[Congressional Record Volume 153, Number 1 (Thursday, January 4, 2007)]
[Senate]
[Page S70]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. LANDRIEU:
  S. 29. A bill to clarify the tax treatment of certain payments made 
to homeowners by the Louisiana Recovery Authority and the Mississippi 
Development Authority; to the Committee on Finance.
  Ms. LANDRIEU. Mr. President, at the end of the 109th Congress, I 
learned that the Internal Revenue Service had a tax surprise for 
citizens in my state of Louisiana and in Mississippi who are trying to 
rebuild after Katrina. This tax surprise will set back our recovery and 
discourage our citizens from coming home.
  Let me explain to my colleagues what I am talking about. Both 
Louisiana and Mississippi have established programs to help families 
rebuild their homes and their lives after Katrina and Rita. Congress 
appropriated the money for these initiatives--more than $10 billion in 
all, and we are very grateful for the assistance. The Louisiana program 
is called the ``Road Home'' and it is administered by the Louisiana 
Recovery Authority (LRA). The program is now starting to get going. 
Homeowners are eligible to receive grants from the Road Home of up to 
$150,000 to help them rebuild or repair their homes. Rental properties 
are also eligible. Grants can also be used to buy out homes. The 
Louisianians who were displaced by the storms want to go home and the 
Road Home program will get them there.
  But the IRS has dug a big pothole in the middle of the Road Home by 
making some of these payments taxable. The way this tax surprise works 
is by requiring that any hurricane victim who claimed a casualty loss 
deduction for damage to their home on their tax return for 2005 will 
have to reduce that loss by the amount of any payment from the LRA. So 
if they had their taxes reduced in one year and received a Road Home 
grant the next year, they have to essentially eliminate any benefit of 
the earlier casualty loss deduction. Their taxes will go up.
  Now I realize that under normal circumstances, when a person's home 
burns down, the roof caves in, or they are a victim of theft, they can 
take a casualty loss deduction, provided it meets certain requirements. 
The loss must exceed ten percent of the taxpayer's adjusted gross 
income, with a per loss floor of $100. In some circumstances, taxpayers 
are permitted to include a current-year casualty loss on an amended 
prior year return.
  Immediately after Katrina, we enacted the Katrina Emergency Tax 
Relief Act (KETRA) that suspended the ten percent floor for casualty 
losses incurred in the Hurricane Katrina disaster area, including those 
claimed on amended returns. The purpose of the change in KETRA was 
simple: we wanted to put money in the hands of Katrina victims as 
quickly as possible. We essentially encouraged taxpayers to take this 
casualty loss, even by amending a past return. The IRS would then 
provide them with a refund.
  This was a very helpful proposal in the days immediately following 
Katrina, Mr. President. Hurricane victims needed that money. If you had 
lost your home, that money could help you pay for a place to live. Many 
hurricane victims lost their jobs and needed this money to see them 
through until they started working again. They used the money to begin 
the rebuilding of their lives.
  Congress encouraged people to take the new deduction by changing the 
law. Now the IRS wants to take it back.

  I fully understand the policy behind what the IRS is doing. Casualty 
loss deductions are normally reduced by the amount of any insurance or 
other recovery they make on the loss. In fact, at the time the taxpayer 
makes the deduction he or she is supposed to reduce the amount of the 
loss by any insurance recovery they reasonably expect to receive. If 
you receive a larger payment than you expected at a future time, you 
must claim it on your income tax return when you receive it.
  The problem is that this policy will encourage people to leave 
Louisiana. If you took the casualty loss on your return, and you 
receive a $150,000 Road Home payment to rebuild your house, you will 
have a tax consequence. But if you took the casualty loss and sold your 
house to the LRA for the $150,000 payment, it is treated like a home 
sale and there is no tax. This policy creates a disincentive to 
recovery. The Road Home will become the Road Out.
  Congress has done a tremendous job passing legislation to encourage 
investment and the rebuilding of the Gulf Coast. At the end of the last 
session we passed a tax extenders bill that contained a two-year 
extension of the bonus depreciation for investment in the most 
seriously damaged areas in the GO Zone. That investment is supposed to 
attract businesses and people to Louisiana and the Gulf. The IRS's 
actions will only keep people away. We should not put road blocks in 
the way of the Road Home.
  Today, I am introducing legislation to eliminate this road block to 
our recovery and to clarify that Road Home payments are not to be 
taxed. The hurricanes in 2005 were remarkable events causing 
unprecedented damage. As Congress has done in the past, we must 
continue to respond in unprecedented and innovative ways. I encourage 
my colleagues to support this bill.
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