[Federal Register Volume 81, Number 199 (Friday, October 14, 2016)]
[Rules and Regulations]
[Pages 70938-70940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24664]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9789]
RIN 1545-BM03


Election To Take Disaster Loss Deduction for Preceding Year

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
relating to the election to accelerate the timing of a loss sustained 
by a taxpayer attributable to a federally declared disaster. The text 
of the temporary

[[Page 70939]]

regulations also serves as the text of the proposed regulations (REG-
150992-13) set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective October 13, 
2016.
    Applicability Dates: For dates of applicability, see Sec.  1.165-
11T(i).

FOR FURTHER INFORMATION CONTACT: Daniel Cassano (202) 317-7011 (not a 
toll free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 165(i) of the Internal Revenue Code (Code) 
regarding the election to deduct a loss attributable to a federally 
declared disaster for the taxable year prior to the year in which the 
disaster occurred.
    Under section 165, a loss from a federally declared disaster is a 
form of casualty loss. A casualty loss is generally allowed as a 
deduction only for the taxable year in which the loss is sustained 
(disaster year). Section 165(i) provides an exception to the general 
timing rule by allowing a taxpayer to elect to treat an allowable loss 
occurring in a disaster area and attributable to a federally declared 
disaster as sustained in the taxable year immediately prior to the 
taxable year in which the disaster occurred (preceding year).
    Taxpayers make the election under section 165(i) by clearly 
indicating on an original return, an amended return, or a refund claim, 
that the election has been made. The existing regulations under section 
165(i) provide that the original return, amended return, or refund 
claim must be filed on or before the later of: (1) The due date of the 
taxpayer's income tax return (determined without regard to any 
extension of time for filing the return) for the disaster year; or (2) 
the due date of the taxpayer's income tax return (determined with 
regard to any extension of time for filing the return) for the 
preceding year. Thus, taxpayers typically have until the unextended due 
date of the return for the disaster year to make the section 165(i) 
election.
    Concerns have been raised that the due date for making the section 
165(i) election may not always provide sufficient time for taxpayers 
affected by disasters to consider whether to make the election. These 
concerns led the Department of the Treasury (Treasury Department) and 
the IRS to issue notices postponing the due date in the wake of a 
number of federally declared disasters in the last ten years. Notice 
2006-17, 2006-1 C.B. 559, postponed the due date for victims of 
Hurricanes Katrina, Rita, and Wilma to make a section 165(i) election 
for their disaster losses to October 16, 2006. Notice 2013-21, 2013-15 
I.R.B. 903, postponed the due date for victims of Hurricane Sandy to 
make a section 165(i) election for their disaster losses to October 15, 
2013. Notice 2014-20, 2014-16 I.R.B. 937, postponed the due date for 
victims of a major Colorado flooding event to make a section 165(i) 
election for their disaster losses to October 15, 2014.

Explanation of Provisions

1. Definitions

    These temporary regulations add a paragraph that defines the 
following terms for purposes of the temporary regulations: Federally 
declared disaster; federally declared disaster area; disaster loss; 
disaster year; and preceding year. A federally declared disaster means 
any disaster subsequently determined by the President of the United 
States to warrant assistance by the Federal Government under the Robert 
T. Stafford Disaster Relief and Emergency Assistance Act or a successor 
enactment. A federally declared disaster area is the area determined to 
be eligible for assistance pursuant to the Presidential declaration in 
paragraph (b)(1) of the section. A disaster loss is a loss occurring in 
a federally declared disaster area that is attributable to a federally 
declared disaster and that is otherwise allowable as a deduction for 
the disaster year under section 165(a) and Sec. Sec.  1.165-1 through 
1.165-10 of the Income Tax Regulations. The disaster year is defined as 
the taxable year in which a taxpayer sustains a loss attributable to a 
federally declared disaster. The preceding year is the taxable year 
immediately prior to the disaster year.

2. Time and Manner of Making the Section 165(i) Election

    These temporary regulations generally provide that the due date for 
making the section 165(i) election is six months after the due date for 
filing the taxpayer's federal income tax return for the disaster year 
(determined without regard to any extension of time to file). This 
amount of time is comparable to the length of the postponements of the 
due dates for making the election granted in the notices identified in 
the Background section of this preamble.
    These temporary regulations also authorize the Treasury Department 
and the IRS to issue additional guidance regarding the time and manner 
for making the section 165(i) election. The authorization in these 
temporary regulations will permit the Treasury Department and the IRS 
to act quickly to adapt to both taxpayer needs and the needs of tax 
administration as future disasters occur.
    Contemporaneously with these temporary regulations, the Treasury 
Department and the IRS are issuing Rev. Proc. 2016-53, I.R.B 2016-44, 
which specifies how a taxpayer makes a section 165(i) election and 
incorporates the due date for making the election provided in these 
temporary regulations.

3. Revocations of a Section 165(i) Election

    These temporary regulations extend the period of time for revoking 
a section 165(i) election to ninety (90) days after the due date for 
making the election. This change conforms to the rule established by 
the United States Tax Court in Matheson v. Commissioner, 74 T.C. 836 
(1980), acq., AOD-1980-177. These temporary regulations also authorize 
the Treasury Department and the IRS to issue additional guidance 
regarding the time and manner of revoking the election. Rev. Proc. 
2016-53 specifies how a taxpayer revokes a section 165(i) election and 
incorporates the due date for revoking the election provided in these 
temporary regulations.

