Internal Revenue Service Announces Relief for Southeast Texas Due to Hurricane Harvey

September 5, 2017

The Internal Revenue Service (the “IRS”) has announced relief from certain time sensitive deadlines for taxpayers affected by Hurricane Harvey (https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas). Pursuant to the announcement, affected Taxpayers (described below) may defer certain time-sensitive actions otherwise to be made on or after August 23, 2017 and before January 31, 2018 (the “Postponement Period”) to January 31, 2018. The IRS also reminded taxpayers of their ability to report deductions for casualty losses unreimbursed by insurance for Harvey in 2016 or 2017 and provided guidance on how to get expedited refund processing for 2016.

In addition, the IRS has announced relief intended to ease the process whereby employer-sponsored retirement plans, such as 401(k) plans, may extend loans and make hardship distributions to individuals impacted by Hurricane Harvey and their family members (https://www.irs.gov/pub/irs-drop/a-17-11.pdf) (the “Relief Announcement”).

Actions Postponed

Tax Reporting and Payment Deadlines. Affected Taxpayers may postpone payment and filing deadlines for federal income taxes (e.g., individual, corporate and partnership tax return filings, estimated tax payments otherwise due September 15, 2017 and January 15, 2018) that would have been due during the Postponement Period until January 31, 2018. Payroll and certain excise tax reporting is postponed but not payment of employment and excise tax deposits (although penalties on deposits due on or after August 23, 2017 and before September 7, 2017 will be abated if paid by September 7, 2017). Employee plan reporting on Form 5500 due during the Postponement Period is included in the relief.

Like-Kind Exchange Reporting Deadlines. The last day of the 45-day identification period and the 180 day exchange period and applicable reverse like kind exchange periods are postponed for Affected Taxpayers to the end of the Postponement Period and possibly up to 120 days thereafter. This rule also applies for some non-Affected Taxpayers in certain cases where the property at issue, a counterparty, a titleholder, or material documents are in the affected areas or lender or title insurance issues arise due to Hurricane Harvey.

Casualty Losses

In the announcement, the IRS reminds taxpayers that they may opt to deduct unreimbursed casualty losses from a federally declared disaster area in the year of the disaster or in the preceding taxable year. See IRS Publication 547 here: (https://www.irs.gov/publications/p547/ar02.html#en_US_2016_publink1000225399). Note casualty loss deductions are subject to other limitations, such as a floor of $100 and 10% of adjusted gross income, each discussed in IRS Publication 547.

Affected taxpayers declaring the deduction on their 2016 return should put the disaster designation “Texas, Hurricane Harvey” at the top of Form 4684 (https://www.irs.gov/forms-pubs/form-4684-casualties-and-thefts) to expedite their refund claim.

Benefit Plans

This Relief Announcement extends to 401(k), 403(b) and 457(b) plans, IRAs, and qualified defined benefit pension plans with stand-alone accounts that hold employee contributions and rollover amounts.  Employees and close family members (e.g., spouse, children, grandchildren, parents, grandparents and other dependents) who live or work in areas affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA) are eligible for relief under the Relief Announcement.[1]

The Relief Announcement provides the following forms of relief:

• A plan will not be treated as failing to satisfy any requirement under the Internal Revenue Code (“Code”) merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey.
• When determining whether to make a hardship distribution, plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution (unless the plan administrator has actual knowledge to the contrary).
• The relief applies to any hardship of the employee, not just the types enumerated under the Code.
• The six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.
• Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features.  However, the plan must be amended to allow for plan loans and/or hardship distributions no later than the end of the first plan year beginning after December 31, 2017 (i.e., on or before December 31, 2018 for calendar year plans).
• Even in a situation where a plan administrator has not assembled all of the documentation required for a loan or distribution, loans and distributions may be made so long as the plan administrator makes a good-faith diligent effort under the circumstances to comply with those requirements.  As soon as practicable, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation.

The relief provided under the Relief Announcement only applies to loans and hardship distributions made on or prior to January 31, 2018.  It is important to note that the tax treatment of loans and distributions remains unchanged. Thus, any distribution (not including amounts already taxed) made pursuant to the relief provided in the Relief Announcement will be includible in gross income and generally subject to the 10-percent additional tax imposed under Code section 72(t).

   [1]   Parts of Texas are currently eligible for individual assistance. A complete list of eligible counties is available at https://www.fema.gov/disasters.  If additional areas in Texas or other states are identified by FEMA for individual assistance because of damage related to Hurricane Harvey, the relief provided in the Relief Announcement will also apply from the date specified by FEMA as the beginning of the incident period.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other tax- or benefits-related developments.  If you have any questions, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax or Executive Compensation and Employee Benefits practice groups, or the authors:

James Chenoweth – Houston (+1 346-718-6718, [email protected])
Michael J. Collins – Washington, D.C. (+1 202-887-3551, [email protected])
Sean C. Feller – Los Angeles (+1 310-551-8746, [email protected])
Krista Hanvey – Dallas (+1 214-698-3425,[email protected])
David Sinak – Dallas (+1 214-698-3107, [email protected])
Michael Q. Cannon – Dallas (+1 214-698-3232, [email protected])

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