IRS follows AICPA position in guidance on proceeds received for homes and contents destroyed by disasters.

• Author: Sherr, Eileen Reichenberg
• Position: American Institute of CPAs

Taxpayers in presidentially declared disaster areas received good news from the IRS in March. In Rev. Rul. 95-22, the IRS adopted a position allowing gain to be deferred if the insurance proceeds for a home and its contents are reinvested in a replacement residence and/or any type of replacement property.

Previously, the IRS Western Region Counsel, under guidance from the IRS National Office, had taken the position that to avoid gain recognition, the common pool of funds (received for the residence and scheduled contents) had to be reinvested only in property similar or related in service or use to the residence or the scheduled property. The AICPA, in the Tax Division's 1994 edition of the Disaster Area Practice Guide, disagreed with this earlier IRS position. The AICPA is pleased with the Service's new position, as it follows the statutory intent of Sec. 1033(h), which was enacted by the Omnibus Budget Reconciliation Act of 1993 (OBRA).

According to Rev. Rul. 95-22, the tax treatment of insurance proceeds received for residences and contents destroyed by disasters, and the use of such proceeds, is:

* No gain is recognized on insurance proceeds - received for unscheduled (general) personal property, regardless of how the proceeds are used. * Proceeds received for the residence and scheduled personal property (i.e., that property itemized for insurance purposes) are treated as a common pool of funds. * No gain is recognized to the extent that the common pool of funds is reinvested in property similar or related in service or use to the original residence or its contents, regardless of whether or not the replacement contents are scheduled.

Rev. Rul. 95-22 permits taxpayers who suffer from the devastating consequences of a disaster loss to replace the necessities of life (including such unscheduled necessities as furniture, appliances and linens) without tax consequence, before replacing luxury items of the type that are typically scheduled (such as jewelry and artwork). The new ruling recognizes that these individuals, who by all standards and measurements endure incredible hardship and loss for which they are never adequately compensated, will now not be penalized for such decisions.

The AICPA Individual Taxation Committee has been working on this issue for quite a while. Initially in response to a letter from an AICPA member involved in a California Society of CPAs group dealing with the tax ramifications of the horrors of the Oakland...