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FAQs for Hurricane Victims - Grant Proceeds (Including Road Home Grants)

(8/13/08) Q: What are the tax consequences when a taxpayer who previously claimed a casualty loss sells his property to an unrelated party and assigns the LRA Road Home grant to the purchaser?

A: FACTS:
The taxpayer purchased a house and lot (the property) in 1999, and used the property as his principal residence until the house was totally destroyed in 2005 by Hurricane Katrina. The residence was insured, and taxpayer received a $150,000 insurance payment in 2005 as reimbursement for the loss.

The fair market value of the property immediately before the casualty was $300,000; the fair market value of the property immediately after the casualty was $100,000.

The taxpayer’s pre-casualty adjusted tax basis in the property was $215,000.

The taxpayer deducted a $50,000 casualty loss on his 2005 federal income tax return.

The LRA Road Home program was established to compensate homeowners whose homes were moderately or severely damaged by Hurricanes Katrina and Rita. Qualified homeowners may elect to assign their rights to benefits under the program to a purchaser of the property. In 2007, the taxpayer was awarded a $70,000 LRA Road Home grant, but did not collect the grant money. The taxpayer’s LRA Road Home grant was based on an estimated cost of repairs less insurance reimbursement formula ($220,000 estimated cost of damage - $150,000 insurance reimbursement).

The taxpayer did not rebuild the house. In 2007, the taxpayer sold the property to an unrelated third party purchaser for $170,000. As part of the sale transaction, the taxpayer assigned his LRA Road Home grant of $70,000 to the purchaser. At the time of the sale, the fair market value of the property was still $100,000.

TAX CONSEQUENCES

Casualty Loss Deduction:
To determine the allowable casualty loss, the taxpayer takes the lesser of the reduction in value of the taxpayer’s property or the taxpayer’s basis in that property, and then reduces this amount by any compensation or reasonable expectation of compensation for the loss by insurance or otherwise. The taxpayer computed the 2005 casualty loss deduction of $50,000 as follows:

 

Calculation Loss Deduction Calculation
The lesser of (1) the reduction in value of the taxpayer’s property ($300,000 - $100,000 = $200,000) or (2) the taxpayer’s pre-casualty basis in that property ($215,000) $200,000
Less insurance payment received in 2005 ($150,000)
2005 Casualty Loss Deduction $50,000

Effect of Insurance Recovery and Casualty Loss Deduction on Basis:
In 2005, the taxpayer must reduce his pre-casualty adjusted tax basis in the property ($215,000) by both (a) the $150,000 insurance recovery, and (b) the $50,000 casualty loss deduction, resulting in an adjusted tax basis of $15,000.

Tax Effects (Including Assignment) of LRA Road Home Grant:

“Tax Benefit” Income
As indicated above, Hurricane Katrina damage reduced the value of taxpayer’s property by $200,000 ($300,000 pre-disaster value minus $100,000 post-disaster value). However, taxpayer did not incur a loss of $200,000 because insurance reimbursed $150,000 of the damage. Consequently, taxpayer incurred an actual loss of $50,000 ($200,000 reduction in value minus $150,000 insurance recovery). Taxpayer deducted the $50,000 casualty loss in 2005. In 2007, the $70,000 grant completely offset the taxpayer’s earlier $50,000 loss deduction. Under the “tax benefit” rule, the taxpayer must take the $50,000 loss deduction (tax benefit) back into income.

The remaining $20,000 balance of the LRA Road Home grant ($70,000 - $50,000) is an additional recovery to the taxpayer for the damage to the property, and is gain to the extent it exceeds the taxpayer's adjusted tax basis.

LRA Road Home Grant Income
Thus, in 2007, the taxpayer realizes a gain of $5,000 from the LRA Road Home grant, computed as follows:

 

LRA Road Home Grant Income Calculation
LRA Road Home grant $70,000
Less “tax benefit” income ($50,000)
Less adjusted basis (see above) ($15,000)
Gain from LRA Road Home grant $5,000

As with the insurance recovery in 2005, the $20,000 remaining balance of the LRA Road Home grant reduces the taxpayer’s adjusted basis in the property, resulting in an adjusted tax basis of zero ($0).

