[Congressional Record Volume 151, Number 43 (Wednesday, April 13, 2005)]
[Senate]
[Pages S3604-S3605]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




    INTERNAL REVENUE CODE OF 1986 AMENDED TO PROVIDE FOR PROPER TAX 
           TREATMENT OF CERTAIN DISASTER MITIGATION PAYMENTS

  Mr. SESSIONS. Mr. President, I ask unanimous consent that the Finance 
Committee be discharged from further consideration of H.R. 1134 and 
that the Senate proceed to its consideration.
  The PRESIDING OFFICER. Without objection, it is so ordered. The clerk 
will report the bill by title.
  The assistant journal clerk read as follows:

       A bill (H.R. 1134) to amend the Internal Revenue Code of 
     1986 to provide for the proper tax treatment of certain 
     disaster mitigation payments.

  There being no objection, the Senate proceeded to consider the bill.
  Mr. BAUCUS. Mr. President, today, we will pass legislation in the 
Senate that provides tax relief to all Americans receiving disaster 
mitigation grants from the Federal Emergency Management Agency, FEMA. I 
am pleased that my good friend, Senator Grassley, and I, along with my 
colleagues, Senators Landrieu, Bond, Feinstein, Lott, Martinez, Nelson, 
and Vitter could work together to add a necessary and important 
amendment to H.R. 1134, which exempts disaster mitigation payments from 
taxation.
  For 15 years, FEMA has awarded natural disaster mitigation grants 
that assist citizens, businesses and communities to take steps to 
prevent or mitigate damages from future natural disasters. The grants 
go towards elevating buildings in floodplains, flood proofing, seismic 
reinforcement, acquisitions or relocations, wind protections for roofs 
and strengthening of window protections. These grants provide a long-
term benefit to society by reducing future loss of life and increasing 
public safety. In addition to these life-saving benefits, mitigation 
grants also provide a net cost benefit to society. FEMA conducts a 
cost-benefit analysis prior to awarding a grant that ensures the cost 
of funding a project is less than the damages expected to occur in the 
event of a disaster. FEMA estimates that for every dollar spent on 
mitigation, an average of eight dollars is saved in the long run.
  Let me take a minute to explain the history of the tax issue at hand. 
Prior to June of last year, recipients of FEMA mitigation grants 
generally excluded them from income. The tax code states clearly that 
post-disaster grants were not taxable. But the tax code doesn't 
specifically describe the tax treatment of mitigation grants. FEMA 
assumed mitigation grants were treated the same as post-disaster relief 
grants. However, on June 28, 2004, the Internal Revenue Service issued 
a legal memorandum stating these mitigation grants were taxable as 
income. That means that someone who took advantage of mitigation 
opportunities to prevent future losses would face a significant tax 
liability. The average mitigation grant is $83,000. That means the 
average tax on a grant is tens of thousands of dollars. That isn't 
fair. It was never intended that taxes be collected under these 
mitigation programs, but under the legal memorandum issued by the 
Internal Revenue Service thousands of taxpayers may have to file 
amended tax returns and pay additional tax. Moreover, the Federal 
Government changed the rules and never made the recipients aware of the 
potential tax consequences.
  I compliment the House for taking up this issue and passing 
legislation that helps taxpayers who receive mitigation grants after 
the date of enactment. However, there is a flaw in the House bill. The 
bill clearly provides tax relief to ``amounts received after the date 
of enactment.'' What about taxpayers who received mitigation grants in 
2004 or 2003 and before? The chairman of the Finance Committee and I 
have added an amendment that provides absolute certainty for all 
taxpayers who received grants in past years. Some have argued that the 
Department of the Treasury can provide tax relief for those who 
received grants prior to the date of enactment by using the intent 
gleaned from floor statements and letters from Members of Congress. Let 
me be clear, Congress writes laws and the clearest intent is in the 
letter of the law. If our intent is to provide tax relief for those who 
received grants before the date of enactment, we should write it into 
the law. And that is what the amendment my good friend Senator Grassley 
and I have offered.
  Before I finish, I want to thank Senators Landrieu, Nelson and 
Feinstein for their tireless work. I can tell you firsthand there was a 
significant amount of pressure to pass this bill as it was sent from 
the House. We all wanted to pass this bill as quickly as possible, but 
we also wanted to be sure we got it right the first time. This bill 
does that.
  I sincerely hope the House will do the right thing and pass this bill 
with the Senate amendment before the tax filing deadline on Friday.
  Ms. LANDRIEU. Mr. President, last year the Internal Revenue Service 
hit my State like a Category 4 hurricane when it determined that 
disaster mitigation benefits from the Federal Emergency Management 
Agency are taxable. We get hurricane warnings when a storm is coming, 
we can track their paths as they come out of the Carribean and into the 
Gulf of Mexico. We didn't get any kind of ``tax warning'' from the IRS, 
but the financial toll on many of my constituents was devastating.
  Let me explain what happened. In June of last year, the IRS chief 
counsel issued an advice letter that determined that FEMA disaster 
mitigation benefits were taxable as a matter of law. This ruling 
applied to a variety mitigation grant programs, covering a wide range 
of natural disasters. The main disasters that concern us in Louisiana 
are hurricanes and flooding. They are as much a part of life as 
crawfish boils and Mardi Gras. The key to our peace of mind is the 
National Flood Insurance program administered by FEMA. In Louisiana, 
377,000 property owners participate in the National Flood Insurance 
program. It is a real Godsend to the people of my state.

