Memorandum

From: Tax 3070 Student
Re: Taxable homeowner’s policy

Facts:
The Taylors are forced to stay in a motel for three weeks while their home is being restored due to fire damage. The motel ends up costing them $2000 for the room and $500 for meals. Their homeowner’s policy reimburses them with $2500. The Taylors estimated that during the five-week period they would’ve paid $300 for meals.
Issues:
1. Is the reimbursement given to the Taylors taxable? 2. Under what basis is the reimbursement taxable or not taxable?
Conclusions:
1. The reimbursement is not taxable. 2. Due to this being his primary residence, as well as the insurance company reimbursing exactly what they spent while waiting for their house to be restored.
Discussion:
The limitation subsection states in Sec. 123: “(b) Limitation Subsection (a) shall apply to amounts received by the taxpayer for living expenses incurred during any period only to the extent the amounts received do not exceed the amount by which - (1) the actual living expenses incurred during such period for himself and members of his household resulting from the loss of use or occupancy of their residence, exceed (2) the normal living expenses which would have been incurred for himself and members of his household during such period. (Added Pub. L. 91-172, title IX, Sec. 901(a), Dec. 30, 1969, 83 Stat. 709.)”
In subsection (b) it shows that in order for gross income to not include the amounts received by an individual it must not fall under one of the categories. They violate (2) of the subsection by the insurance reimbursement being $200 over what they would’ve normally spent. However, (1) of the subsection is not violated as the insurance company reimbursed them for the expenses they incurred while staying at the motel. Also in Sec 1.123-1 it says that this exclusion applies only if the loss is of the individual’s personal residence. “(a) In general. (1) Gross income does not include insurance proceeds received by an individual on or after January 1, 1969, pursuant to the terms of an insurance contract for indemnification of the temporary increase in living expenses resulting from the loss of use or occupancy of his principal residence, or a part thereof, due to damage or destruction by fire, storm, or other casualty.”
Sec 1.123-1 also goes on to explain that general, the excludable amount represents excess expenses such as those incurred by the Taylors during the restoration of their house. “Generally, the excludable amount represents such excess expenses actually incurred by reason of a casualty, or threat thereof, for renting suitable housing and for extraordinary expenses for transportation, food, utilities, and miscellaneous services during the period of repair or replacement of the damaged principal residence or denial of access by governmental authority.” No, the reimbursement is taxable. The reason is because the reimbursement doesn’t meet the whole criteria for limitation under Sec. 123 and Sec. 123-1 of the Internal Revenue Code.