Therefore, as a result of the LRA Road Home grant, in 2007 the taxpayer: a) must report $50,000 as ordinary income under the “tax benefit” rule; b) realizes gain of $5,000; and c) has an adjusted tax basis in the property of $0.

Gain from Sale of the Property
In addition, the taxpayer realizes $100,000 gain from the sale of the property to the purchaser. The taxpayer's assignment of the LRA Road Home grant to the purchaser in connection with the sale is treated as an adjustment to the purchase price of the property. The taxpayer computes gain on the sale of the property to the purchaser as follows:

Gain from Sale of the Property Calculation
Sales price $170,000
Less LRA Road Home grant assigned to purchaser ($70,000)
Less Taxpayer’s adjusted tax basis at the time of the sale ($0)
Gain on the sale of the property to purchaser $100,000

Therefore, in 2007 the taxpayer realizes total gain of $105,000 from the property: $5,000 gain from the LRA Road Home grant and $100,000 gain from the sale of the property to the purchaser.

Exclusion of Gain (§ 121):
Section 121(a) of the Code provides that a taxpayer may exclude gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, the taxpayer has owned and used the property as the taxpayer’s principal residence for periods aggregating 2 years or more. The amount of gain excludable under § 121 is limited to $250,000 for single taxpayers and $500,000 for married taxpayers filing a joint return.

The destruction of the house and the subsequent sale of the property are treated together as a single involuntary conversion (that is, as a single sale) of the principal residence for purposes of § 121. Accordingly, the taxpayer may exclude from income under § 121 the total gain realized from the sale in 2007 ($105,000). Under the 2-of-5 year residency rule, the taxpayer may also qualify for § 121 exclusion if the taxpayer sells the property in 2008 or 2009.

Deferral of Gain (§ 1033):
If for some reason the taxpayer does not meet the requirements of § 121, the taxpayer may be able to defer recognition of the gain ($105,000) under § 1033.

If all the requirements of § 1033 are met, a taxpayer may elect to postpone recognizing gain under the involuntary conversion rules of § 1033 by investing in property similar or related in service or use to the damaged property and meeting other requirements. Generally, the taxpayer must replace the damaged property within 2 years after the close of the first taxable year in which any gain is realized. However, if the damaged property is in a federally declared disaster area, the replacement period is 4 years. If the damaged property is located in the Hurricane Katrina disaster area, the replacement period is 5 years if substantially all of the use of the replacement property is in the Hurricane Katrina disaster area. Additionally, the IRS may grant an extension of these periods if the taxpayer can show reasonable cause for not making the replacement within the specified period.

“Tax Benefit” Rule Income:
The $50,000 “tax benefit” income is not subject to exclusion under § 121 or deferral under § 1033.

Tax Consequences for Purchaser:
The purchaser’s cost basis in the property is $100,000 ($170,000 sales price less $70,000 LRA Road Home grant funds assigned by the taxpayer). The purchaser may increase his basis in the property by the amount of the grant funds he uses to repair or improve the property. For example, if the purchaser later invests the $70,000 LRA Road Home grant funds in the property, his adjusted basis in the property will be $170,000 ($100,000 plus $70,000).

A recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a grant, such as a Road Home grant, as reimbursement for the loss, to amend the tax return on which the taxpayer claimed the casualty loss to reduce the loss by the amount of the grant, rather than report the grant as income in the year received. For more information about this change in the law, see the fourth FAQ dated 8/13/08 in this section.

For more information, see:

In computing the "tax benefit," you are advised to review Publication 525, Taxable and Nontaxable Income.

(3/14/08) Q. Is a taxpayer required to report as ordinary income a grant from the LRA received in 2007 to reimburse the taxpayer for property damage caused by hurricane Katrina if the taxpayer did not claim a casualty loss on the 2005 tax return?

A: No, as illustrated by the following example:

The taxpayer’s house, which was his principal residence, was damaged by hurricane Katrina in 2005. The taxpayer’s residence was not insured.

The taxpayer’s pre-casualty basis in the property is $10,000.

