New Law Offers Relief Elda A. DiRe, CPA
Partner, Personal Financial Counselling
Ernst & Young LLP
New York, NY
to Terrorist Attack Roby B. Sawyers, Ph.D., CPA
Associate Professor, Department of Accounting
Victims North Carolina State University
Neil A.J. Sullivan, CPA
Peter J. Westort, Ph.D., CPA
Assistant Professor of Accounting
Department of Accounting & Finance
University of Massachusetts Boston
The Victims of On Jan. 23, 2002, President Bush signed
the Victims of Terrorism Tax Relief Act
income taxes during the tax year of
death and for the preceding tax year.
Terrorism Tax Relief Act of 2001 (VTTRA), providing income The individual had to have died from
of 2001 offers income and estate tax relief to “speciﬁed terrorist injury or wounds incurred in a terrorist
victims” (STVs). Special tax treatment is attack or from an illness stemming from
and estate tax relief to not unusual; in the past, it was extended to an anthrax attack. Relief does not apply
those who were American hostages held captive in Iran to anyone (or his representative) identiﬁed
injured or killed in and victims of the bombing of Pan by the U.S. Attorney General as having
American Airways ﬂight 103 over participated or conspired in any terrorist
U.S.-based terrorist or Lockerbie, Scotland.1 This article attack.
anthrax attacks. This describes the VTTRA provisions and For decedents dying before 2002, there
article explains the their ramiﬁcations. will likely be few issues as to who qualiﬁes
as a victim. As time goes by, however, this
new provisions and What Is an STV? may become more problematic. For
their implications and example, would an individual who
offers some examples. VTTRA Section 101, adding Sec. inhaled asbestos-contaminated dust at
692(d), defines an STV in Sec. 692(d)(4) Ground Zero on Sept.11,2001 be eligible
as any deceased victim of the terrorist for Sec. 692(d) relief if he dies in 2004?
attacks against the U.S. occurring on
April 19, 1995 or Sept. 11, 2001, or of Income Tax Provisions
the anthrax cases occurring after Sept.
10, 2001 and before 2002, regardless of Elimination of Tax Liability
whether the victim was killed in the Sec. 692(d)(1) exempts STVs from
attack or in rescue or recovery opera- paying Federal individual income taxes for
tions. The VTTRA extends Sec. 692, the tax year of death and the preceding
which previously applied only to U.S. tax year. Executors of STVs’ estates may
Armed Forces members, to STVs, amend 2000 income tax returns to obtain
exempting an individual from paying a refund of any Federal taxes paid. As dis-
Editor’s note: Ms. DiRe and Dr. Westort are members Authors’ note: Ms. DiRe and Dr. Westort thank
of the AICPA Tax Division’s Individual Taxation Patricia Thompson, Chair of the Individual Taxation
Technical Resource Panel (TRP). Dr. Sawyers is a TRP, and Dr. Sawyers and Mr. Sullivan thank
member of the AICPA Tax Division’s Trust, Estate Evelyn M. Capassakis, Chair of the Trust, Estate &
& Gift Tax TRP. Mr. Sullivan is a member of the Gift Tax TRP, for reviewing this article.
AICPA Tax Division’s International Taxation TRP 1See P.L. 96-449 and 101-604.
and the Trust, Estate & Gift Tax TRP’s Estate Tax
Expatriation Tax Task Force.
THE TAX ADVISER / MAY 2002 313
cussed below,the IRS has implemented Pub.3920,Tax Relief for Victims of Ter-
procedures to expedite ﬁling refund rorist Attacks, available at www.irs.gov,
EXECUTIVE SUMMARY claims for STVs. offers detailed guidance.
Under Sec. 692(d)(3), the exemp- Under IR-2002-07, STVs’ surviving
tion does not apply to any amount spouses or executors may ﬁle amended
I STVs are exempt paid by an employer attributable to 2000 returns until April 13, 2004 and
from Federal income deferred compensation that would claim 2001 tax relief when ﬁling the
taxation for the tax have been payable after death had the decedent’s return. Amended 1994 and
year of death and the individual died other than as an STV, 1995 returns for Oklahoma City vic-
preceding tax year. or amounts payable in a tax year that tims can be ﬁled until Jan. 23, 2003.
would not have been payable in such “Married” ﬁling status: For mar-
I For an STV who died tax year but for an action taken after ried taxpayers, the exemption applies
in 2001, the new rate Sept. 11, 2001. For example, death only to the deceased spouse’s income.
schedule effectively beneﬁts and amounts payable to an Taxpayers who ﬁled jointly may ﬁle a
eliminates Federal STV’s estate from a qualiﬁed plan or refund claim for 2000 taxes paid on
estate tax on an estate IRA are not exempt. Similarly, if an their deceased spouse’s income and
of $8,762,500, but does employer accelerates vesting of could exclude their deceased spouse’s
not eliminate the state restricted property or paying nonquali- income in ﬁling their 2001 tax return.
