Joint Committee on Taxation
March 24, 1994
JCX-3-94

Treatment of Certain Crop Insurance Proceeds and Disaster Payments

Present Law

A taxpayer engaged in a farming business generally may use the
cash receipts and disbursements method of accounting ("cash
method") to report taxable income. A cash method taxpayer
generally recognizes income in the taxable year in which cash is
received, regardless of when the economic events that give rise to
such income occur. Under a special rule (sec. 451(d) of the
Internal Revenue Code), in the case of insurance proceeds received
as a result of destruction or damage to crops, a cash method
taxpayer may elect to defer the income recognition of the proceeds
until the taxable year following the year of the destruction or
damage, if the taxpayer establishes that under his practice, income
from such crops would have been reported in a following taxable
year. For this purpose, certain payments received under the
Agricultural Act of 1949, as amended, or title II of the Disaster
Assistance Act of 1988, are treated as insurance proceeds received
as a result of destruction or damage to crops.

Description of Proposal

S. 1814 would amend the special rule of section 451(d) to
allow a cash method taxpayer to elect to accelerate (or defer) the
recognition of certain disaster-related payments so long as the
taxpayer establishes that, under the taxpayer’s practice, income
from the crops lost in the disaster would have been accelerated (or
deferred). The bill also would expand the payments for which these
elections are available to include disaster assistance received as
a result of destruction or damage to crops caused by drought,
flood, or other natural disaster, or the inability to plant crops
because of such a disaster, under any Federal law (rather than only
payments received under the Agricultural Act of 1949, as amended,
or title II of the Disaster Assistance Act of 1988).

Thus, for example, the bill would allowa calendar-year, cash
method taxpayer who has received disaster assistance payments in
1994 relating to the destruction of crops by a flood in 1993 to
elect to treat such payments as received in 1993, so long as the
taxpayer establishes that, under the taxpayer's practice, income
from such crops would have been reported in 1993. Without the
benefit of the bill, the income of such a taxpayer would be
"bunched" in 1994, possibly resulting in the loss of itemized
deductions in 1993, a higher marginal income tax rate in 1994, and
the loss of several AGI-based deductions and exemptions in 1994.

Effective Date

S. 1814 would be effective for payments received after
December 31, 1992, as a result of destruction or damage occurring
after such date.



Indexation of Threshold Applicable to Excise Tax on Luxury
Automobiles

Present Law

The 1993 Act indexed the threshold above which the excise
tax on luxury automobiles is to apply.

Description of Proposal

The proposal would correct the application of the indexing
adjustment so that the adjustment calculated for a given calendar
year would apply for that calendar year rather than in the
subsequent calendar year. This would conform the indexation to
that described in the conference report to the Omnibus Budget
Reconciliation Act of 1993.' The intent of Congress, as
reflected in the conference report, was that current year
indexation be effective on the date of enactment of the 1993 Act.
The proposal would, however, be effective on January 1, 1995, to
alleviate the difficulties that both taxpayers and the Treasury
would experience in administering a retroactive refund effective
for the period from August 10, 1993 through December 31, 1993.
(The proposal has no effect on the threshold for calendar year
1994. Under present law, the threshold for calendar year 1994
was indexed to $32,000, which is the same as it would be under
the proposal if the proposal were effective for calendar year
1994.)

' See Conference Report on H.R. 2264, Omnibus Budget

Reconciliation Act of 1993 (H. Rept. 103-213), August 4, 1993, at
page 558.