[[Page S3605]]

  The National Flood Insurance program also provides funding for 
property owners to flood-proof their homes through the flood mitigation 
grant program. FEMA distributes these grant funds to the States which 
then pass them along to local communities. The local communities select 
properties for mitigation and contract for the mitigation services. 
Communities use these funds to put homes on stilts, improve drainage on 
property, and to acquire flood proofing materials. These mitigation 
grants encourage property owners to take responsible steps to lessen 
the potential for loss of life and property damage due to future 
flooding. The grants also have the added benefit of saving money in the 
long term for the flood insurance program.
  But the IRS has turned this valuable disaster preparedness and 
prevention program into a financial disaster for responsible property 
owners by making these payments taxable. This tax is unfair, 
unexpected, and an unfortunate policy decision--unfair and unexpected 
because no one told my constituents that they would be taxed for 
accepting FEMA disaster mitigation assistance. The local officials in 
their parish were just as surprised. This tax is unfortunate policy 
because in the long term, the IRS will undercut the effectiveness of 
using mitigation as a means of decreasing future costs to the flood 
insurance program. It will force people to take risks that they will 
not be hit by a disaster.
  I was pleased that the House of Representatives passed a bill, H.R. 
1134, to correct this problem. It says that going forward, disaster 
mitigation benefits are not taxable. But this legislation is not 
retroactive. It offers no relief to people who are facing a huge tax 
bill this Friday, April 15, for mitigation funding received in 2004 or 
earlier years. Virtually every constituent who has written or called my 
office about this issue received their grant in 2004. This bill will do 
nothing for them.
  I understand that the sponsors of H.R. 1134 and its Senate version S. 
586 claim that once it has been passed, the Department of the Treasury 
will issue some sort of notice to IRS field personnel essentially 
making the effect of this bill retroactive. Treasury officials, 
however, cannot cite a legal justification for issuing such a notice. 
They claim that they can rely on the floor statements of the chairs and 
ranking members of the House Ways and Means Committee and the Senate 
Finance Committee as a basis for issuing the notice.
  Mr. President, we cannot legislate on a wink and a nod. The right way 
to make this relief retroactive is to pass the Baucus-Grassley 
amendment to H.R. 1134 and send it back to the House. This amendment 
will extend the tax relief in this bill to all recipients of FEMA 
disaster mitigation assistance past, present, and future. I am proud to 
be a cosponsor of the amendment. I thank the chairman and ranking 
member of the Finance Committee for their leadership in bringing this 
matter to the floor.
  April 15th is 2 days away. I urge the other body to take up and pass 
H.R. 1134 as amended by the Senate, and send it to the President for 
his signature. This bill will bring peace of mind to thousands of 
responsible property owners who face an unfair tax burden. We should 
not allow April 15th to pass without giving these people relief.
  Mr. SESSIONS. Mr. President, there is a substitute amendment at the 
desk. I ask that the amendment be considered and agreed to; the motion 
to reconsider be laid upon the table; the bill, as amended, be read a 
third time, passed, and the motion to reconsider be laid upon the 
table; that any statements relating thereto be printed in the Record, 
without intervening action or debate.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  The amendment (No. 411) was agreed to, as follows:

