rr-03-12.pdf

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Part I

Section 61.–Gross income defined

26 CFR 1.61-1(a): Gross income
(Also §§ 102; 139; 7805; 1.102-1; 301.7805-1)

Rev. Rul. 2003-12

ISSUES

(1) Are grants individuals receive under a state’s program to pay or reimburse
certain reasonable and necessary medical, temporary housing, or transportation
expenses they incur as a result of a flood includible in gross income?
(2) Are grants individuals receive under a charitable organization’s program to
pay or reimburse certain medical, temporary housing, or transportation expenses they
incur as a result of a flood includible in gross income?
(3) Are grants employees receive under an employer’s program to pay or
reimburse certain reasonable and necessary medical, temporary housing, or
transportation expenses they incur as a result of a flood includible in gross income?

FACTS

Situation 1. An area within state ST was affected by a flood that was a
Presidentially declared disaster as defined in § 1033(h)(3) of the Internal Revenue
Code. ST enacted emergency legislation appropriating funds for grants to pay or
reimburse medical, temporary housing, and transportation expenses individuals incur
as a result of the flood that are not compensated for by insurance or otherwise. ST will
not require individuals to provide proof of actual expenses to receive a grant payment.
ST’s program, however, contains requirements (which are described in the program
documents) to ensure that the grant amounts are reasonably expected to be
commensurate with the amount of unreimbursed reasonable and necessary medical,
temporary housing, and transportation expenses individuals incur as a result of the
flood. The grants are not intended to indemnify all flood-related losses or to reimburse
the cost of nonessential, luxury, or decorative items and services.

Situation 2. O, a charitable organization described in § 501(c)(3) that is exempt
from tax under § 501(a), whose purpose is to provide assistance to individuals who are
affected by disasters, also makes grants to distressed individuals affected by the flood
described in Situation 1. The grants will pay or reimburse individuals for medical,
temporary housing, and transportation expenses they incur as a result of the flood that
are not compensated for by insurance or otherwise.

Situation 3. Employer R makes grants to its employees who are affected by the
flood described in Situation 1. The grants will pay or reimburse employees for medical,

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temporary housing, and transportation expenses they incur as a result of the flood that
are not compensated for by insurance or otherwise. R will not require individuals to
provide proof of actual expenses to receive a grant payment. R’s program, however,
contains requirements (which are described in the program documents) to ensure that
the grant amounts are reasonably expected to be commensurate with the amount of
unreimbursed reasonable and necessary medical, temporary housing, and
transportation expenses R’s employees incur as a result of the flood. The grants are
not intended to indemnify all flood-related losses or to reimburse the cost of
nonessential, luxury, or decorative items and services. The grants are available to all
employees regardless of length or type of service with R.

LAW AND ANALYSIS

Section 61(a) provides that, except as otherwise provided by law, gross income
means all income from whatever source derived. Rev. Rul. 131, 1953-2 C.B. 112,
concludes, in part, that certain payments by an employer to its employees for the
purpose of helping the employees defray costs they incurred from personal injury and
property loss resulting from a tornado do not come within the concept of gross income
to the employees under the predecessor of § 61 because the payments are gratuitous,
measured solely by need, not related to services rendered, and designed to place the
employees in about the same economic position as they were before the tornado. In
1955, the Supreme Court of the United States held that Congress intended under § 61
to tax all gains or undeniable accessions to wealth, clearly realized, over which
taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S.
426 (1955), 1955-1 C.B. 207.

The Internal Revenue Service has concluded that payments made by
governmental units under legislatively provided social benefit programs for the
promotion of the general welfare (i.e., based on need) are not includible in the gross
income of the recipients of the payments (“general welfare exclusion”). For example,
Rev. Rul. 98-19, 1998-1 C.B. 840, concludes that a relocation payment, authorized by
the Housing and Community Development Act of 1974 and funded under the 1997
Emergency Supplemental Appropriations Act for Recovery From Natural Disasters,
made by a local jurisdiction to an individual moving from a flood-damaged residence to
another residence, is not includible in the individual’s gross income. Likewise, Rev. Rul.
76-144, 1976-1 C.B. 17, concludes that grants received under the Disaster Relief Act of
1974 by individuals unable to meet necessary expenses or serious needs as a result of
a disaster are in the interest of general welfare and are not includible in the recipients’
gross income.

