When disaster strikes, the IRS may permit taxpayers additional time to make tax payments and file returns provided they qualify as “affected” taxpayers in counties that have been designated as federal disaster areas. IRC Sec. 7508A. While it is clear that partnerships with a principal place of business inside the disaster area qualify as affected taxpayers, what about the partners of those partnerships who live outside the disaster area? Do they qualify for tax relief? As is often the answer in the tax world, it depends.
As noted above, only “affected” taxpayers are eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts. Under Treas. Reg. Sec. 301.7508A-1(d)(1), the term affected taxpayers includes the following persons:
- Any individual whose principal residence, and any business entity whose principal place of business, is located the disaster area.
- Any individual who is a relief worker assisting in a disaster area.
- Any individual whose principal residence, and any business entity whose principal place of business, is not located in a covered disaster area, but whose records necessary to meet a filing or payment deadline are maintained in a covered disaster area.
- Any estate or trust that has tax records necessary to meet a filing or payment deadline in a disaster area.
- In the case of a joint return, any spouse of an affected taxpayer.
While it is tempting to read this provision as treating all business owners as affected taxpayers where the business has a principal place of business in the disaster area, Treasury expressly rejected such a rule in the preamble to the Reg. Sec. 301.7508A-1. Instead, Treasury carefully limited relief to those circumstances where the records necessary for the business owner to meet a tax obligation were located or maintained in the disaster area:
The regulations list seven types of affected taxpayers, including "any business whose principal place of
business is located in a covered disaster area." The commentator recommends that this definition be
expanded to include all owners of a business.
The final regulations do not adopt this recommendation. The IRS and Treasury Department believe that
the definition of affected taxpayer in the proposed regulations is sufficiently broad to cover all taxpayers
within the intended scope of section 7508A. Although the final regulations do not provide a specific
rule for business owners (other than sole proprietors), the IRS may nonetheless make a determination
based on the facts and circumstances in a particular case that a business owner is an affected taxpayer
under either § 301.7508A-1(d)(1)(iv), which applies to an individual whose principal residence is not
located in a disaster area, but whose records necessary to meet the deadline for a specified act are
maintained in a covered disaster area, or under § 301.7508A-1(d)(1)(vii), which applies to any other
person determined by the IRS to be affected by a Presidentially declared disaster. For example, in the
case of a partnership, it is expected that partners whose ability to meet a deadline is significantly
affected by a Presidentially declared disaster will be granted relief.
See Treasury Decision 8911, Postponement of filing deadlines by reason of presidentially declared disaster (12/15/2000).
It is helpful that Treasury acknowledged in its example that a partner of a partnership could be eligible for relief. The example, however, makes clear that the partner’s ability to meet the tax deadline was significantly affected by the disaster. It would therefore be misguided to read the example as providing automatic relief to the partner where in the sentences preceding the example, the Treasury explicitly rejected the notion of automatic relief.
In summary, for partners and shareholders who live outside the disaster zone, just showing a principal place of business for the partnership or S corporation in the disaster area is seemingly not enough. To be treated as an “affected” taxpayer qualifying for tax relief, the partner or shareholder must be able to show that necessary tax records were located/maintained in the disaster zone area.
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