Order Code RS22269
September 19, 2005
CRS Report for Congress
Received through the CRS Web
H.R. 3768: the Katrina Emergency Tax Relief
Act of 2005
Erika Lunder
Legislative Attorney
American Law Division
Summary
On September 15, 2005, the House and Senate passed different versions of a bill
that contains tax provisions intended to assist the victims of Hurricane Katrina. H.R.
3768, the Katrina Emergency Tax Relief Act of 2005, was passed by voice vote in the
House, while the Senate passed an amended version by unanimous consent. This report
compares the House and Senate versions of the bill. It will be updated as events
warrant.
This report compares the provisions in H.R. 3768, the Katrina Emergency Tax Relief
Act of 2005, as passed by the House with those in the amended version of the bill that was
passed by the Senate. The version passed by the House will be referred to as H.R. 3768,
while the version passed by the Senate will be referred to as S.Amdt. 1728. The
provisions are grouped by topic and not discussed in the section order found in the House
or Senate version of the bill.
Discharge of indebtedness. When all or part of a debt is forgiven, the amount
of the cancellation is ordinarily included in the income of the taxpayer receiving the
benefit of the discharge.1 This rule is based on the idea that the taxpayer has been
enriched from not having to pay a debt that he or she was legally obligated to pay. There
are currently several exceptions to the general rule that a cancelled debt is included in
taxable income in the year of discharge. For example, no amount of the discharge is
included in income if the cancellation is intended to be a gift or is from the discharge of
student loans for the performance of qualifying services.2 There are also certain situations
in which the taxpayer may defer taxation, with the possibility of permanent exclusion, on
income from the discharge of indebtedness, such as if discharge occurs when the debtor
is in title 11 bankruptcy proceedings or insolvent.3
1 IRC § 61(a)(12).
2 IRC §§ 102 and 108.
3 IRC § 108(a).
Congressional Research Service { The Library of Congress

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Both versions of the bill would allow victims of Hurricane Katrina to exclude a
cancelled debt under certain circumstances. Section 104 of H.R. 3768 and section 401
of S.Amdt. 1728 would allow individuals who lived in the Hurricane Katrina disaster area
on August 28, 2005, or who owned real property in the area on the date of the discharge
to exclude non-business debt that was forgiven by a governmental agency or certain
financial institutions, if the discharge occurred before January 1, 2007. Individuals with
certain tax attributes (such as basis) would be required to reduce them by the amount
excluded from income. This would have the effect of deferring the tax on the cancelled
debt.
Involuntary conversions. An involuntary conversion occurs when property is
converted to money or other property because of its complete or partial destruction, theft,
seizure or condemnation, or if it is disposed of under threat of condemnation.4 An
example of an involuntary conversion is when an individual receives an insurance
payment for damaged property. If the cash or property that was received is worth less
than the basis of the property that was converted, the taxpayer has a loss, which may
qualify for deduction under the casualty loss rules discussed below. If the cash or
property received is worth more than the basis of the property that was converted, then
the taxpayer has a gain, which may or may not be immediately taxable.
There are no immediate tax consequences if the property is converted to property that
is similar or related in service or use (“similar property”).5 If, on the other hand, the
property is involuntarily converted to cash or dissimilar property, the taxpayer must
recognize any gain unless he or she purchases similar property within a certain time
period. If the taxpayer purchases the replacement property in a timely manner, then he
or she may elect to only recognize gain to the extent that the amount realized from the
involuntary conversion exceeds the cost of the new property. The time period is generally
two years. It is increased to three years if the converted property is business real property
and to four years if the property is the taxpayer’s principal residence or its contents which
were involuntarily converted due to a presidentially-declared disaster.6 Additionally, the
IRS has the discretion to extend the time period on a case-by-case basis.
Section 101 of the H.R. 3768 and section 405 of S.Amdt. 1728 would increase the
time period that the taxpayer has to purchase the replacement property to five years. The
extended period would apply if both the property that was damaged and the replacement
property is within the presidentially-declared disaster area for Hurricane Katrina.
4 IRC § 1033.
5 The taxpayer’s basis in the new property is the same as in the converted property; thus, he or
she is able to defer recognition of any gain until he or she sells or exchanges the new property.
6 When a taxpayer’s principal residence or its contents are involuntarily converted due to a
presidentially-declared disaster, he or she does not recognize any gain upon receiving insurance
proceeds covering unscheduled personal property located in the residence. The other insurance
proceeds, including amounts received for the residence and scheduled items, are combined into
a common pool of funds. The taxpayer has four years to use any of the pooled funds to purchase
replacement property for the residence or its content in order to take advantage of the non-
recognition rules. IRC § 1033(h).

