On March 13, 2020, the President issued a determination under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”). A consequence of that action is that payments from employers to employees that meet the requirements of a qualified disaster relief payment under Internal Revenue Code Section 139 are excludible from income, a rather unusual result, for the reasons discussed below. Although Section 139 cannot be used to exempt income replacement payments (wages), other amounts may be considered exempt.

Background – The tax law has long wrestled with the issue of when various payments are subject to income tax in light of the general rule that gross income means all income from whatever source derived. Various exceptions to taxation have existed over the years for payments in disaster-related situations. A “general welfare” exception, for example, excludes from income payments made by a governmental unit under a social benefit program designed to promote the general welfare. This exception has been relied on in excluding federal and state payments to disaster victims. In a similar vein, relief payments made by charities are generally not taxable because the tax law views those payments as gifts.