Simplified disaster-loss rules, backed by AICPA, become law.

New tax rules included in the Omnibus Budget Reconciliation Act of 1993 (OBRA) free disaster victims from having to pay taxes on insurance money received for lost property, regardless of how the money is spent. (For a discussion of a related issue, taxes on insurance proceeds for a damaged or destroyed principal residence, see "Flood Relief," Tax Briefs, page 30.)

The rule change was supported by the American Institute of CPAS tax executive committee, which had voted unanimously to support HR 406, a bill to modify the involuntary conversion rules for personal property losses resulting from natural disasters. That bill, introduced earlier this year by Congressman Pete Stark (D-Calif.), had garnered 21 cosponsors. The rule changes in HR 406, modifying Internal Revenue Code section 1033, subsequently were incorporated into OBRA.

The changes also will reduce the record-keeping problems encountered by taxpayers who suffered disaster losses.

Ken Strauss, a partner of Wainberg Zipper Strauss in Miami, praised the AICPA'S efforts. A leader in the campaign to simplify conversion rules, Strauss had asked for AICPA support after Hurricane Andrew struck parts of Florida and Louisiana and caused billions of dollars in property damage last year.

Basically, Strauss said, the new rules "simplify a situation that's pretty complicated" by extending the period for replacing lost property from two years to four years and creating a "basket" of tangible personal property that can be replaced as the owner chooses.

As an example, Strauss noted the case of a California artist who lost lithographs worth $100,0000 in that state's devastating forest fires a few years back. After receiving $100,000 in insurance, the artist replaced the lithographs with oil paintings. The Internal Revenue Service ruled oil paintings and lithographs were not "similar property" and taxed the money.

In another case, the IRS ruled $500 paid for a destroyed phonograph could not be used to purchase a video-cassette recorder.

"Taxing money people receive from an insurance company right after they've been victimized didn't make any sense," Strauss said.

Under the new rules, he explained, insurance money paid for lost tangible property can be used to purchase any tangible item without being subject to tax.

The bill, which immediately benefits Midwest flood victims, also will help victims of Hurricane Andrew who formerly had two years to replace lost property (in South Florida, the IRS district director already agreed to grant a one-year extension).

Individuals now have four years to replace lost property, after which any money not spent on valuables or on replacing a home will be taxable.

The new rules, which are retroactive to September 1, 1991, apply only to residential property in federal disaster areas.

Timely support. "We know firsthand the problems natural disaster victims face when tax time comes," wrote Harvey L. Coustan, chairman of the AICPA tax executive committee, in a letter sent to Congress while the measure was being debated. Coustan called the rules then in place "onerous."

"As our country faces the Mississippi River flooding, which some have billed as the worst natural disaster in our history, passage of HR 406 could not be more warranted," Coustan said.

Moreover, the concept embodied in HR 406 should not be limited to disaster victims, he urged. "We suggest that adoption of these rules for all taxpayers who suffer a casualty loss would simplify and make fair the current rules."