to include taxpayers whose fourth quarter includes September 11, 2001. [n200174.pdf, 23K]

Notice 2001-77, providing additional air transportation excise tax deposit relief under the Air Transportation Safety and System Stabilization Act (P.L. 107-42). [n200177.pdf, 15K]

Notice 2001-78, while legislation is pending, the IRS will treat payments made by charities to victims of the September 11, 2001 terrorist attacks as related to the charities' exempt purpose if made in good faith under objective standards. [n200178.pdf, 15K]

Notice 2001-79, ignoring certain rent holidays in qualified aircraft leases for purposes of section 467 of the Code. [n200179.pdf, 21K]

Notice 2002-7, in which the IRS, the Department of Labor's Pension and Welfare Pension Benefits Administration and the Pension Benefit Guaranty Corporation grant relief to employee benefit plans under the Victims of Terrorism Tax Relief Act of 2001. [n20027.pdf, 23K]

Notice 2002-15, expanding the relief of Notices 2001-61 and 2001-68 by postponing the due date for applying for certain tentative carryback adjustments under section 6411 of the Code. [n200215.pdf, 23K]

Notice 2002-25, granting partial relied from the substantiation requirements of section 170(f)(8) of the Code for charitable contributions made after September 10, 2001 and before January 1, 2002. [n200225.pdf, 16K]

Announcement 2001-101, relief for tax-exempt bond issuers affected by the September 11th terrorist attack. [an2001101.pdf, 22K]

Announcement 2001-103, a grant of relief by the IRS, the Department of Labor's Pension and Welfare Benefits Administration and the Pension Benefit Guaranty Corporation (the "PBGC") from certain penalties relating to Forms 5500 due on or before October 15, 2001, as well as the PBGC's statement of relief relating to premiums, reporting and disclosure and certifications. [an2001103.pdf, 22K]

Announcement 2001-112, authorizing taxpayers to redesignate estimated tax payments as employment tax deposits. [an2001112.pdf, 17K]

Announcement 2001-117, granting extensions to file to partners, shareholders or beneficiaries of passthrough entities entitled to relief under Notice 2001-61. [an2001117.pdf, 14K]

Announcement 2001-124, modifying and expanding the relief granted under Announcement 2001-117. [an2001124.pdf, 16K]

Internal Revenue Service Publications

IRS Publication 3833 (March 2002), Disaster Relief: Providing Assistance through Charitable Organizations. [p3833.pdf, 57K]

IRS Publication 3920 (February 2002), Tax Relief for Victims of Terrorist Attacks. [p3920.pdf, 134K]

IRS Publication 3921, Help from the Internal Revenue Service for Those Affected by the Terrorist Attacks on America September 11, 2001. [p3921.pdf, 232K]


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