Certain East Palestine Derailment Relief Payments Are Excludable from Income

(Parker Tax Publishing June 2024)

The IRS announced that it has determined that the February 3, 2023, derailment of a freight train operated by a common carrier in East Palestine, Ohio, is a qualified disaster for purposes of Code Sec. 139. As a result of this determination, certain payments made by the common carrier to individuals affected by the derailment are excludable from gross income as qualified disaster relief payments under Code Sec. 139(a). Notice 2024-46.

Background

On February 3, 2023, a multi-car freight train operated by a common carrier derailed in East Palestine, Ohio (Derailment). Several of the train cars contained hazardous materials, including vinyl chloride, ethylene glycol monobutyl ether, ethylhexyl acrylate, butyl acrylate, benzene residue, and isobutylene. Some of these train cars spilled their loads onto the ground and into local waterways, and other train cars caught fire. Later, the contents of certain train cars were vented and burned off by the common carrier to prevent an explosion.

As a result of the Derailment, and the potential environmental and health concerns from the spillage of the hazardous material, a number of residents and businesses near the Derailment site were evacuated. The Environmental Protection Agency deployed a team to support state and local emergency and environmental response efforts.

Following the Derailment, the common carrier began operating a family assistance center in Ohio to provide financial support to affected individuals of East Palestine, Ohio and surrounding communities, including communities in Pennsylvania and West Virginia. Beginning in 2023, the common carrier made payments to affected individuals for the following items: (1) relocation expenses, including for hotels, meals, gas or other fuel, pet boarding, and replacement of clothing and other personal items; (2) costs to repair and rehabilitate homes and the surrounding environment (for example, power washing, air purifiers, air duct cleaning, and well-water testing); (3) medical expenses, including prescription medications; (4) lost wages; (5) one-time "inconvenience payments" of $1,000; (6) compensation to certain affected individuals who sold their homes, if the sale was completed after the Derailment; and (7) payments to property owners to allow the common carrier access to the track for remediation and for access to clean nearby creeks and streams. In connection with the Derailment, the common carrier also made payments to certain businesses.

The common carrier has furnished Forms 1099-MISC, Miscellaneous Information, to affected individuals for payments made after February 3, 2023, and on or before December 31, 2023, reporting these payments as includable in gross income.

Exclusion of Qualified Disaster Relief Payments from Gross Income

Code Sec. 139(a) provides that gross income does not include any amount received by an individual as a qualified disaster relief payment. This exclusion does not apply to exclude payments made to businesses from gross income.

Code Sec. 139(b) provides that a qualified disaster relief payment includes 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 (not otherwise compensated for by insurance or otherwise) incurred as a result of a qualified disaster,

(2) To reimburse or pay reasonable and necessary expenses (not otherwise compensated for by insurance or otherwise) 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, or

(3) By a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster.

Under Code Sec. 139(c)(3), the term "qualified disaster" includes a disaster that results from an accident involving a common carrier, or from any other event, which is determined by the Secretary of the Treasury or her delegate (Secretary) to be of a catastrophic nature.

Notice 2024-46

The IRS has determined that the Derailment is an event of a catastrophic nature under Code Sec. 139(c)(3). Therefore, the Derailment is a qualified disaster under Code Sec. 139. As a result of this determination, certain payments, which were made by the common carrier to affected individuals, are excluded from affected individuals' gross income because the payments are qualified disaster relief payments.

Specifically, according to the IRS, the following types of payments to affected individuals are excludable from gross income as qualified disaster relief payments: payment or reimbursement of relocation expenses, including for hotels, meals, gas or other fuel, pet boarding, and replacement of clothing and other personal items, as well as payment or reimbursement of expenses for the repair and rehabilitation of homes and surrounding environment (for example power washing, air purifiers, air duct cleaning, and well-water testing), medical expenses, prescription medications, the one-time inconvenience payments of $1,000, and compensation to certain affected individuals who sold their homes if the sale was completed after the Derailment.

The IRS stated that the following types of payments are not qualified disaster relief payments and are includable in gross income: (1) payments made for the replacement of income, such as lost wages; (2) payments of any type made to businesses; or (3) payments made by the common carrier to access the track for remediation or to access creeks or streams for cleaning.

The IRS advised that affected individuals who received payments from the common carrier and who have not yet filed their federal income tax returns for the year the payment was received should not include any qualified disaster relief payments described in Section 3.02 of Notice 2024-46 (even if reflected on Form 1099-MISC) in federal gross income on their Form 1040, U.S. Individual Income Tax Return, except to the extent the expenses reimbursed by the common carrier were (or are expected to be) also compensated for by insurance or otherwise. If filing Form 1040 electronically, taxpayers should attach to the Form 1040 a .pdf attachment with filename "EPTDR-East Palestine Train Derailment Relief." The attachment should state "East Palestine Train Derailment Relief." If filing Form 1040 on paper, taxpayers should state "East Palestine Train Derailment Relief" at the top of Form 1040.

The IRS also stated that affected individuals who have filed their 2023 federal income tax returns may amend their returns by filing Form 1040-X, Amended U.S. Individual Income Tax Return, to exclude any qualified disaster relief payments described in Section 3.02 of Notice 2024-46 (even if reflected on a Form 1099-MISC) that were previously included on their original 2023 individual federal income tax returns (except to the extent the expenses that were reimbursed by the common carrier were (or are expected to be) also compensated for by insurance or otherwise). The IRS accepts paper and electronically filed Forms 1040-X, although a Form 1040-X may be filed electronically only with certain tax filing software. If filing Form 1040-X electronically, taxpayers should attach a .pdf attachment with filename "EPTDR-East Palestine Train Derailment Relief." The attachment should state "East Palestine Train Derailment Relief." Individuals may also state, "East Palestine Train Derailment Relief," at the beginning of Part III, Explanation of Changes. If filing Form 1040-X on paper, taxpayers should state, "East Palestine Train Derailment Relief," at the top of Form 1040-X, as well as at the beginning of Part II, Explanation of Changes.

For a discussion of the exclusion for qualified disaster relief payments, see Parker Tax ¶79,305.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com