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Casualty losses. There are several circumstances under which taxpayers may
deduct losses of property not connected to a trade or business. One of these
circumstances is when the losses are from a casualty, such as a hurricane.7 In addition to
losses from the actual damage caused by the casualty, a taxpayer in a presidentially-
declared disaster area has a casualty loss if ordered, within 120 days of the area’s
designation, by the state to demolish or relocate his or her home because it is unsafe due
to the disaster. The amount of the loss is the lesser of (1) the decrease in the property’s
fair market value due to the casualty or (2) the taxpayer’s adjusted basis in the property
(i.e., the cost of the property with certain adjustments). The cost of repairing the property
may be used as evidence of the amount of loss.8 There is no loss if the taxpayer is
reimbursed by insurance or other means. The taxpayer may only claim a deduction to the
extent that the loss from the casualty exceeds (1) $100 plus (2) the sum of 10% of the
taxpayer’s adjusted gross income and any taxable gains from property that was
involuntarily converted due to a casualty (discussed above). In general, the deduction
may only be claimed in the year of the loss, although a loss in a presidentially-declared
disaster zone may be deducted in the year prior to the loss.
Section 106 of H.R. 3768 and section 402 of S.Amdt. 1728 would waive both the
$100 and 10% floors for casualty losses from Hurricane Katrina.
Employment tax incentives. Under current law, businesses that hire individuals
from groups with high unemployment rates or special employment needs may claim the
work opportunity credit.9 Examples of these groups include high-risk youth, veterans,
ex-felons, and food stamp recipients. The credit may only be claimed for the wages paid
during the employee’s first year and depends on how much the employee worked during
the year. For an employee who worked at least 400 hours, the credit equals 40% of his
or her wages, with wages limited to $6,000 per employee. For an employee who worked
between 120 and 400 hours, the credit equals 25% of his or her wages, with wages limited
to $6,000 per employee. For a summer youth employee, the wages are limited to $3,000.
Section 110 of H.R. 3768 would allow the work opportunity credit to be claimed for
wages paid to an employee who had a principal place of abode in the Hurricane Katrina
disaster area on August 28, 2005, who is being hired for a position in the area, and who
begins working during the two-year period beginning on August, 29, 2005. Section 201
of S.Amdt. 1728 would allow the credit to be claimed for employees who had a principal
place of abode in disaster area on August 28, 2005 and were unemployed because of
Hurricane Katrina. The credit in S.Amdt. 1728 would be available beginning on August
29, 2005, to employers outside the disaster area for six months and to employers within
the disaster area for two years.
For employers in the disaster area with an active business that was rendered
inoperable because of damage from Hurricane Katrina for any day between August 28,
2005, and January 1, 2006, the Senate amendment would provide a new tax credit for
continuing to pay their eligible employees’ wages. While employers may generally deduct
7 IRC § 165.
8 26 CFR § 1.65-7(a)(2)(ii).
9 IRC § 51.

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all the wages paid to their employees, section 202 of S.Amdt. 1728 would create an
additional credit equal to 40% of each eligible employee’s wages, up to $6,000 per
employee (thus, a maximum credit of $2,400 per employee). Eligible employees would
be employees (a) whose principal place of employment on August 28, 2005, was in the
disaster area or (b) who are activated military Reservists and Guards whose principal
place of employment immediately prior to serving on active duty was in the disaster area.
The credit would apply to wages paid between the date the business became inoperable
at the employee’s principal place of employment and the date the business resumed
significant operations there, but no later than December 31, 2005. H.R. 3768 does not
have this provision.
Housing provisions. Both versions of the bill would allow taxpayers who
provide free housing to persons displaced by Hurricane Katrina to claim personal
exemptions for the displaced persons. Under current law, individuals may claim
exemptions that equal $3100 per person for themselves, their spouses, and dependents.10
Section 107 of H.R. 3768 and section 304 of S.Amdt. 1728 would allow individuals who
allow displaced Hurricane Katrina victims to stay in their homes to claim exemptions for
the displaced persons. The housing would have to be provided for free and for at least
sixty days. The exemption would be $500 per person, with a maximum of four
exemptions. The exemption would be available in 2005 and 2006, although a taxpayer
could only claim a specific individual once.
Both versions of the bill would also ease requirements relating to mortgage revenue
bonds. These tax-exempt bonds are used to finance below-market interest rate mortgages
for low and moderate-income homebuyers who have not owned a home for the past three
years.11 The price of the house generally cannot exceed 90% of the average purchase
price of homes in the area. Homes in targeted areas, which are areas that are low-income
or of chronic economic distress, are subject to special rules that, among other things,
remove the requirement that the homebuyer not have owned a home for the past three
years. Section 105 of H.R. 3768 and section 404 of S.Amdt. 1728 would treat homes in
the Hurricane Katrina disaster area as targeted area residences so that there would be no
requirement that the homebuyer not have owned a home in the three prior years. H.R.
3768 would apply to financing provided before January 1, 2008. S.Amdt. 1728, which
would also increase the limitation on qualified home improvement loans from $15,000
to $150,000 for loans used to repair damage from the Hurricane, would apply to bonds
issued between August 28, 2005, and August 29, 2008.
Charitable giving.
Limits on charitable deductions. Both versions of the bill would increase the
maximum amount that individuals and corporations may deduct as a charitable
contribution. Under current law, individuals may not claim a charitable deduction that
exceeds 50% of their adjusted gross income (the amount may be reduced depending on
the type of donee and property) and corporations may not claim a deduction that exceeds
10 IRC § 151.
11 IRC § 143.

