By Amy Lee Rosen

Law360 (May 14, 2020, 6:50 PM EDT ) A perhaps overlooked tax provision that excludes disaster relief payments from workers' income could give businesses another tool to weather the economic storm from the novel coronavirus pandemic.

Under Internal Revenue Code Section 139 , individuals can exclude from gross income qualified disaster relief payments, which can include an employer's reimbursement for reasonable and necessary personal, family, living or funeral expenses as a result of a qualified disaster.

The provision was enacted in the wake of the terrorist attacks of Sept. 11, 2001, and has mostly been applied in the context of disasters such as hurricanes, floods and tornadoes. Thus businesses may not realize that they can likely make use of it for expenses related to COVID-19, the respiratory disease caused by the novel coronavirus.

"It doesn't jump out and say to you that these payments can be made from an employer to an employee," Tony Nitti, a certified public accountant and partner at RubinBrown LLP, said of the provision.

Under the statute, disasters for which Section 139 can be applied include terrorist activity and federally declared disasters. President Donald Trump declared a national emergency to fight COVID-19 in March, which is not technically the same thing as a federally declared disaster, but it is still likely that the provision can be invoked for payments relating to the disease, Nitti told Law360. 

For example, when the Internal Revenue Service extended the deadline for filing income tax returns from April 15 to July 15, it invoked authority that can be used only during a federally declared disaster, Nitti said. As long as the employer reimbursements are for "necessary and reasonable" employee expenses, it's likely Section 139 can apply to the novel coronavirus pandemic too, he said.

Section 139 can be useful not only for workers affected by the coronavirus but also possibly for companies, since the costs can likely be deducted by businesses, Nitti said.

While Section 139 does not explicitly grant employers a deduction, reimbursements of employee expenses related to COVID-19 can likely be treated as deductible ordinary and necessary business expenses under Section 162 , he said.

"I think you can argue that pretty easily," Nitti said.

Jerry Schreiber, a certified public accountant and partner at Schreiber & Schreiber, told Law360 that there has been uncertainty in the past over whether payments from a business owner to himself or herself can be treated as exempt payments under Section 139.

During disasters such as Hurricanes Katrina and Sandy, it was clear that employer reimbursements for employee expenses related to the hurricanes would qualify under Section 139, but not whether reimbursements paid by a business to the owner could also qualify, Schreiber said.

With such little guidance released by the IRS in the area, it is hard to know, for instance, whether a single-member limited liability company can reimburse the owner under Section 139 and deduct it from income under Section 162, he said.

What's clear, however, is that under Section 139, the payments must be for reasonable and necessary expenses in order to qualify for the income exclusion, so businesses and employees should exercise discretion when making use of the provision, he said.

"People have to exercise judgment on what they're doing, because it's not a blank check," he said.

Another practical issue with Section 139 is that businesses may not have the money available to reimburse employees for reasonable expenses if they have been closed because of the pandemic, according to Ofer Lion, a partner at Seyfarth Shaw LLP.

Section 139, Lion said, "assumes the employer has any money, and these days it's really the employers who are broke." 

If the government wants Section 139 to be used for COVID-19 relief, there are changes that Congress or the IRS could make to more easily facilitate that, such as explicitly allowing nonemployer parties to contribute to disaster relief grant funds operated by an employer, Lion said.

For example, a high school or college campus that has transitioned to remote learning may have janitorial and cafeteria employees who have been laid off, Lion said. The IRS or Congress could allow parents or students to contribute money to provide disaster relief grants to support workers when the company itself cannot provide money, Lion said.

"Disaster relief payments really need to be renamed or recharacterized and reassessed as ways to get money to the suddenly unemployed," he said.

The IRS did not immediately respond to a request for comment.

--Editing by John Oudens and Neil Cohen.

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