New Law Offers Relief to Terrorist Attack Victims by yaofenjin



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
                                                                                                  Raleigh, NC
                                                                                        Neil A.J. Sullivan, CPA
                                                                                                 Scarsdale, NY
                                                                                    Peter J. Westort, Ph.D., CPA
                                                                                      Assistant Professor of Accounting
                                                                                   Department of Accounting & Finance
                                                                                    University of Massachusetts Boston
                                                                                                Boston, MA

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,
      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
      estate tax.
                                   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, Dr.             Internal Revenue Service                replacement is attributable to a quali-
 Sawyers at roby_sawyers@             310 Lowell Street                       fied disaster., Mr. Sullivan at            Stop 661                                3. By a person engaged in the furnish- or Dr.          Andover, MA 01810                       ing or sale of transportation as a com-
 Westort at peter.westort@                          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

              Estate tax:
              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
   Federal tax.
** 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.
only $2,936,820.
    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
    offer victims’
    families some
    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

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