4. Consistent Return Positions

    These temporary regulations reflect rules established elsewhere in 
federal tax law that a taxpayer cannot deduct the same loss in more 
than one taxable year. Taxpayers must amend the return for the disaster 
year in order to make the section 165(i) election for a disaster loss 
if the taxpayer has deducted such loss for the disaster year. 
Similarly, taxpayers must amend the preceding year return to revoke a 
section 165(i) election before filing a return or amended return to 
deduct the loss in the disaster year. Rev. Proc. 2016-53 contains 
further guidance for taxpayers in amending returns and taking 
consistent return positions to minimize the administrative burden on 
the IRS in ensuring the prompt processing of refunds.

5. Immediate Effect

    These temporary regulations are effective immediately because they 
provide relief to taxpayers who suffer casualty losses attributable to 
federally declared disasters and the Treasury Department and the IRS 
anticipate a significant number of casualty losses arising from recent 
instances of flooding

[[Page 70940]]

in areas located throughout the United States, including Texas and 
Louisiana.

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It also has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations. For applicability of the Regulatory Flexibility Act 
(5 U.S.C. chapter 6), please refer to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section in this 
issue of the Federal Register. Pursuant to section 7805(f) of the Code, 
these temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business.

Drafting Information

    The principal authors of these regulations are Daniel Cassano and 
Christopher Wrobel of the Office of the Associate Chief Counsel (Income 
Tax & Accounting). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1-- INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.165-11 is revised to read as follows:


Sec.  1.165-11  Election in respect of losses attributable to a 
disaster.

    (a) through (j) [Reserved]. For further guidance, see Sec.  1.165-
11T(a) through (j).

0
Par. 3. Section 1.165-11T is added to read as follows:


Sec.  1.165-11T  Election to take disaster loss deduction for preceding 
year (temporary).

    (a) In general. Section 165(i) allows a taxpayer who has sustained 
a loss attributable to a federally declared disaster in a taxable year 
to elect to deduct that disaster loss in the preceding year. This 
section provides rules and procedures for making and revoking an 
election to claim a disaster loss in the preceding year.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) A federally declared disaster means any disaster subsequently 
determined by the President of the United States to warrant assistance 
by the Federal Government under the Robert T. Stafford Disaster Relief 
and Emergency Assistance Act or a successor enactment.
    (2) A federally declared disaster area is the area determined to be 
eligible for assistance pursuant to the Presidential declaration in 
paragraph (b)(1) of this section.
    (3) A disaster loss is a loss occurring in a federally declared 
disaster area that is attributable to a federally declared disaster and 
that is otherwise allowable as a deduction for the disaster year under 
section 165(a) and Sec. Sec.  1.165-1 through 1.165-10.
    (4) The disaster year is the taxable year in which a taxpayer 
sustains a loss attributable to a federally declared disaster.
    (5) The preceding year is the taxable year immediately prior to the 
disaster year.
    (c) Scope and effect of election. An election made pursuant to 
section 165(i) for a disaster loss attributable to a particular 
disaster applies to the entire loss sustained by the taxpayer from that 
disaster during the disaster year. If the taxpayer makes a section 
165(i) election with respect to a particular disaster occurring during 
the disaster year, the disaster to which the election relates is deemed 
to have occurred, and the disaster loss to which the election applies 
is deemed to have been sustained, in the preceding year.
    (d) Requirement to file consistent returns. A taxpayer may not make 
a section 165(i) election for a disaster loss if the taxpayer claims a 
deduction (as a loss, as cost of goods sold, or otherwise) for the same 
loss for the disaster year. If a taxpayer has claimed a deduction for a 
disaster loss for the disaster year and the taxpayer wishes to make a 
section 165(i) election with respect to such loss, the taxpayer must 
file an amended return to remove the previously deducted loss on or 
before the date that the taxpayer makes the section 165(i) election for 
such loss. Similarly, if a taxpayer has claimed a deduction for a 
disaster loss for the preceding year based on a section 165(i) election 
and the taxpayer wishes to revoke that election, the taxpayer must file 
an amended return to remove the loss for the preceding year on or 
before the date the taxpayer files the return or amended return for the 
disaster year that includes the loss.
    (e) Manner of making election. An election under section 165(i) to 
deduct a disaster loss for the preceding year is made on an original 
federal tax return for the preceding year or an amended federal tax 
return for the preceding year in the manner specified by guidance 
issued pursuant to these regulations. See paragraph (h) of this 
section.
    (f) Due date for making election. The due date for making the 
section 165(i) election is six months after the due date for filing the 
taxpayer's federal income tax return for the disaster year (determined 
without regard to any extension of time to file).
    (g) Revocation. Subject to the requirements in paragraph (d) of 
this section, a section 165(i) election may be revoked on or before the 
date that is ninety (90) days after the due date for making the 
election.
    (h) Additional guidance. The time and manner for making and 
revoking a section 165(i) election under paragraphs (d), (e), (f), and 
(g) of this section may be modified through guidance published in the 
Federal Register or in the Internal Revenue Bulletin (see Sec.  
601.601(d) of this chapter).
    (i) Effective/applicability date. This section is effective October 
13, 2016 and applies to elections, revocations, and any other related 
actions that can be made or taken on or after October 13, 2016.
    (j) Expiration date. The section expires October 13, 2019.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: September 19, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-24664 Filed 10-13-16; 8:45 am]
 BILLING CODE 4830-01-P