       Strike all after the enacting clause and insert the 
     following:

     SEC. __. PROPER TAX TREATMENT OF CERTAIN DISASTER MITIGATION 
                   PAYMENTS.

       (a) Qualified Disaster Mitigation Payments Excluded From 
     Gross Income.--
       (1) In general.--Section 139 of the Internal Revenue Code 
     of 1986 (relating to disaster relief payments) is amended by 
     adding at the end the following new subsections:
       ``(g) Qualified Disaster Mitigation Payments.--
       ``(1) In general.--Gross income shall not include any 
     amount received as a qualified disaster mitigation payment.
       ``(2) Qualified disaster mitigation payment defined.--For 
     purposes of this section, the term `qualified disaster 
     mitigation payment' means any amount which is paid pursuant 
     to the Robert T. Stafford Disaster Relief and Emergency 
     Assistance Act (as in effect on the date of the enactment of 
     this subsection) or the National Flood Insurance Act (as in 
     effect on such date) to or for the benefit of the owner of 
     any property for hazard mitigation with respect to such 
     property. Such term shall not include any amount received for 
     the sale or disposition of any property.
       ``(3) No increase in basis.--Notwithstanding any other 
     provision of this subtitle, no increase in the basis or 
     adjusted basis of any property shall result from any amount 
     excluded under this subsection with respect to such property.
       ``(h) Denial of Double Benefit.--Notwithstanding any other 
     provision of this subtitle, no deduction or credit shall be 
     allowed (to the person for whose benefit a qualified disaster 
     relief payment or qualified disaster mitigation payment is 
     made) for, or by reason of, any expenditure to the extent of 
     the amount excluded under this section with respect to such 
     expenditure.''.
       (2) Conforming amendments.--
       (A) Subsection (d) of section 139 of such Code is amended 
     by striking ``a qualified disaster relief payment'' and 
     inserting ``qualified disaster relief payments and qualified 
     disaster mitigation payments''.
       (B) Subsection (e) of section 139 of such Code is amended 
     by striking ``and (f)'' and inserting ``, (f), and (g)''.
       (b) Certain Dispositions of Property Under Hazard 
     Mitigation Programs Treated as Involuntary Conversions.--
     Section 1033 of such Code (relating to involuntary 
     conversions) is amended by redesignating subsection (k) as 
     subsection (l) and by inserting after subsection (j) the 
     following new subsection:
       ``(k) Sales or Exchanges Under Certain Hazard Mitigation 
     Programs.--For purposes of this subtitle, if property is sold 
     or otherwise transferred to the Federal Government, a State 
     or local government, or an Indian tribal government to 
     implement hazard mitigation under the Robert T. Stafford 
     Disaster Relief and Emergency Assistance Act (as in effect on 
     the date of the enactment of this subsection) or the National 
     Flood Insurance Act (as in effect on such date), such sale or 
     transfer shall be treated as an involuntary conversion to 
     which this section applies.''.
       (c) Effective Date.--
       (1) Qualified disaster mitigation payments.--The amendments 
     made by subsection (a) shall apply to amounts received 
     before, on, or after the date of the enactment of this Act.
       (2) Dispositions of property under hazard mitigation 
     programs.--The amendments made by subsection (b) shall apply 
     to sales or other dispositions before, on, or after the date 
     of the enactment of this Act.

  The bill (H.R. 1134), as amended, was read the third time and passed.

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