## Facts

- A flood in state “ST” constitutes a “Presidentially declared disaster” within the meaning of I.R.C. § 1033(h)(3).
- Affected individuals incur reasonable and necessary medical, temporary housing, and transportation expenses due to the flood that are not reimbursed by insurance or otherwise.
- Each payment program is limited to covering unreimbursed, reasonable, and necessary disaster-related expenses and excludes nonessential, luxury, or decorative items and services.
- None of the programs requires recipients to provide proof of actual expenditures as a condition of payment.
- Each program includes rules intended to ensure that grant amounts are reasonably expected to be commensurate with the recipients’ unreimbursed, reasonable, and necessary disaster-related expenses.
- Situation 1 (State): ST enacts emergency legislation and appropriates funds to make grants to flood victims for covered expenses.
- Situation 2 (Charity): A § 501(c)(3) organization provides grants to distressed individuals affected by the flood for covered expenses.
- Situation 3 (Employer): An employer provides grants to employees affected by the flood for covered expenses under a program designed to approximate unreimbursed needs.

## Issues

1. Whether state grants to flood victims to pay or reimburse certain unreimbursed, reasonable, and necessary medical, temporary housing, or transportation expenses are includible in gross income.
2. Whether charitable grants to flood victims to pay or reimburse certain unreimbursed medical, temporary housing, or transportation expenses are includible in gross income.
3. Whether employer grants to employees affected by the flood to pay or reimburse certain unreimbursed, reasonable, and necessary medical, temporary housing, or transportation expenses are includible in gross income and treated as wages.

## Decision

- State grants are excluded from recipients’ gross income under the administrative general welfare exclusion.
- Charitable organization grants are excluded from recipients’ gross income under I.R.C. § 102 (gifts) and, to the extent applicable, I.R.C. § 139 (qualified disaster relief payments).
- Employer grants that meet the ruling’s conditions are excluded from recipients’ gross income under I.R.C. § 139 and are not treated as wages for withholding and employment tax purposes.

## Legal Principles

- I.R.C. § 61 broadly includes “all income from whatever source derived,” subject to applicable statutory or administrative exclusions.
- Under the general welfare exclusion, payments by governmental units under legislatively provided social benefit programs to promote the general welfare are excluded from gross income when structured as need-based assistance rather than compensation.
- I.R.C. § 139(a) excludes from gross income any amount received as a “qualified disaster relief payment,” including amounts paid to reimburse or pay reasonable and necessary personal, family, or living expenses incurred as a result of a qualified disaster.  
- I.R.C. § 102 excludes from gross income the value of property received by gift when the transfer is motivated by detached and disinterested generosity rather than an expectation of services or economic benefit.
- Disaster-relief programs may provide payments without item-by-item substantiation if program rules reasonably calibrate payments to expected unreimbursed, reasonable, and necessary disaster-related expenses and do not function as disguised compensation.
- Employer-provided disaster-relief payments that qualify under § 139 are not wages and are not subject to income tax withholding or employment taxes to the extent they are limited to qualifying disaster-related expenses.

## Conclusion

Disaster-relief grants paid to individuals affected by a Presidentially declared disaster to cover unreimbursed, reasonable, and necessary medical, temporary housing, and transportation expenses are excluded from gross income when properly structured: state payments under the general welfare exclusion, charitable payments as gifts under § 102 and/or as qualified disaster relief payments under § 139, and employer payments under § 139, in which case they are not wages.


Rev. Rul. 2003-12, 2003-1 C.B. 283 (2003)