New law offers relief to terrorist attack victims.

• Author: DiRe, Elda A.
• Position: Victims of Terrorism Tax Relief Act of 2001

The Victims of Terrorism Tax Relief Act of 2001 offers income and estate tax relief to those who were injured or killed in U.S.-based terrorist or anthrax attacks. This article explains the new provisions and their implications and offers some examples.

On Jan. 23, 2002, President Bush signed the Victims of Terrorism Tax Relief Act of 2001 (VTTRA), providing income and estate tax relief to "specified terrorist victims" (STVs). Special tax treatment is not unusual; in the past, it was extended to American hostages held captive in Iran and victims of the bombing of Pan American Airways flight 103 over Lackerbie, Scotland. (1) This article describes the VTTRA provisions and their ramifications.

What Is an STV?

VTTRA Section 101, adding Sec. 692(d), defines an STV in Sec. 692(d)(4) as any deceased victim of the terrorist attacks against the U.S. occurring on April 19, 1995 or Sept. 11, 2001, or of the anthrax cases occurring after Sept. 10, 2001 and before 2002, regardless of whether the victim was killed in the attack or in rescue or recovery operations. The VTTRA extends Sec. 692, which previously applied only to U.S. Armed Forces members, to STVs, exempting an individual from paying income taxes during the tax year of death and for the preceding tax year.

The individual had to have died from injury or wounds incurred in a terrorist attack or from an illness stemming from an anthrax attack. Relief does not apply to anyone (or his representative) identified by the U.S. Attorney General as having participated or conspired in any terrorist attack.

For decedents dying before 2002, there will likely be few issues as to who qualifies as a victim. As time goes by, however, this may become more problematic. For example, would an individual who inhaled asbestos-contaminated dust at Ground Zero on Sept. 11, 2001 be eligible for Sec. 692(d) relief if he dies in 2004?

Income Tax Provisions

Elimination of Tax Liability

Sec. 692(d)(1) exempts STVs from paying Federal individual income taxes for the tax year of death and the preceding tax year. Executors of STVs' estates may amend 2000 income tax returns to obtain a refund of any Federal taxes paid. As discussed below, the IRS has implemented procedures to expedite filing refund claims for STVs.

Under Sec. 692(d)(3), the exemption does not apply to any amount paid by an employer attributable to deferred compensation that would have been payable after death had the individual died other than as an STV, or amounts payable in a tax year that would not have been payable in such tax year but for an action taken after Sept. 11, 2001. For example, death benefits and amounts payable to an STV's estate from a qualified plan or IRA are not exempt. Similarly, if an employer accelerates vesting of restricted property or paying nonqualified deferred compensation, the exemption will not apply. However, amounts paid by an employer to an STV's estate out of generosity are exempt from taxes. The exemption also applies to payments of an STV's accrued vacation and sick leave.

Minimum Benefit

Sec. 692(d)(2) provides each STV with a $10,000 minimum individual income tax benefit. If an STV's Federal income tax liability during the tax year of death and the preceding tax year is less than $10,000 overall, the government will refund the difference to the STV's estate.

Expedited Refund Procedures

IR-2002-07 (2) enumerated procedures for expediting refund claims for those killed in terrorist action (KITA). Executors should print "KITA--Oklahoma City," "KITA--9/11" or "KITA--Anthrax" at the top of an amended return and send it to:

Internal Revenue Service P.O. Box 4053 Woburn, MA 01888 If using a private carrier, the amended return should be sent to:

Internal Revenue Service 310 Lowell Street Stop 661 Andover, MA 01810 Pub. 3920, Tax Relief for Victims Terrorist Attacks, available at www.irs.gov, offers detailed guidance.

Under IR-2002-07...