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How to elect & revoke the election to deduct disaster losses in the preceding year

Rev Proc 2016-53, 2016-44 IRB

In a Revenue Procedure that is being issued contemporaneously with the issuance of temporary and proposed regs, IRS has provided the procedures and requirements for making and revoking a Code Sec. 165(i) election to deduct a disaster loss for the tax year immediately preceding the tax year in which the disaster occurred.

For the contemporaneously issued temporary and proposed regs, see ¶ 21.

Background. Under Code Sec. 165(i), a taxpayer may elect to deduct a disaster loss for the tax year before the year the loss occurred, instead of for the year the loss occurred. As provided in temporary regs (see ¶ 21) issued contemporaneously with Rev Proc 2016-53, a taxpayer must elect to deduct a disaster loss by filing a return, an amended return, or a refund claim within six months after the due date for filing the taxpayer’s federal income tax return for the year of the disaster (determined without regard to any extension of time to file). (Reg. § 1.165-11T(f)) The election may be revoked on or before the date that is ninety (90) days after the due date for making the election. (Reg. § 1.165-11T(g))

New procedures under new temporary regs. As provided in the temporary regs, Rev Proc 2016-53, Sec. 5.01, states that a taxpayer must make the Code Sec. 165(i) election on an original federal tax return or an amended federal tax return for the preceding year. The original federal tax return or amended federal tax return must be filed on or before the date that is six months after the original due date for the taxpayer’s federal tax return for the disaster year (determined without regard to any extension of time to file).Rev Proc 2016-53, Sec. 5.02, provides that the taxpayer doesn’t need to request an extension of time to file the federal tax return for the disaster year in order to benefit from the due date identified in the temporary regs.

Making the election. A taxpayer makes a Code Sec. 165(i) election by deducting the disaster loss on either an original federal tax return or an amended federal tax return for the preceding year and including an election statement indicating that the taxpayer is making the election. (Rev Proc 2016-53, Sec. 3.01) The statement must contain the information required in Rev Proc 2016-53, Sec. 3.02, including: the name or a description of the disaster, and date or dates of the disaster, which gave rise to the loss; and the address where the damaged or destroyed property was located at the time of the disaster.

For an election made on an original federal tax return, this information must be provided on Lines 1 or 19 (as applicable) of Form 4684 (Casualties and Thefts). A taxpayer filing an original federal tax return electronically may attach a statement as a PDF document if there is insufficient space on Lines 1 or 19 of the Form 4684 to provide the required information. (Rev Proc 2016-53, Sec. 3.03)

For an election made on an amended return, this information may be provided by any reasonable means. This includes, but is not limited to, writing the name or a description of the disaster, the State in which the damaged or destroyed property was located at the time of the disaster, and “Section 165(i) Election” on the top of the Form 4684 and providing the rest of the information required by Rev Proc 2016-53, Sec. 3.02 in either the Explanation of Changes in Form 1040X (Amended U.S. Individual Income Tax Return), Form 1120X (Amended U.S. Corporation Income Tax Return), or other appropriate form, or directly on the Form 4684, attaching a statement if there is insufficient room on the form. (Rev Proc 2016-53, Sec. 3.03)

Revoking the election. A taxpayer may revoke the election on or before the date that is 90 days after the due date for making the election. (Rev Proc 2016-53, Sec. 6.02) A taxpayer revokes a previously made Code Sec. 165(i) election by filing an amended return for the preceding year that contains a revocation statement. The revocation statement must include the following information: (1) a statement clearly showing that the election is being revoked; (2) the name or a description of the disaster, and date or dates of the disaster, for which the election was originally made; and (3) the address where the damaged or destroyed property was located at the time of the disaster and for which the taxpayer originally made the election. (Rev Proc 2016-53, Sec. 6.01) A taxpayer may provide the information required in Rev Proc 2016-53, Sec. 6.01, in either the Explanation of Changes in Form 1040X (Amended U.S. Individual Income Tax Return), Form 1120X (Amended U.S. Corporation Income Tax Return), or other appropriate form or on a statement attached to the amended return. (Rev Proc 2016-53, Sec. 6.03)

Consistency requirement. Rev Proc 2016-53, Sec. 4.01 provides that a taxpayer may not make a Code Sec. 165(i) election for a disaster loss if the loss is claimed as a deduction for the disaster year. If a taxpayer has claimed a deduction for a disaster loss in the disaster year and the taxpayer wishes to make a Code Sec. 165(i) election for such loss, the taxpayer must file an amended return to remove the previously deducted loss. The amended return must be filed on or before the date that the taxpayer files the return or amended return for the preceding year that includes the Code Sec. 165(i) election.

Similarly, a taxpayer may not revoke a previously made Code Sec. 165(i) election and deduct the loss in the disaster year unless the taxpayer files an amended return to remove the loss for the preceding year. The amended return removing the Code Sec. 165(i) election must be filed on or before the date that the taxpayer files the return or amended return for the disaster year that includes the loss. (Rev Proc 2016-53, Sec. 4.02)

A taxpayer that is required to file such an amended return must pay or make arrangements to pay any additional tax and interest due as a result of removing the duplicative disaster loss deduction on that amended return. (Rev Proc 2016-53, Sec. 4.03)

Effective/applicability date. Rev Proc 2016-53 applies to any Code Sec. 165(i) elections, revocations, and other related actions that can be made or taken on or after Oct. 13, 2016.

References: For the election to deduct disaster losses in preceding year, see FTC 2d/FIN ¶  M-2001; United States Tax Reporter ¶  1654.520; TG ¶  16977.