Section 102(a) provides that the value of property acquired by gift is excluded
from gross income. Under § 102(a) a gift “must proceed from a ‘detached and
disinterested generosity,’ ... ‘out of affection, respect, admiration, charity or like
impulses.’” Commissioner v. Duberstein, 363 U.S. 278, 285 (1960), 1960-2 C.B. 428,
431. In general, a payment made by a charity to an individual that responds to the
individual’s needs, and does not proceed from any moral or legal duty, is motivated by

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detached and disinterested generosity. Rev. Rul. 99-44, 1999-2 C.B. 549. Section
102(c) provides that § 102(a) shall not exclude from gross income any amount
transferred by or for an employer to, or for the benefit of, an employee. Governmental
grants in response to a disaster generally do not qualify as gifts because the
government’s intent in making the payments proceeds from its duty to relieve the
hardship caused by the disaster. Kroon v. United States, Civ. No. A-90-71 (D. Alaska
1974).

The Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-134, 115 Stat.
2427 (2001), added § 139 to the Code. Section 139(a) provides that gross income does
not include any amount received by an individual as a qualified disaster relief payment.

Section 139(b) provides, in part, that the term “qualified disaster relief payment”
means any amount paid to or for the benefit of an individual:

(1) to reimburse or pay reasonable and necessary personal, family, living, or
funeral expenses incurred as a result of a qualified disaster (§ 139(b)(1));

(2) to reimburse or pay reasonable and necessary expenses incurred for the
repair or rehabilitation of a personal residence or repair or replacement of its contents to
the extent that the need for such repair, rehabilitation, or replacement, is attributable to
a qualified disaster (§ 139(b)(2)); or

(3) by a Federal, State, or local government, or agency or instrumentality thereof,
in connection with a qualified disaster in order to promote the general welfare (§
139(b)(4)).

Thus, § 139(b)(4) codifies (but does not supplant) the administrative general
welfare exclusion with respect to certain disaster relief payments to individuals. Section
139(b) also provides that the exclusion from income applies only to the extent any
expense compensated by such payment is not otherwise compensated for by insurance
or otherwise.

Section 139(c) provides that the term “qualified disaster” means:

(1) a disaster that results from a terroristic or military action (as defined in §
692(c)(2));

(2) a Presidentially declared disaster as defined in § 1033(h)(3) (generally, a
disaster in an area that has been subsequently determined by the President to warrant
federal assistance under the Disaster Relief and Emergency Assistance Act);

(3) a disaster resulting from any event that the Secretary determines to be of a
catastrophic nature; or

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(4) with respect to amounts described in § 139(b)(4), a disaster that is
determined by an applicable Federal, State, or local authority (as determined by the
Secretary) to warrant assistance from the Federal, State, or local government or an
agency or instrumentality thereof.

Because “of the extraordinary circumstances surrounding a qualified disaster, it
is anticipated that individuals will not be required to account for actual expenses in order
to qualify for the [§ 139] exclusion, provided that the amount of the payments can be
reasonably expected to be commensurate with the expenses incurred.” Joint
Committee on Taxation Staff, Technical Explanation of the “Victims of Terrorism Tax
Relief Act of 2001," as Passed by the House and Senate on December 20, 2001, 107
th

Cong., 1
st
Sess. 16 (2001). As under § 139, the Service will not require individuals to
account for actual disaster-related expenses for governmental payments to qualify
under the administrative general welfare exclusion if the amount of the payments is
reasonably expected to be commensurate with the expenses incurred.

