REVENUE RULE 93-43

1993-2 C.B. 69, 1993-24 I.R.B. 54.

Internal Revenue Service
Revenue Ruling

INSURANCE PROCEEDS; LOSS OF USE OF PRINCIPAL RESIDENCE WHICH WAS DAMAGED OR DESTROYED BY A CASUALTY; EXCLUSION OF PROCEEDS FOR INCREASED LIVING EXPENSES

Published: July 6, 1993

§ 123. Amounts Received Under Insurance Contracts for Certain Living Expenses, 26 CFR 1.123-1: Exclusion of insurance proceeds for reimbursement of certain living expenses.

Insurance proceeds; loss of use of principal residence which was damaged or destroyed by a casualty; exclusion of proceeds for increased living expenses. Insurance proceeds for increased living expenses resulting from the loss of use of a principal residence damaged or destroyed by a casualty are excluded from gross income. The increase in living expenses is determined once, when the taxpayer regains use of a principal residence, rather than at the end of each intervening tax year.

ISSUE

When an individual receives insurance proceeds for increased living expenses incurred due to a casualty, what portion of the proceeds is excludable from the individual's gross income under § 123 of the Internal Revenue Code?

FACTS

In July 1989, a fire destroyed A's principal residence. A replaced the residence in August 1991. Between July 1989 and August 1991, A and members of A's household did not have use of the residence. A's insurance contract included coverage for a temporary increase in living expenses resulting from the loss of use or occupancy of the principal residence due to damage or destruction by fire, storm, or other casualty. Therefore, A was compensated for the temporary increase in living expenses incurred because of the loss of use of A's residence. A is a calendar year taxpayer and received the following insurance proceeds for A's increased living expenses:

Situation 1. A received a total amount of $30,000 in insurance proceeds for increased living expenses as follows: $6,000 in 1989, $12,000 in 1990, $10,000 in 1991, and $2,000 in 1992. A incurred a total of $30,000 in increased living expenses as follows: $5,000 in 1989, $11,000 in 1990, and $14,000 in 1991.

Situation 2. A received a total amount of $25,000 in insurance proceeds for increased living expenses as follows: $20,000 in 1989, $3,000 in 1991, and $2,000 in 1992. A incurred a total of $22,000 in increased living expenses as follows: $5,000 in 1989, $10,000 in 1990, and $7,000 in 1991.

LAW AND ANALYSIS

§ 61 of the Code provides that gross income means all income from whatever source derived except as otherwise provided by law.

§ 123(a) of the Code provides that if an individual's principal residence is damaged or destroyed by fire, storm, or other casualty, amounts received by the individual under an insurance contract are not includable in gross income if paid to compensate or reimburse the individual for living expenses incurred for the individual and members of the individual's household resulting from the loss of use or occupancy of such residence.

§ 123(b) of the Code provides that the amount of the insurance proceeds which can be excluded under § 123(a) is limited to the amount by which (1) the actual living expenses incurred by the individual and members of the individual's household resulting from the loss of use or occupancy of their residence, exceed (2) the normal living expenses that would have been incurred by the individual and members of the individual's household during the period that they are unable to use or occupy the principal residence (the loss period).

§ 1.123-1(a)(2) of the Income Tax Regulations provides that the exclusion applies to amounts received as reimbursement or compensation for the reasonable and necessary increase in living expenses incurred by the insured and members of the household to maintain their customary standard of living during the loss period.

§ 1.123-1(b) of the regulations defines actual living expenses to include the cost during the loss period of temporary housing, utilities furnished at the place of temporary housing, meals obtained at restaurants that customarily would have been prepared in the residence, transportation, and other miscellaneous services. Normal living expenses consist of the same categories of expenses comprising actual living expenses that would have been incurred but are not incurred during the loss period.

§ 451 of the Code states the general rule that the amount of any item of gross income shall be included in gross income for the taxable year in which received by a taxpayer, unless, under the method of accounting used by the taxpayer in computing taxable income, such amount is to be properly accounted for in a different period.

Under § 123 of the Code and the regulations thereunder, if an individual's principal residence is destroyed by fire, insurance proceeds are excludable from gross income to the extent that they compensate or reimburse the individual for the increased living expenses incurred during the loss period due to the loss of use or occupancy of the individual's principal residence. The amount of insurance proceeds that are excludable from gross income for a particular loss period cannot be properly determined until the end of the loss period. Thus, if the total insurance proceeds received for the loss period exceeds the increased living expenses incurred during the loss period, the excess portion of the insurance proceeds received is includable in gross income for the taxable year in which the loss period ends, or, if later, the taxable year in which the excess portion of the insurance proceeds is received.

In Situation 1, the total amount of the insurance proceeds ($30,000) that A received does not exceed the total increased living expenses ($30,000) incurred by A and members of A's household during the loss period (1989-1991). Therefore, the entire amount of the insurance proceeds received by A is excludable from A's gross income.

In Situation 2, the $20,000 in insurance proceeds received by A in 1989 plus the $3,000 in insurance proceeds received by A in 1991 exceeds by $1,000 the total of $22,000 in increased living expenses incurred by A and members of A's household during the loss period (1989-1991). Therefore, $22,000 of the $23,000 in insurance proceeds received by A from 1989 to 1991 is excludable from A's gross income. The remaining $1,000 of these insurance proceeds is includable in A's gross income for 1991, the taxable year in which the loss period ended. The $2,000 in insurance proceeds received by A in 1992 further exceeds the increased living expenses incurred during the loss period, and, thus, is includable in A's gross income for 1992, the taxable year in which this excess portion was received.

HOLDING

When an individual receives insurance proceeds for increased living expenses incurred due to a casualty, the portion of the insurance proceeds that does not exceed the individual's increased living expenses incurred during the loss period is excludable from the individual's gross income under § 123 of the Code. However, if the insurance proceeds received exceed the individual's increased living expenses incurred during the loss period, the excess portion of the insurance proceeds received is includable in the individual's gross income for the taxable year in which the loss period ends, or, if later, for the taxable year in which the excess portion of the insurance proceeds is received.

DRAFTING INFORMATION

The principal author of this revenue ruling is John Moran of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Moran on (202) 622-6232 (not a toll- free call).

Rev. Rul. 93-43, 1993-2 C.B. 69, 1993-24 I.R.B. 54.