Japan Earthquake And Tsunami Designated As Disaster Under Disaster Payment Exclusion

IR 2011-37, Notice 2011-37, 2011-32 IRB

IRS has designated the Japan earthquake and tsunami occurring on Mar. 11, 2011, as a qualified disaster for purposes of the Code Sec. 139 exclusion for qualified disaster relief payments. Thus, employees of U.S. companies who were victims of that disaster may receive tax-free qualified disaster relief payments from private foundations sponsored by their employers.

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 the Japan earthquake and tsunami occurring on Mar. 11, 2011 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 the Japan earthquake and tsunami and their families. Notice 2011-37, 2011-32 IRB, 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.

Observation: 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.

Observation: Code Sec. 4941 imposes an excise tax for various acts of self-dealing between a private foundation and a disqualified person, as defined in Code Sec. 4946.

Publication 3833 cautions that the presumption doesn't apply to payments that would otherwise constitute self-dealing. For example, the presumption does not apply to payments made to (or for the benefit of) individuals who are directors, officers, or trustees of the foundation. The presumption also does not apply to payments made to (or for the benefit of) individuals who are members of the foundation's selection committee.

References: For qualified disaster relief payments, see FTC 2d/FIN ¶J-1294; United States Tax Reporter ¶1394; TaxDesk ¶193,601; TG ¶13127.