The Extra Session of the 1999 General Assembly met in December, 1999 and passed legislation entitled the Hurricane Floyd Recovery Act of 1999. This Act authorized various types of relief payments to local governments, individuals, and businesses in an attempt to mitigate some of the disasterous effects of Hurricance Floyd. In addition to authorizing relief payments, Section 4.5 of the Act mandated that each agency disbursing funds from the Hurricane Floyd Reserve Fund, other than for payment of goods or services provided by the recipient, include with the disbursement a written statement of the state and federal tax consequences of the funds or property disbursed.

This same legislation exempted payments made from the Hurricane Floyd Reserve Fund from North Carolina individual and corporate income taxes regardless of whether the grant was for goods or services that would otherwise be taxable. However, the action of the General Assembly has no effect on the federal tax consequences of the grants. Consequently, a grant may be tax exempt for N.C. tax purposes, but taxable for federal tax purposes.

The Department of Revenue - Personal Taxes Division has been providing tax assistance to agencies responsible for administering the grants made under this specific legislation. At this time, the Personal Taxes Division has requested guidance from the IRS-Chief Legal Counsel on the federal tax treatment of some 13 different types of payments that they have identified as being made as a result of Hurricane Floyd.

The 13 payment types can be broken down into two general types of payments, general welfare and income replacement. Generally speaking, general welfare payments include housing assistance, food, clothing, shelter, immediate health needs, etc. These payments are usually exempt from taxation, which means the agency would not have any tax reporting requirements. Economic recovery assistance grants (income replacement) to small businesses, farmers and fishermen will generally be taxable and require Form 1099-MISC reporting.

At this time the IRS Chief Legal Counsel has provided technical assistance on the following specific issues:

1. Relocation assistance to renters. Payments made from the State Acquision and Relocation Fund to assist individual renters in relocating from flood-damaged homes to other residences are general welfare payments and are not includible in the recipients' gross income. Form 1099-MISC should not be issued for these payments.

2. Flood Relief - Income Replacement. Payments to farmers for crop disaster assistance or crop yield losses; payments to farmer owned cooperatives for commodity quality losses; supplemental payments to growers' associations for uncollected assessments; and payments to fishermen for harvest losses are income replacement payments and therefore are includible in income. IRC Section 61(a) provides generally that gross income means all income from whatever source derived. Since these payments are for income replacement, they should be reported by the agency disbursing the grant as income on a Form 1099-G. Should the payment constitute a "loan" it should not be reported on Form 1099-G. Also, as stated above, income replacement payments made from the Hurricane Floyd Reserve Fund are tax-exempt for N.C. income tax purposes.

3. Grants to SBA Loan Applicants. This grant program provides payments to individuals who have incurred or will incur additional debt in repairing their flood damaged homes. The grants are intended to reduce the burden of the additional debt by financially assisting recipients in repairing their homes. The grants range from $2,500 to $10,000, depending on the homeowner's age, income, and amount of damage, except that families above a certain adjusted gross family income ceiling are not eligible for grants. These grants are in the nature of general welfare payments and are not subject to federal or state income taxes. Form 1099 should not be generated for these type payments.

4. State Supplemental Payments From the State Acquisition and Relocation Fund. Payments to enable homeowners to purchase comparable housing outside the 100 year flood plain after their damaged homes in the flood plain were purchased under a federally assisted program are in the nature of general welfare payments and are not includible in the recipients gross income. The agencies making these type payments should not issue Form 1099s to the recipients.

Payments made under legislatively provided social benefit programs for the promotion of general welfare are not includible in an individual's gross income. Although the grants to SBA loan applicants are excludible from a recipient's gross income, the grants may require special tax treatment by the homeowners. Individuals who may have otherwise been eligible to claim casualty losses for flood damage must reduce such losses by the amounts of grants received. If the recipient took a casualty loss in 1999 and received a grant in 2000, he may need to include the grant in income in 2000. This is due to the timing of the transaction.

The IRS further informed Revenue that grants made to SBA loan appliciants are not subject to Form 1099 reporting.

The Department of Revenue - Personal Taxes Division is still waiting for guidance on the tax treatment of several other types of grants administered by the Hurricane Floyd Reserve Fund. We will pass this information along to you when it is received.

Some agencies are administering grants to individuals or businesses that were authorized from sources other than the Hurricane Floyd Reserve Fund. The tax treatment of these grants may be different that the treatment of the grants outlined previously.

Some of the differences are as follows:

Some of the similarities are as follows:

Following Hurricane Fran, the OSC in Memorandum No. 97-16, dated 4/21/97, informed you that temporary workers providing services to the State during emergencies were not subject to FICA tax withholding.

Section (B)(6) of the State's Agreement for Social Security Coverage (Section 218 Agreement) exempts from Social Security withholding and matching requirements "services of an emergency nature". The Federal-State Reference Guide for Social Security Coverage and FICA Reporting by State/Local Government Employers further define emergency services to be "services performed by an employee on a temporary basis in case of fire, storm, snow, earthquake, flood, volcanic or other similar activity."

Also, the U.S. Department of Health and Human Services, following the Mt. St. Helens disaster, issued an opinion dated July 7, 1980, which stated, "It is our opinion that the Social Security Act meant to deal with all emergency situations regardless of duration as long as employees were hired on a temporary basis and specifically for work in dealing with the emergency". The term services performed by an employee on a temporary basis, for purposes of the FICA exclusion, does not include work performed by an employee who is a member of the Teachers' and State Employees' Retirement System and is performing his/her regular duties, whether during normal work hours or on an overtime basis, during an emergency situation. Temporary administrative, clerical and support workers also qualify for the FICA exclusion.

Under General Statute 135, Article 2, the Director of the Retirement System is custodian of Social Security Coverage for State and Local Government Employees. Questions concerning FICA withholding on specific emergency situations can be addressed to that office or the OSC will try to assist you.

Should you have questions concerning any of the above, please call Randy Thomas at (919) 981-5488.