ﬁed deferred compensation, the
exemption will not apply. However, Disaster Relief Payments
I The IRS can now amounts paid by an employer to an VTTRA Section 111 created Sec.
postpone ﬁlings and STV’s estate out of generosity are 139, Disaster Relief Payments. Under
payments for up to one exempt from taxes. The exemption that provision,“qualiﬁed disaster relief
year without issuing also applies to payments of an STV’s payments” are exempt from Federal
regulations. accrued vacation and sick leave. taxation.
Sec. 139(c) deﬁnes a “qualiﬁed disas-
Minimum Beneﬁt ter” as (1) a disaster that results from a
Sec. 692(d)(2) provides each STV terroristic or military action, (2) a Presi-
with a $10,000 minimum individual dentially declared disaster, (3) a disaster
income tax beneﬁt. If an STV’s Federal that results from an accident involving a
income tax liability during the tax year common carrier, or from any other
of death and the preceding tax year is event determined by the Secretary to
less than $10,000 overall, the govern- be of a catastrophic nature or (4) a dis-
ment will refund the difference to the aster determined by an applicable Fed-
STV’s estate. eral, state or local government (or
agency or instrumentality thereof ).
Expedited Refund Procedures A qualiﬁed disaster relief payment is
IR-2002-072 enumerated proce- deﬁned by Sec. 139( b) as any payment
dures for expediting refund claims for made for the beneﬁt of an individual:
those killed in terrorist action (KITA). 1. To reimburse or pay reasonable and
Executors should print “KITA—Okla- necessary personal, family, living or
homa City,” “KITA—9/11” or funeral expenses incurred in a qualiﬁed
“KITA—Anthrax” at the top of an disaster.
amended return and send it to: 2. To reimburse or pay reasonable and
Internal Revenue Service necessary expenses incurred for the
P Box 4053 repair or rehabilitation of a personal
Woburn, MA 01888 residence, or repair or replacement of
If using a private carrier, the its contents, to the extent that the need
For more information about
amended return should be sent to: for such repair, rehabilitation or
this article, contact Ms. DiRe
at email@example.com, Dr. Internal Revenue Service replacement is attributable to a quali-
Sawyers at roby_sawyers@ 310 Lowell Street ﬁed disaster.
ncsu.edu, Mr. Sullivan at Stop 661 3. By a person engaged in the furnish-
firstname.lastname@example.org or Dr. Andover, MA 01810 ing or sale of transportation as a com-
Westort at peter.westort@
umb.edu. 2IR-2002-07, IRB 2002.
314 THE TAX ADVISER / MAY 2002
Exhibit 1: Estate tax reduced rate schedule (VTTRA Section 103(a), amending Sec. 2201(c))
If the amount on which the tentative tax is computed is: The tentative tax is:
Not over $150,000 1% of the amount by which such amount exceeds $100,000
Over $150,000 but not over $200,000 $500, plus 2% of the excess over $150,000
Over $200,000 but not over $300,000 $1,500, plus 3% of the excess over $200,000
Over $300,000 but not over $500,000 $4,500, plus 4% of the excess over $300,000
Over $500,000 but not over $700,000 $12,500, plus 5% of the excess over $500,000
Over $700,000 but not over $900,000 $22,500, plus 6% of the excess over $700,000
Over $900,000 but not over $1,100,000 $34,500, plus 7% of the excess over $900,000
Over $1,100,000 but not over $1,600,000 $48,500, plus 8% of the excess over $1,100,000
Over $1,600,000 but not over $2,100,000 $88,500, plus 9% of the excess over $1,600,000
Over $2,100,000 but not over $2,600,000 $133,500, plus 10% of the excess over $2,100,000
Over $2,600,000 but not over $3,100,000 $183,500, plus 11% of the excess over $2,600,000
Over $3,100,000 but not over $3,600,000 $238,500, plus 12% of the excess over $3,100,000
Over $3,600,000 but not over $4,100,000 $298,500, plus 13% of the excess over $3,600,000
Over $4,100,000 but not over $5,100,000 $363,500, plus 14% of the excess over $4,100,000
Over $5,100,000 but not over $6,100,000 $503,500, plus 15% of the excess over $5,100,000
Over $6,100,000 but not over $7,100,000 $653,500, plus 16% of the excess over $6,100,000
Over $7,100,000 but not over $8,100,000 $813,500, plus 17% of the excess over $7,100,000
Over $8,100,000 but not over $9,100,000 $983,500, plus 18% of the excess over $8,100,000
Over $9,100,000 but not over $10,100,000 $1,163,500, plus 19% of the excess over $9,100,000
Over $10,100,000 $1,353,500, plus 20% of the excess over $10,100,000
mon carrier by reason of the death or Implications: The Sec. 139 exclu- can be paid in a single sum or other-
personal physical injuries incurred in a sion is broad; expenses that may qualify wise. The exclusion does not apply to
qualiﬁed disaster. include an employer’s payments to an amounts that would have been payable
4. By a Federal, state or local govern- employee for housing, clothing, food after death had the individual died
ment (or agency or instrumentality or other necessities. These amounts .
