[Congressional Record Volume 151, Number 33 (Thursday, March 17, 2005)]
[Senate]
[Page S2984]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


              TAXATION OF FEMA DISASTER MITIGATION GRANTS

  Mr. BOND. Mr. President, last week I introduced a bill, S. 586, as an 
alternative to my previous bill, S. 290, regarding the taxation of FEMA 
disaster mitigation grants. Both bills are designed to prevent the IRS 
from taxing these grants.
  With the help of Senators Vitter, Talent, Voinovich, Nelson, 
Feinstein, and Landrieu, I introduced this new legislation as a 
companion to Congressman Mark Foley's bill, H.R. 1134, in House of 
Representatives. I commend Mr. Foley for his hard work and dedication 
to this proposal. Also, I commend the Department of Treasury for 
recognizing the serious nature of this issue and committing to work 
with Congress to resolve it.
  This new legislation adds additional language to ensure that FEMA 
disaster mitigation grant recipients do not abuse the tax-free nature 
of the grant by capitalizing on the increased value of his/her 
property. In addition, the new language provides for a prospective 
effective date.
  It is important to note, however, that the President's budget 
proposal gives the Treasury Department the administrative authority to 
apply the policies of S. 586 and H.R. 1134 to cases involving 
mitigation payments where the statue of limitations has not expired. It 
is my understanding that the Department of Treasury has agreed to issue 
a notice to the IRS clearly indicating that, in accordance with the 
policies of S. 586 and H.R. 1134, those taxpayers who are in receipt of 
these mitigation grants prior to the enactment of this legislation will 
not be subject to extra tax liabilities.
  This legislation came about as a result of a direct threat by the IRS 
to tax these disaster mitigation grants. As I have said before, I am 
absolutely stunned at this latest antic by the IRS. The last thing 
Americans who are working to prevent potential destruction from floods, 
tornadoes, and hurricanes need is for Government-grant funding to be 
subject to tax. My bill ensures that the IRS's disaster tax does not 
see the light of day.
  I ask unanimous consent that two letters from the Department of 
Treasury be printed in the Record. These letters are written to the 
chairmen of both the Senate Finance Committee and the House Ways and 
Means Committee expressing support for S. 586 and H.R. 1134 and 
committing to prevent retroactive taxation at the request of Congress.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:


                                   Department of the Treasury,

                                  Washington, DC., March 14, 2005.
     Hon. Charles Grassley,
     Chairman, Committee on Finance, U.S. Senate, Washington, DC.
       Dear Chairman Grassley: I am writing to express the 
     Administration's support for legislation to provide tax 
     relief to property owners who participate in Federal 
     Emergency Management Agency (FEMA) hazard mitigation 
     projects, specifically H.R. 1134 and S. 586 sponsored by 
     Representative Mark Foley and Senator Bond respectively.
       FEMA provides grants through State and local governments to 
     mitigate potential damage from future natural hazards. 
     Examples of mitigation projects include demolition, retro-
     fitting, and elevation of buildings. As a result, these grant 
     projects are distinguishable from other grant programs in 
     that their goal is to avoid the larger costs of damage that 
     otherwise would be compensated in the future out of the 
     taxpayer funded Disaster Relief Fund, National Flood 
     Insurance Program, other Federal assistance programs, and 
     State, local and private sources. Through hazard mitigation 
     programs, FEMA has funded community mitigation projects 
     affecting individual properties for over fifteen years. In 
     particular, FEMA makes grants under the Flood Mitigation 
     Assistance program, the Hazard Mitigation Grant Program, and 
     the Pre-Disaster Mitigation program.
       Under current law, gross income generally includes all 
     income from whatever source derived. Generally, the 
     mitigation grants from FEMA (or construction services paid by 
     grants) represent income to the recipients. Under specific 
     statutory and administrative exceptions, gross income does 
     not include certain government payments made to individuals 
     in response to need resulting from particular disasters. 
     However, grants under the three FEMA mitigation programs 
     described above often are made in anticipation of future 
     disasters and other natural hazards and are not need based. 
     Consequently, the mitigation grants generally do not qualify 
     for these specific exceptions.
       Similarly, if a property owner participates in a FEMA-
     assisted acquisition of his or her property, the property 
     owner generally is required to include in income any gain 
     from the sale of the property (subject to the $250,000/
     $500,000 exclusion from income of gain from the sale of a 
     principal residence).
       By explicitly excluding FEMA mitigation grants from income, 
     the Foley/Bond legislation provides tax relief to home and 
     property owners that receive the grants. Because 
     participation by property owners in FEMA projects is 
     voluntary, there is concern that owners of at-risk properties 
     might decline to participate because of the potential tax 
     obligation under current law, thus adding to long term 
     taxpayer funded recovery costs. This presents a potential 
     impediment to the policy Congress initially sought to 
     implement through these grant programs.
       Finally, it is also my understanding that the effective 
     dates of the Foley/Bond legislation are prospective and that 
     the tax exemption for these FEMA mitigation grants will be 
     recognized upon date of enactment of the bill. Because the 
     issue of retroactivity is also one of fairness, it is our 
     hope that Congress, consistent with the Administration's 
     budget proposal, will encourage the Treasury Department to 
     provide retroactive relief to those individuals who have 
     utilized FEMA mitigation grants in the past.
       I commend the House for acting quickly to address this 
     issue and urge the Congress to send this legislation to the 
     President for his signature.
           Sincerely,
     John W. Snow.
                                  ____

