CLIENT UPDATE

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November 21, 2012

IRS Provides Relief For Superstorm Sandy Victims

The Internal Revenue Service has announced that Superstorm Sandy has been designated a “qualified disaster,” as defined in Section 139 of the Internal Revenue Code (Code).  In response, the IRS enacted several tax relief measures for individuals and businesses affected by the storm.

Qualified Disaster Relief Payments.

Covered payments for qualified disaster relief made by employers or others are excludable from the donor’s gross income.  Such payments include amounts used to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses, provided such expenses are not compensated by insurance or otherwise.  Payments made to reimburse or pay reasonable and necessary expenses for the repair or rehabilitation of a personal residence, or for the repair or replacement of the residence's contents, are also excludable from gross income, provided those replacement expenditures are not compensated by insurance.  Qualified disaster relief payments also are excludable for purposes of self-employment taxes and employment taxes.

Private Foundations.

The designation of Superstorm Sandy as a qualified disaster also clears the way for employers that sponsor private foundations to make payments to employees or family members affected by the storm without endangering the tax-exempt status of the private foundation.  The IRS recommends that all such payments should be made in accordance with the due diligence guidance found in Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.

Liberalized Rules for Leave Donation Programs.

On November 6, 2012, the IRS issued Notice 2012-69, which provides guidance for those employers wishing to establish paid leave donation programs.  These programs permit employees to voluntarily elect to forego vacation, sick days or personal leave, so that their employer may donate the value of their paid leave benefits to a public charity.  Such amounts will not be included in the gross income of employees, provided the amounts are paid by January 1, 2014 to a Section 170(c) organization for the relief of victims of the storm.  Notwithstanding, employees who participate do not receive a charitable contribution deduction.  The employer’s deduction is subject to Section 162 limits (ordinary and necessary business expense), rather than the limitations on contributions under Code Section 170.

Tax Filing and Payment Deadlines Extended.

In IR 2012-83, the IRS has extended certain tax deadlines for counties in New York, New Jersey and Connecticut affected by the storm.  Deadlines that occurred in late October have been extended to February 1, 2013.  These extended deadlines apply to fourth quarter estimated tax payments for individuals, as well as to payroll and excise tax returns and payments for the third and fourth quarters of 2012.  The IRS will work with taxpayers who reside outside the designated disaster areas but whose business records or accountants are located in areas affected by the storm.

Plan Sponsors Can Provide Relief.

Employers that sponsor qualified plans may wish to amend their plans to provide for loans or hardship distributions or distributions to individuals who have attained age 59 ½ and who have been affected by the storm, if these provisions are not already in the plan.  Congress may act in the “lame duck” session to liberalize loans and hardship distribution rules for retirement plans, as was done after Hurricane Katrina.  We will keep you apprised.