The Internal Revenue Service issued Notice 2011-32 yesterday designating the earthquake and tsunami in Japan in March 2011 as a qualified disaster for federal tax purposes. This guidance affects recipients of disaster relief payments, as well as employer-sponsored private foundations.

The guidance issued under IRS § 139 allows U.S. taxpayers of qualified disaster relief payments to exclude those payments from income on their U.S. income tax returns. Also, the guidance allows employer-sponsored private foundations to assist employee victims in areas affected by the March 2011 earthquake and tsunami in Japan without affecting their tax-exempt status.

Under the tax law, a private foundation that is employer-sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. Because of the IRS announcement, these qualified disaster relief payments are not included in the individual recipient’s U.S. gross income.

The IRS will presume that qualified disaster relief payments made by an employer-sponsored private foundation to employees and their family members in areas affected by the earthquake and tsunami in Japan are consistent with the foundation's charitable purposes.

For more information on this subject, see IRS Publication 3833 (“Disaster Relief: Providing Assistance Through Charitable Organizations”) available at http://www.irs.gov/pub/irs-pdf/p3833.pdf.