other than as an STV For this purpose,
thereof ) in connection with a qualiﬁed should be excluded from taxable an “employee”includes a self-employed
disaster to promote the general welfare. wages. person,under Sec.101(i)(3). This provi-
Under Sec. 139(e), qualiﬁed disaster sion would cover, for example, pay-
relief payments are not subject to self- Death Beneﬁt Exclusion ments from a partnership to a partner’s
employment tax. Sec. 139 does not VTTRA Section 102 enacted Sec. surviving spouse.
apply to any individual (or his repre- 101(i) to provide an exclusion from If a life insurance contract excludes
sentative) identiﬁed by the U.S. Attor- gross income for amounts paid by an terrorist acts,but nevertheless pays ben-
ney General as a participant or conspir- employer because of the death of an eﬁts, Sec. 101(a) excludes such beneﬁts
ator in any terrorist attack. .
employee who is an STV The amounts from income.
THE TAX ADVISER / MAY 2002 315
COD Income Exclusion Feb. 21, 2002, VTTRA Section The reduced rate schedule automati-
VTTRA Section 105 excludes from 115(c)(1) states that the tax will not cally applies, unless an executor elects
gross income any amount includible as apply to transactions entered into from otherwise. If it is more advantageous
cancellation of debt (COD) income if Feb. 22, 2002–July 1, 2002, if certain for an estate to be treated under the
the debtor is an STV This applies to all requirements are met. general Sec. 2001 rules, the executor
debt discharges made after Sept.10,2001 must elect not to have the new rate
and before 2002. The Sec. 6050P return Estate Tax Provisions schedule apply. Sec. 2001(d) provides
requirements do not apply.Sec.105 does that the new rate structure does not
not apply to Oklahoma City STVs. Reduced Rate apply in determining the uniﬁed cred-
VTTRA Section 103(a) amends it; thus, the applicable exclusion
Due Date Extensions Sec. 2201 and treats any STV as a remains at $675,000 for estates of
VTTRA Section 112 expands and “qualiﬁed decedent” for purposes of decedents dying in 2001 and at $1
clariﬁes the scope of Sec. 7508A. The Sec. 2201 estate tax relief. The provi- million for those dying in 2002. The
new provision allows the IRS to extend sion applies regardless of whether an reduced rate schedule is used to com-
the due date for certain ﬁling and pay- STV was killed in the attack or in res- pute both the Sec. 2001( b)(1) tenta-
ment deadlines for up to one year,with- cue or recovery operations. tive tax and the Sec. 2001( b)(2) tax on
out having to issue regulations. Under Under Sec. 2201( b)(1) (which previous gifts; thus, it applies to all
Sec.7508A(a),the postponement applies applies to U.S. armed forces members), transfers ( both lifetime and at death) a
to “any tax liability”; thus, it applies to a qualiﬁed decedent had to have been a qualiﬁed decedent made.
paying income and employment taxes U.S. citizen. Sec. 2201( b)(2), applying For an individual dying in 2001,
and ﬁling related returns, and to making to STVs, omits this requirement. Thus, the new rate schedule effectively
IRA contributions. an otherwise-eligible nonresident alien eliminates Federal estate tax on an
may be a qualiﬁed decedent under Sec. estate of $8,762,500, but does not
Disability Payment Exclusion 2201( b)(2). eliminate the state estate tax. Under
VTTRA Section 113 amended Under post-VTTRA Sec. 2201, current law, the estate of an individual
Sec. 104(a)(5), so that employees can the estate tax is calculated under the residing in New York City and killed
exclude disability payments from gross normal Sec. 2001 rules, but with an in the World Trade Center (WTC)
income for injuries incurred as a direct alternative reduced rate schedule equal attack would still owe $882,200 in
result of a terrorist attack against the to 125% of the maximum state death state death taxes (see Example 1
U.S. (or its allies), regardless of where a tax credit (see Exhibit 1 on p. 315). below).
