Employers seeking to provide financial assistance to employees and their families in the aftermath of Hurricane Katrina can offer tax-favorable disaster relief, provided the payments are "Qualified Disaster Relief Payments." If certain requirements are met, the funds received by those employees and their families will not be taxable and the payments made by the employer will be deductible. The payments can cover personal and family expenses as well as expenses related to property damage caused by Hurricane Katrina. Section 139 of the Internal Revenue Code defines "Qualified Disaster Relief Payments" as any amount paid to or for the benefit of an individual:

(1) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,

(2) to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

It is important to note that the income is excluded by the recipient only to the extent that the expenses covered by the payment have not been compensated by insurance or otherwise. Hurricane Katrina has been declared a disaster by the President and thus qualifies for the favorable tax treatment. An employer can either directly make qualified disaster payments to affected employees and their families or establish a charitable foundation to receive contributions from its nonaffected employees, the employer and others. If the employer makes payments directly to or for the benefit of the employees and their families, the payments will be deductible to the employer as compensation rules and not be subject to federal withholding or payroll taxes. If payments are made to the charitable foundation, the contributions are tax deductible charitable contributions. The employer can also consider a matching charitable contribution to the foundation for each contribution made by the employees. The foundation can then make Qualified Disaster Relief Payments to or for the benefit of the affected employees and their families. We have provided links on our website to materials containing a more detailed description as to the requirements of establishing a foundation for disaster relief (Employee Relief Foundation) and the exclusion of the payments from the gross income of the recipients (Employer Disaster Relief Payments). For more information, please feel free to contact J. Leigh Griffith, Richard Johnson or any other member of Waller Lansden's Tax Practice at (615) 244-6380. WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.