The grants that individuals receive from ST, O, and R, and the payments that the
employees receive from their employer in Rev. Rul. 131, are accessions to wealth
clearly realized over which the recipients have complete dominion, and therefore come
within the concept of gross income under § 61 as described in Glenshaw Glass. Thus,
these amounts are included in gross income unless specifically excluded by another
provision of law. Accordingly, Rev. Rul. 131 is modified to the extent that it holds that
the payments received by the employees from their employer do not come within the
concept of gross income.

In Situation 1, the grants made by ST are reasonably expected to be
commensurate with the unreimbursed reasonable and necessary medical, temporary
housing, or transportation expenses individuals incur as a result of the flood. These
expenses are personal, living, or family expenses within the meaning of § 139.
Moreover, they are paid to compensate individuals for expenses that are not
compensated for by insurance or otherwise. Thus, the grants are in the nature of
general welfare and are, therefore, excluded from the recipients’ gross income under
the general welfare exclusion. The payments also qualify for exclusion from gross
income under § 139. Because ST’s intent in making the grants proceeds from its duty
to relieve the hardship caused by the disaster, not from a detached and disinterested
generosity, the grants made by ST do not qualify for exclusion from income as gifts
under § 102.

In Situation 2, the grants made by O are designed to help distressed individuals
with unreimbursed medical, temporary housing, or transportation expenses they incur
as a result of the flood. Under these facts, O’s grants are made out of detached and
disinterested generosity rather than to fulfill any moral or legal duty. Thus, the grants
are excluded from the gross income of the recipients as gifts under § 102. Because
payments by non-governmental entities are not considered payments for the general
welfare, the grants made by O are not excluded from the recipients’ gross income under

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the general welfare exclusion. Rev. Rul. 82-106, 1982-1 C.B. 16. It is not necessary to
reach the question of whether § 139 applies to the grants.

In Situation 3, the grants made by R to its employees do not qualify as gifts under
§ 102. Also, because payments by non-governmental entities are not considered
payments for the general welfare, the grants made by R are not excluded from the
recipients’ gross income under the general welfare exclusion. The grants, however, are
reasonably expected to be commensurate with the unreimbursed reasonable and
necessary personal, living, or family expenses that R’s employees incur as a result of a
flood that is a qualified disaster as defined in § 139(c). Moreover, they are paid to
compensate individuals for expenses that are not compensated for by insurance or
otherwise. Therefore, R’s grants are qualified disaster relief payments that are excluded
from the gross income of R’s employees under § 139. Similar to the grants in Situation
3, the payments made by the employer described in Rev. Rul. 131 do not qualify as gifts
under § 102 and are not excluded from the employees’ gross income under the general
welfare exclusion. Whether the payments described in Rev. Rul. 131 are included in an
employee’s gross income depends on whether the payments qualify for exclusion under
§ 139.

HOLDINGS

Under the facts of this ruling:

(1) Payments individuals receive under a state’s program to pay or reimburse
unreimbursed reasonable and necessary medical, temporary housing, or transportation
expenses they incur as a result of a flood are excluded from gross income under the
general welfare exclusion. Such payments also qualify for exclusion under § 139.

(2) Payments that individuals receive under a charitable organization’s program
to pay or reimburse unreimbursed medical, temporary housing, or transportation
expenses they incur as a result of a flood are excluded from gross income under § 102.
(3) Payments that employees receive under an employer’s program to pay or
reimburse unreimbursed reasonable and necessary medical, temporary housing, or
transportation expenses they incur as a result of a flood are excluded from gross
income under § 139.
Amounts that are excluded from gross income under this revenue ruling are not subject
to information reporting under § 6041.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 131 is modified.

PROSPECTIVE APPLICATION

Pursuant to the authority contained in § 7805(b), this revenue ruling will not apply
adversely to payments received on or before January 21, 2003.

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DRAFTING INFORMATION

The principal author of this revenue ruling is Sheldon A. Iskow of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue ruling contact Mr. Iskow on (202) 622-4920 (not a toll-free call).