terrorist attack occurred. Formerly, the
attack had to have occurred outside the
U.S. and was limited to employees of
the U.S. This redeﬁnition also extends
Example 1: T, age 57 and single, was a New York City resident. He died on Sept. 11, 2001 in the WTC terror-
to Sec. 692(c) (income tax relief to
ist attack. T ’s taxable estate was $8,762,500. Without VTTRA estate tax relief, T ’s estate would owe $3,357,425
U.S. military and civilian personnel
in Federal estate tax and $882,200 in state estate tax. As shown below, the reduced rate structure eliminates all
who die as a result of terrorist activity,
no matter where it occurs). Federal estate tax on his estate, but does not change T ’s state death tax liability.
Structured Settlements Without VTTRA With VTTRA
VTTRA Section 115 added new
Sec.5891,on structured-settlement fac- Taxable estate $8,762,500 $8,762,500
toring transactions. An individual who Estate tax:
acquires property rights in a structured- Gross estate tax $4,460,175 $1,102,750
settlement factoring arrangement may Less: uniﬁed credit 220,550 220,550
be subject to a 40% excise tax under Balance $4,239,625 $ 882,200
Sec. 5891(a), unless the transfer of the Less: state death tax credit 882,200 882,200*
payment rights was approved in
Federal estate tax due $3,357,425 $ 0
advance in a qualiﬁed order (under Sec.
5891( b)(1)). The excise tax is comput- State death taxes due** $ 882,200 $ 882,200
ed on the excess of the undiscounted *The state death tax credit is based on an adjusted taxable estate of $8,762,500 less $60,000.
amount of the payments being **The state tax due would be similar had the decedent been a resident of New Jersey or Connecticut. As of March 1, 2002, New York,
acquired over the total amount actually New Jersey and Connecticut had not enacted new estate tax legislation for WTC STVs.
paid to acquire them.While this provi-
sion applies to actions entered into after
316 THE TAX ADVISER / MAY 2002
Example 2: The facts are the same as in Example 1, except that T ’s taxable estate was $2,936,820. Without
VTTRA estate tax relief, his estate would have owed $860,325 of Federal estate tax and $176,440 of state estate
tax. As shown below, the reduced rate structure eliminates all Federal and state estate taxes.
Without VTTRA With VTTRA
Taxable estate $2,936,820 $2,936,820
Gross estate tax $1,257,315 $ 220,550
Less: uniﬁed credit 220,550 220,550
Balance $1,036,765 $ 0
Less: state death tax credit 176,440 0*
Federal estate tax due $ 860,325 $ 0
State death taxes due** $ 176,440 $ 0
*The state death tax credit is based on the adjusted taxable estate of $2,936,820 less $60,000, but is limited to the amount of
** The state tax due would be similar had the decedent been a resident of New Jersey or Connecticut. As of March 1, 2002, New York,
New Jersey and Connecticut had not enacted new estate tax legislation for WTC STVs.
As demonstrated in Example 2 death taxes by 25% for 2002, NewYork
above, the taxable estate protected from still collects 100% of the Federal credit
both Federal and state death taxes is as the state tax due.
For a victim dying in 2002, the Refund Claims
results in Examples 1 and 2 will differ. The VTTRA provides a special rule
In addition to the increased applicable that extends the period to ﬁle a refund
exclusion amount, reduced tax rates claim resulting from enactment until
and change in the operation of the one year after the enactment date. This
state death tax credit enacted by the allows the families of victims of the
Economic Growth and Tax Relief Oklahoma City bombing until Jan. 23,
Reconciliation Act of 2001 (EGTR- 2003 to ﬁle a refund claim. According
RA),3 New York will calculate state to Pub. 3920, STV survivors or execu-
death taxes based on pre-EGTRRA tors should write “KITA—Oklahoma
rules. Thus, while the EGTRRA City,” “KITA—9/11” or “KITA—
reduces the Federal credit for state Anthrax” at the top of estate tax return
refund claims and send them to:
Internal Revenue Service
West River Center Blvd.
VTTRA may E & G Department/Stop 824T
Covington, KY 41011
small comfort. No amount of tax relief will ease the hor-
ror of the attacks, but perhaps it will offer
the victims’ families some small comfort
and a bit less to worry about. 4 TTA
3SeeSawyers and Whitlock, “Estates, Trusts & Gifts: 4For further discussion, see Schuster, Tax Clinic,
Post-EGTRRA Analysis and Planning,” 32 The “Victims of Terrorism Tax Relief Act of 2001,” p.
Tax Adviser 822 (December 2001). 300, this issue.
THE TAX ADVISER / MAY 2002 317