Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-28

1975-1 C.B. 68

Sec. 111
Sec. 165

IRS Headnote

State grants to flood victims; prior year losses. A grant received under a Pennsylvania statute to further compensate and reimburse individuals for flood losses sustained in 1971 and 1972, by a taxpayer who in a prior year had deducted the loss as a casualty loss, is includible in the taxpayer's gross income in the year received, subject to the provisions of section 111 of the Code, but, if not previously deducted or if the standard deduction was claimed, the grant need not be included.

Full Text

Rev. Rul. 75-28

Advice has been requested whether grants made to flood victims pursuant to Act No. 13 of the General Assembly of the Commonwealth of Pennsylvania, 1 Purdon's Pennsylvania Legislative Service 21 (1973), are includible in the recipients' gross income.

Section 1 of Act No. 13 provides that the Office of the Governor may make grants not to exceed $3,000 to a non-farm owner of a home or personal property damaged or destroyed by the floods of September 1971, or June 1972. Section 1 of Act No. 13 further provides that the total loss eligible for a State grant is determined by reference to the amount of an individual's loss approved for a Federal Disaster Relief Loan by the Small Business Administration or the Farmers Home Administration. The figure so ascertained must then be adjusted by deducting the amount of a Disaster Relief Loan forgiven by the Federal government.

Section 165(a) of the Internal Revenue Code of 1954 allows as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 1.165-1(d)(2)(iii) of the Income Tax Regulations provides, in pertinent part, that if a taxpayer deducted a loss in accordance with the provisions of section 165 of the Code and in a subsequent taxable year receives reimbursement for such loss, he does not recompute the tax for the taxable year in which the deduction was taken but includes the amount of such reimbursement in his gross income for the taxable year in which received, subject to the provisions of section 111, relating to recovery of amounts previously deducted.

Section 1.111-1 of the regulations provides that income attributable to the recovery during any taxable year of losses or of other section 111 items, made the basis of the deductions from gross income for prior taxable years, shall be excluded from gross income to the extent of the "recovery exclusion." The term "recovery exclusion" means an amount equal to the portion of the losses or other section 111 items that when deducted or credited for a prior taxable year did not result in a reduction of any tax under the Code.

It is apparent from the explicit language of Act No. 13 that the grants provided therein are intended to further compensate and reimburse individuals for portions of losses sustained due to the 1971 and 1972 floods. The grants provided in Act No. 13 are intended to supplement the Federal financial assistance programs available to Pennsylvania residents who were victims of the 1971 and 1972 floods.

Accordingly, if an individual received a grant under Act No. 13 in a taxable year subsequent to the taxable year in which he properly deducted an allowable casualty loss, such grant is includible in gross income in the year received, subject to the provisions of section 111 of the Code. However, if the recipient of the grant under Act No. 13 did not claim a casualty loss deduction for a prior year or claimed a standard deduction under section 141, no amount of the grant is includible in gross income. See Rev. Rul. 71-160, 1971-1 C.B. 75, relating to the Federal income tax treatment of amounts of Federal Disaster Relief Loans cancelled by the Federal government.