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10% of their taxable income.12 Section 102 of H.R. 3768 and section 301 of S.Amdt.
1728 would suspend these limitations for individuals and corporations for cash
contributions made for Hurricane Katrina relief efforts between August 27, 2005, and
January 1, 2006.
Inventory. S.Amdt. 1728 would permit all businesses to use the special enhanced
deduction rules that apply when C corporations donate food inventory. Presently, donors
who donate food inventory but are not C corporations may only claim a charitable
deduction that equals their basis in the inventory (generally, the inventory’s cost).13 Under
the enhanced deduction rules, C corporations may deduct the lesser of (1) the basis plus
50% of the property’s appreciated value or (2) two times basis. Section 302 of the
amendment would allow all donors of food inventory to benefit from the enhanced
deduction rules if the donation is made between August 28, 2005, and January 1, 2006.
Donors, other than C corporations, could not compute the deduction using contributions
in excess of 10% of the taxpayer’s net business income. H.R. 3768 does not include this
provision.
S.Amdt. 1728 would also create a special enhanced deduction for donations of book
inventory. Section 303 of the amendment would allow businesses that donate book
inventory for educational purposes to deduct the lesser of the book’s fair market value or
two times basis. The donations must be made between August 28, 2005, and January 1,
2006. There is no comparable provision in H.R. 3768.
Mileage rate for charitable contribution deduction. Individuals who use their
personal vehicles for charitable purposes may claim a deduction based on the number of
miles driven. The statutory amount is 14 cents per mile.14 Section 103 of H.R. 3768 and
section 305 of S.Amdt. 1728 would set the rate at 70% of the standard business mileage
rate for contributions made before January 1, 2007. The standard business mileage rate
is periodically set by the IRS and is currently 48.5 cents per mile.
Section 306 of S.Amdt. 1728 would also exclude from a charitable volunteer’s gross
income qualifying mileage reimbursements received from the charitable organization for
the operating expenses of the volunteer’s passenger automobile. The provision would
apply for taxable years ending after the act’s enactment. H.R. 3728 does not have a
similar provision.
Credit computations. Section 108 of H.R. 3768 would allow individuals who
were residents of the Hurricane Katrina disaster area on August 28, 2005, to elect to use
last year’s earned income for computing the child tax credit [IRC § 24] and the earned
income tax credit [IRC § 32] instead of this year’s income. Section 406 of S.Amdt. 1728
would permit a similar election.
Early withdrawals from retirement plans. Section 201 of H.R. 3768 and
section 101 of S.Amdt. 1728 would waive the 10% penalty tax on early withdrawals of
12 IRC § 170(b).
13 IRC § 170(e).
14 IRC § 170(i).

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up to $100,000 from retirement plans if the taxpayer’s principal residence is in the
presidentially-declared Hurricane Katrina disaster area and the distribution is made within
one year after the declaration was made. These individuals could also re-contribute the
money to a qualified plan over a three-year period and receive tax-free rollover treatment.
Under section 202 of H.R. 3768 and section 102 of S.Amdt. 1728, Hurricane Katrina
victims who receive an early withdrawal could, rather than being taxed on the entire
taxable amount in the year of distribution, include an equal portion of the amount in their
income over a period of three years. Section 203 of H.R. 3768 and section 103 of
S.Amdt. 1728 would allow the Hurricane victims to re-contribute, without tax
consequence, distributions that were made between February 28, 2005, and August 29,
2005, to purchase or construct a home in the disaster area and were not used because of
the Hurricane. Section 204 of H.R. 3768 and section 104 of S.Amdt. 1728 would increase
the amount that Hurricane Katrina victims could borrow from their plans and extend
repayment due dates by one year if the original date fell between August 29, 2005, and
August 30, 2006. Section 205 of H.R. 3768 and section 105 of S.Amdt. 1728 would
provide transition rules for plans to make amendments that adopt the new provisions.
IRS Administration Provisions. Section 109 of H.R. 3768 and section 407 of
S.Amdt. 1728 would allow the Treasury Secretary to make adjustments in the application
of the tax laws for tax years 2005 and 2006 so that temporary relocations after Hurricane
Katrina or the receipt of hurricane relief do not cause taxpayers to lose dependency
exemptions or child credits or have a change of filing status.
Section 403 of S.Amdt. 1728 would amend the authority of the IRS to suspend
various tax filing and payment deadlines for taxpayers affected by natural disasters and
terroristic activity to include employment and excise taxes. This provision is not
temporary. Additionally, while the IRS announced in News Release IR-2005-96 that it
would extend deadlines for Hurricane Katrina victims until January 3, 2006, section 403
would further extend the deadlines to February 28, 2006. H.R. 3768 does not include a
similar provision.

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