IRS Commissioner Charles Rettig, in a letter to members of Connecticut’s Congressional delegation, indicated that the Connecticut Foundation Solutions Indemnity Company, Inc. (CFSIC) is not required to issue Forms 1099 to homeowners who receive reimbursement from the state-chartered insurer, for pyrrhotite related foundation damage.[1]

The Journal Inquirer’s website reported that the CFSIC had previously issued such Forms 1099 to recipients of such payments, which led to inquiries asking why such payments would be deemed to be taxable income.  Officials of the CFSIC then wrote to the Congressional delegation seeking clarification, who then forwarded the question on to the IRS.[2]

As the letter notes, Revenue Procedures 2017-14 and 2017-60 had previously provided a safe harbor for taxpayers impacted by deterioration of a concrete foundation due to the mineral pyrrhotite.

IRS guidance provides a safe harbor that allows certain homeowners to treat amounts paid to repair damage to their personal residence caused by a concrete foundation, that has deteriorated due to the mineral pyrrhotite as a casualty loss under section 165 so long as the taxpayer was not fully reimbursed by insurance or otherwise before filing a return for the year the loss was sustained. See Revenue Procedure 2017-60, 2017-50 I.R.B. 559; Revenue Procedure 2017-14, 2018-9 I.R.B. 378. If a homeowner deducted a loss and in a subsequent taxable year receives reimbursement for the loss, the homeowner does not recompute the tax for the taxable year in which the deduction was taken. Instead, the homeowner must include the amount of the reimbursement in gross income for the taxable year in which the reimbursement is received, subject to the provisions of Section 111, relating to recovery of amounts previously deducted. See Treasury Regulation Section 1.165-1(d)(2)(iii); Section 4.02 of Rev. Proc. 2017-60; IRS Publication 547, Casualties, Disasters, and Thefts. Reimbursement for a casualty loss that a taxpayer does not deduct is generally not income to the taxpayer if the reimbursement amount does not exceed the taxpayer’s basis in the property.[3]

The letter goes on to summarize the proper treatment of these payments:

Therefore, homeowners who are reimbursed by CFSIC for previously deducted repair costs must include the reimbursed amount in income in the year of receipt. In addition, homeowners who receive reimbursement that exceeds their basis in the property must include the excess amount in income.[4]

However, since the insurance company will generally not possess the information to know if such payments are taxable to the recipient, the letter concludes that the CFSIC is not required to issue Forms 1099 in this case.

As used in Section 6041, the term “gains, profits, and income” means gross income and not the gross amount paid. Section 6041 does not generally require a payor to file or furnish a Form 1099 for payments that are not includible in the recipient's income. Further, a payor is not required to file or furnish a Form 1099 if the payor does not have a basis to determine the amount of a payment that the recipient should include in gross income.

… Under Section 1.6041-1(c), however, if CFSIC does not possess the information about previous deductions and basis necessary to determine whether or how much of the reimbursement will be includible as income by a homeowner, then the reimbursement to that homeowner will not constitute fixed and determinable income for the purpose of information reporting. In those cases, CFSIC will not be required to file an information return under section 6041.[5]

[1] Letter from Charles P. Rettig, IRS Commissioner, Tax Notes Today Federal, 2019 TNTF 229-20, November 20, 2019, https://www.taxnotes.com/tax-notes-today-federal/return-preparation/captive-insurer-doesnt-need-issue-forms-1099-rettig-says/2019/11/26/2b5bj (subscription required, retrieved November 26, 2019)

[2] Eric Bedner, “Captive insurance payments not considered income: IRS,” Journal Inquirer website, November 26, 2019 https://www.journalinquirer.com/politics_and_government/captive-insurance-payments-not-considered-income-irs/article_7e43c9c4-0fa5-11ea-aff4-27bea84c05f6.html (retrieved November 26, 2019)

[3] Letter from Charles P. Rettig, IRS Commissioner, Tax Notes Today Federal, 2019 TNTF 229-20

[4] Letter from Charles P. Rettig, IRS Commissioner, Tax Notes Today Federal, 2019 TNTF 229-20

[5] Letter from Charles P. Rettig, IRS Commissioner, Tax Notes Today Federal, 2019 TNTF 229-20