The fair market value immediately before the casualty is $50,000.

The fair market value immediately after the casualty is $15,000.

The taxpayer sustained a casualty loss of $10,000.

The taxpayer did not itemize deductions on the 2005 return, so the taxpayer did not claim the $10,000 casualty loss.

In 2007, the taxpayer received a $15,000 grant from the LRA to compensate the taxpayer for the property damage caused by the hurricane.

Tax Consequences:
The taxpayer does not have to report the grant as ordinary income. Since the taxpayer did not deduct a casualty loss in 2005 for the property damage caused by the hurricane, the loss did not reduce the taxpayer’s tax for that year.

The taxpayer realizes $5,000 gain upon receipt of the LRA grant in 2007 (the difference between the $15,000 payment received and taxpayer’s basis of $10,000).

Because the damage to the residence is considered an involuntary conversion of the residence, any gain may also be deferred by buying similar or related replacement property, if certain conditions are met under section 1033.

For more information, see:

If the primary residence were destroyed, the destruction could be treated as a sale for purposes of the tax provisions governing the exclusion of gain from the sale of a principal residence, and gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns), if certain conditions are met under section 121.

Additionally, the recipient of LRA grant payments to compensate for the damage to or destruction of the primary residence (and any other compensation for the damaged or destroyed residence) must reduce his or her "cost" basis in any replacement residence by the amount of any deferred gain from the damaged or destroyed residence.

(8/13/08) Q: How do individuals treat grants in the maximum amount of $150,000 that the Louisiana Recovery Authority (LRA) and the Mississippi Development Authority (MDA) make to compensate them for the damage to or destruction of their primary homes by Hurricane Katrina?

A: In general, the recipient of an LRA or MDA grant must reduce the amount of any casualty loss attributable to the damaged or destroyed primary residence by the amount of the LRA or MDA grant. However, if the individual properly claimed a casualty loss deduction and in a later year (for example, 2007) receives the grant as reimbursement for the loss, some or all of the grant proceeds may be required to be included in income in the year of receipt under the "tax benefit rule." See the other FAQs in this section for more information about the tax benefit rule. The recipient is not required to include in income any portion of the LRA or MDA grant that is not required to be included in income under the tax benefit rule.

In addition, a recipient must reduce his or her tax basis in the damaged or destroyed primary residence by the sum of:

  • The amount of the LRA or MDA grant payment that is not required to be included in income under the tax benefit rule; and
  • The amount of the allowable casualty loss deduction attributable to the damaged or destroyed primary residence.

If the recipient repairs the damaged primary residence, the cost of repairs ordinarily is capitalized and added to the recipient's tax basis in the damaged residence.

For more information on determining your adjusted basis, see:

If the LRA or MDA grant payment to compensate for damage to or destruction of the primary residence and/or insurance proceeds (and any other form of compensation for the damaged or destroyed residence) exceed the recipient's adjusted tax basis in the damaged or destroyed residence, the recipient has realized gain for federal income tax purposes. However, because the damage or destruction is considered an "involuntary conversion" of the residence for federal income tax purposes, the recipient may ordinarily defer reporting any gain if the cost of the repairs or the replacement residence is at least as much as the compensation received for the damage (including the LRA or MDA grant to compensate for damage to or destruction of the primary residence and/or insurance proceeds), and if certain other conditions are met.

For more information, see:

If the primary residence is destroyed, the destruction may be treated as a sale for purposes of the tax provisions governing the exclusion of gain from the sale of a principal residence, and gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns), if certain conditions are met. Additionally, because the destruction is considered an involuntary conversion of the residence, any gain in excess of the $250,000/$500,000 limitation may also be deferred by buying similar or related replacement property, if certain conditions are met.

For more information, see:

The recipient of LRA or MDA grant payments to compensate for the damage to or destruction of the primary residence (and any other compensation for the damaged or destroyed residence) must reduce his or her "cost" basis in any replacement residence by the amount of any deferred gain from the damaged or destroyed residence.

A recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a certain grant, such as a Road Home grant, as reimbursement for the loss, to amend the tax return on which the individual claimed the casualty loss to reduce the loss by the amount of the grant, rather than report the grant as income in the year received. See the fourth FAQ dated 8/13/08 in this section for more information on this change in the tax law.

(8/13/08) Q: If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, how much of the reimbursement must the taxpayer include in income in the later year?

A: The tax benefit rule applies to the amount of the casualty loss deduction and the amount reimbursed, not to the amount of the tax savings in the earlier year. Under the tax benefit rule, a taxpayer includes in income the amount of the reimbursement equal to the amount of the deduction that actually reduced the taxpayer's tax.

For instance, if a taxpayer had $50,000 income (after exemptions and other deductions) in 2005 and properly claimed a $150,000 casualty loss for 2005, only $50,000 of the casualty loss deduction actually reduced the taxpayer's income (and, consequently, the amount of 2005 tax). The taxpayer did not use any further amount of the loss by carrying it back. If the taxpayer received $75,000 reimbursement for the casualty, the taxpayer would have to include only $50,000 of that reimbursement in income in the year received.

Often the tax savings attributable to a casualty loss deduction will not match the tax increase attributable to the reimbursement. The reasons for this vary and include fluctuation in gross income, change in tax rates, and change in eligibility for exemptions and deductions. Depending on the circumstances, the tax savings attributable to the casualty loss deduction may be greater than the tax increase attributable to the reimbursement, or vice versa.

For this reason, a recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a certain grant, such as a Road Home grant, as reimbursement for the loss, to amend the tax return on which the individual claimed the casualty loss to reduce the loss by the amount of the grant, rather than report the grant as income in the year received. See the fourth FAQ in this section dated 8/13/08 for more information on this change in the tax law.

(03/09) Q: If a taxpayer properly claimed a Hurricane Katrina casualty loss deduction and in a later year, for example 2007, receives reimbursement for the loss, for example a Louisiana Road Home Grant, does the taxpayer include the reimbursement amount in gross income in the later year?

A: Ordinarily, yes. Under the "tax benefit rule," if a taxpayer claimed a Hurricane Katrina casualty loss deduction on his or her 2004 or 2005 Form 1040 and the taxpayer is reimbursed for all or part of that loss with a Louisiana Road Home Grant (or any other form of compensation) in 2007, the amount reimbursed is included in income on the taxpayer's 2007 Form 1040, subject to the following limitation. The taxpayer need only include in 2007 income the amount of the reimbursement that is equal to the amount of the casualty loss deduction (for the damaged property to which the reimbursement relates) that actually reduced the taxpayer's tax.

Example: In 2005, B's home, which costs $90,000, suffered $30,000 of damage from Hurricane Katrina. At the end of 2005, B did not expect to be reimbursed for the damage. B's gross income for 2005 was $65,000. On B's 2005 Form 1040, B deducted a $30,000 casualty loss, which offset $30,000 of B's $65,000 gross income and thereby reduced the amount of tax that B owed for 2005 by the amount of tax that would otherwise have been due on the offset $30,000. In 2007, B receives a $20,000 Road Home Grant reimbursement. The tax benefit rule requires B to include the full $20,000 reimbursement as income on B's 2007 Form 1040 to offset $20,000 of the $30,000 casualty loss deduction taken for 2005.

A recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a grant as reimbursement for the loss, to amend the tax return on which the individual claimed the casualty loss to reduce the loss by the amount of the grant. If the grant received equaled or exceeded the casualty loss the individual deducted, then the casualty loss would be reduced to zero. To qualify, a taxpayer must have claimed a casualty loss to a principal residence, the loss must have resulted from hurricanes Katrina, Rita, or Wilma, and the taxpayer must have received in a later tax year a grant under Public Law 109-148, 109-234, or 110-116, such as a grant from the Road Home program, as reimbursement for the loss. If the taxpayer made a Section 165(i) election to deduct the loss in the previous year, then the previous year is treated as the loss year and the taxpayer may amend the return for the previous year. If the taxpayer carried back the casualty loss to prior taxable years as a net operating loss, then the taxpayer may amend the tax return or returns to which the loss was carried back. A taxpayer who chooses to amend the tax return for the loss year or any carryback years must file the amended return or returns by the later of either: (1) the due date for filing the return for the tax year the taxpayer received the grant; or (2) July 30, 2009. If the reduction of the taxpayer’s allowable casualty loss by the amount of the grant results in an underpayment of tax for the loss year or any carryback year, any penalties or interest will be waived, as long as the taxpayer pays the additional tax within one year of filing the amended return or returns reducing the casualty loss deduction. See, Notice 2008-95, Notice to Address Amended Returns for Hurricane-Related Casualty Losses and Subsequent Grants Reimbursing Such Losses.