                                       Department of the Treasury,
                                   Washington, DC, March 14, 2005.
     Hon. William Thomas,
     Chairman, Committee on Ways and Means, House of 
         Representatives, Washington, DC.
       Dear Chairman Thomas: I am writing to express the 
     Administration's support for legislation to provide tax 
     relief to property owners who participate in Federal 
     Emergency Management Agency (FEMA) hazard mitigation 
     projects, specifically H.R. 1134 and S. 586 sponsored by 
     Representative Mark Foley and Senator Bond respectively.
       FEMA provides grants through State and local governments to 
     mitigate potential damage from future natural hazards. 
     Examples of mitigation projects include demolition, retro-
     fitting, and elevation of buildings. As a result, these grant 
     projects are distinguishable from other grant programs in 
     that their goal is to avoid the larger costs of damage that 
     otherwise would be compensated in the future out of the 
     taxpayer funded Disaster Relief Fund, National Flood 
     Insurance Program, other Federal assistance programs, and 
     State, local and private sources. Through hazard mitigation 
     programs, FEMA has funded community mitigation projects 
     affecting individual properties for over fifteen years. In 
     particular, FEMA makes grants under the Flood Mitigation 
     Assistance program, the Hazard Mitigation Grant Program, and 
     the Pre-Disaster Mitigation program.
       Under current law, gross income generally includes all 
     income from whatever source derived. Generally, the 
     mitigation grants from FEMA (or construction services paid by 
     grants) represent income to the recipients. Under specific 
     statutory and administrative exceptions, gross income does 
     not include certain government payments made to individuals 
     in response to need resulting from particular disasters. 
     However, grants under the three FEMA mitigation programs 
     described above often are made in anticipation of future 
     disasters and other natural hazards and are not need based. 
     Consequently, the mitigation grants generally do not qualify 
     for these specific exceptions.
       Similarly, if a property owner participates in a FEMA-
     assisted acquisition of his or her property, the property 
     owner generally is required to include in income any gain 
     from the sale of the property (subject to the $250,000/
     $500,000 exclusion from income of gain from the sale of a 
     principal residence).
       By explicitly excluding FEMA mitigation grants from income, 
     the Foley/Bond legislation provides tax relief to home and 
     property owners that receive the grants. Because 
     participation by property owners in FEMA projects is 
     voluntary, there is concern that owners of at-risk properties 
     might decline to participate because of the potential tax 
     obligation under current law, thus adding to long term 
     taxpayer funded recovery costs. This presents a potential 
     impediment to the policy Congress initially sought to 
     implement through these grant programs.
       Finally, it is also my understanding that the effective 
     dates of the Foley/Bond legislation are prospective and that 
     the tax exemption for these FEMA mitigation grants will be 
     recognized upon date of enactment of the bill. Because the 
     issue of retroactivity is also one of fairness, it is our 
     hope that Congress, consistent with the Administration's 
     budget proposal, will encourage the Treasury Department to 
     provide retroactive relief to those individuals who have 
     utilized FEMA mitigation grants in the past.
       I commend the House for acting quickly to address this 
     issue and urge the Congress to send this legislation to the 
     President for his signature.
           Sincerely,
     John W. Snow.

                          ____________________