(8/13/08) Q: Can you provide an example of how the casualty loss, reimbursement and basis rules work and how the non-recognition rules apply under Internal Revenue Code Sections 121 and 1033?

A: Below are facts and consequences on how the casualty loss reimbursement and basis rules work.

Example - Version 2

Facts:
TP's pre-Katrina basis in the property is $215,000.

2005: TP has a casualty loss of $22,000. TP receives insurance reimbursement of $7,000 and has no reasonable prospect of recovering any other amounts for damage to the home.

2006: TP repairs property at a cost of $25,000. TP receives LRA grant of $18,000 to reimburse the portion of the cost of repairs not covered by the insurance reimbursement.

Tax consequences:
2005: Casualty loss deduction = $15,000 ($22,000 less $7,000)
2006: Income due to recovery of benefit of $15,000 casualty loss deduction from receipt of LRA grant = $15,000

Taxpayer's basis in the property
Pre-Katrina basis $215,000
2005 casualty loss deduction (15,000)
2005 insurance reimbursement (7,000)
Basis at the end of 2005 $193,000
2006 Amount of LRA grant in excess of amount of recovery of tax benefit income (18,000 less $15,000) ($3,000)
 
2006 repairs $25,000
Basis at the end of 2006 $215,000

The non-recognition provisions of §§ 121 & 1033 apply only when a taxpayer receives reimbursement/ compensation (e.g., insurance proceeds, grants, etc.) in excess of the taxpayer's tax basis in the property, which is not the case in this example.

A recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a certain grant as reimbursement for the loss, to amend the tax return on which the taxpayer claimed the casualty loss to reduce the loss by the amount of the grant, rather than report the grant as income in the year received. For more information about this change in the law, see the fourth FAQ dated 8/13/08 in this section. Also see, Notice 2008-95, Notice to Address Amended Returns for Hurricane-Related Casualty Losses and Subsequent Grants Reimbursing Such Losses.

(8/13/08) Q: How do reimbursements from the Louisiana Recovery Authority (LRA) affect a homeowner’s casualty loss and basis computations?

If a return was filed, would amending be required?

Response: If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer’s income tax in the tax year in which the taxpayer reported the casualty loss deduction. This question is addressed on pages 5-7 of Publication 547, Casualties, Disasters, and Thefts in the section entitled “Insurance and Other Reimbursements.”

A recent change in the tax law allows a homeowner who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and in a later tax year received a certain grant as reimbursement for the loss, to amend the tax return on which the taxpayer claimed the casualty loss to reduce the loss by the amount of the grant, rather than report the grant as income in the year received. See the fourth FAQ dated 8/13/08 in this section for more information on this change in the tax law.

What if an NOL was generated on the original return, would a taxpayer amend all amended returns and Form 1045?

Response: If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer’s income tax in the tax year in which the taxpayer reported the casualty loss deduction or in a carryback year. This question is addressed on pages 5-7 of Publication 547, Casualties, Disasters, and Thefts in the section entitled “Insurance and Other Reimbursements.”

A homeowner who claimed a casualty loss deduction for damage from hurricane Katrina, Rita, or Wilma, carried back the loss as an NOL to prior taxable years, and received a grant such as a Road Home grant in a later tax year as reimbursement for the loss, may choose to amend the tax returns to which the loss was carried back to reduce the loss by the amount of the grant received, as a result of the change in the tax law described above.

Would there be a provision to repay any refunds without penalty and interest?

Response: We are unsure of what refund needs to be repaid based upon the receipt of the LRA money. Nevertheless, deficiency procedures apply to taxes imposed by subtitle A or B or chapters 41, 42, 43 or 44 of the Code. See I.R.C. § 6213. Generally, penalties or additions to tax calculated on the basis of deficiency amounts are also subject to deficiency procedures. See I.R.C. § 6665. Similarly, interest under section 6601 shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as taxes. See I.R.C. § 6601(e)(1). A taxpayer who receives a statutory notice of deficiency that originates from the receipt of the LRA money, therefore, is generally able to petition the Tax Court without paying the determined taxes, penalties, and interest beforehand. A taxpayer, however, would be required to prepay the taxes, penalties and interest before filing a refund suit in district court or the Court of Federal Claims.

Homeowners who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma, and who, as a result of the change in the tax law described above, choose to amend their returns to reduce the prior casualty loss deduction rather than report the grant as income in the year received, will not have to pay any penalties or interest if they pay any additional tax within one year of filing the amended return or returns.

Is the accuracy-related penalty on underpayments under section 6662 applicable where a taxpayer does not report the amount of LRA money as income in the year received?

Response: If a taxpayer properly claimed a casualty loss deduction and in a later year receives reimbursement for the loss, the taxpayer reports the amount of the reimbursement in gross income in the tax year it is received to the extent the casualty loss deduction reduced the taxpayer’s income tax in the tax year in which the taxpayer reported the casualty loss deduction. This question is addressed on pages 5-7 of Publication 547, Casualties, Disasters, and Thefts in the section entitled “Insurance and Other Reimbursements.”

Section 6662 imposes an accuracy-related penalty on underpayments in an amount equal to 20 percent of the portion of an underpayment attributable to, among other things: (1) negligence or disregard of rules or regulations or (2) any substantial understatement of income tax.

Negligence generally includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code or to exercise ordinary and reasonable care in the preparation of a tax return. See I.R.C. § 6662(c) and Treas. Reg. § 1.6662-3(b)(1). The term “disregard” includes any careless, reckless or intentional disregard of rules or regulations. Treas. Reg. § 1.6662-3(b)(2).

As indicated above, a taxpayer may be required to report the amount of LRA money as income in the year received. Accordingly, if the taxpayer fails to correctly reflect the payments made by the LRA, the Service may impose the accuracy-related penalty attributable to negligence or disregard of rules or regulations against the taxpayer where there is an underpayment of tax and the above standards of care were not met by the taxpayer. An understatement is substantial for individuals if the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. Generally, the understatement is reduced to the extent that either (1) there is substantial authority for the position taken on the return, or (2) the taxpayer disclosed in the return (or in an attached statement) all relevant facts affecting the tax treatment of the item and the taxpayer has a reasonable basis for the tax treatment of the disclosed item. I.R.C. § 6662(d)(2)(B). The accuracy-related penalty attributable to a substantial understatement, therefore, may be imposed if the understatement is not reduced and the monetary thresholds are met.

Section 6664 provides an exception to the imposition of the accuracy-related penalty if the taxpayer shows that there was reasonable cause for the underpayment and that the taxpayer acted in good faith. See I.R.C. § 6664(c). The determination of whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all relevant facts and circumstances. See Treas. Reg. § 1.6664-4(b)(1) and (f)(1). Generally, the most important factor to determine reasonable cause and good faith is the extent to which the taxpayer exercised ordinary business care and prudence in attempting to assess his or her proper tax liability. See Treas. Reg. § 1.6664-4(b)(1). See also Larson v. Commissioner, T.C. Memo. 2002-295.

Certain homeowners who claimed a casualty loss for damage from hurricane Katrina, Rita, or Wilma may choose to amend the tax return on which the individual claimed the casualty loss to reduce the loss by the amount of the grant, based on the change in the law described above. If the reduction of the individual’s casualty loss results in an underpayment of tax for the loss year or any NOL carryback year, any penalties or interest relating to the underpayment will be waived as long as the individual pays the additional tax within one year of filing the amended return.

For more information, see:

In computing the "tax benefit," you are advised to review Publication 525, Taxable and Nontaxable Income.

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