Home hazard-mitigation grants required information reporting

Plain-English summary

A state entity offered grants to selected homeowners for structural work intended to help their homes withstand a future hazard. Eligibility depended on the home's location, age, physical characteristics, and the homeowner's insurance relationship with the entity, not individual or family financial need. The IRS concluded that the grants gave homeowners substantial improvements and were gross income under Section 61. They did not qualify for the general welfare exclusion because they were not need-based or paid after a disaster, and they were not qualified disaster mitigation payments under Section 139(g) because they were not paid under either named federal statute. The state entity therefore had to file information returns and furnish statements under Section 6041 for grants of at least $600.

Ruling snapshot

• Question: Were the homeowner mitigation grants excluded from income so that the state entity had no Section 6041 reporting duty?
• Outcome: Denied; grants of $600 or more required information reporting.
• Key authorities: IRC §§ 61, 139(g), and 6041; Treas. Reg. § 1.6041-1; Rev. Rul. 2005-46.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201816004 [Third Party Communication:
Release Date: 4/20/2018 Date of Communication: Month DD, YYYY]
Index Numbers: 6041.00-00; 61.40-00
Person To Contact:
---------------------------------- ---------------------, ID No. ------------------
------------------------ Telephone Number:
------------------------------------------- ----------------------
---------------------------------- Refer Reply To:
--------------------------------- CC:ITA:04
PLR-122082-17
Date:
January 11, 2018

LEGEND:

Taxpayer = --------------------------------------------------------------------

Program = ----------------------------------------

State = ---------------

B = -------------------------------------

C = -------------------------------------------

D = -----------------------------------------------

E = -------------------

F = --------------------

G = --------------

H = ---------

$x = --------

$y = --------

Dear ------------------:

This in reply to Taxpayer’s request for a ruling that it is not subject to an information
reporting obligation under § 6041 of the Internal Revenue Code with respect to

PLR-122082-17 2

homeowners for grants that it provides to homeowners under Program to H their homes
to better withstand B because the grants are not gross income to the homeowners
under § 61.
FACTS

Taxpayer, an integral part of State, was established following D to mitigate C in State.
Taxpayer established Program to provide grants of up to $x to or on behalf of eligible
homeowners who wish to H their homes to protect against B. The total cost of an H
ranges from approximately $x to $y. Homeowners bear costs in excess of $x. Program
involves securing a house to its foundation and preventing lateral movement in the
event of F. The potential for significant harm reduction, in terms of avoiding both
property damage and ensuring safety of occupants motivated Taxpayer to pursue
Program.

Homes that undergo an H are more likely to withstand B, reduce the likelihood of E
following F, and decrease G resulting from F. Specifically, Program provides grants to
or on behalf of homeowners of owner-occupied residences whose houses meet
requirements demonstrating a need for certain building-code-based structural
reinforcements. Eligibility for Program’s pilot phase is limited to certain Taxpayer
policyholders whose persistency as Taxpayer policyholders, age of dwelling
construction, and location of dwelling will allow Taxpayer to reduce its cost of insuring
eligible dwellings and reduce the expense of transferring the insured risk to reinsurers,
allowing Taxpayer to provide these homeowners with a substantial discount on
Taxpayer premiums.

Taxpayer represents that Program is limited to homeowners and homes where it will
(i) result in the greatest cost savings to Taxpayer, in terms of reinsurance, loss
payments and other expenses, and (ii) save State resources by preventing catastrophic
damage to communities. Program is not available to all State homeowners but is
limited to individuals and families whose residences are particularly vulnerable to
structural damage caused by an F.

                              LAW AND ANALYSIS

Income Taxation

Section 61(a) of the Internal Revenue Code provides that, except as otherwise
provided, gross income means all income from whatever source derived. Under § 61,
Congress intends to tax all gains and undeniable accessions to wealth, clearly realized,
over which taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co.,
348 U.S. 426 (1955), 1955-1 C.B. 207.

Governmental grants are includible in gross income under § 61 unless excluded from
gross income by law. See Rev. Rul. 85-39, 1985-1 C.B. 21 (dividend payments Alaska

PLR-122082-17 3

makes to all adult residents to encourage them to remain in the state and thereby
reduce social, economic, and political instability are gross income under § 61). “The
corollary to § 61(a)'s broad construction, namely [is], the ‘default rule of statutory
interpretation that exclusions from income must be narrowly construed.’” Commissioner
v. Schleier, 515 U.S. 323, 328 (1995).

Program results in a structural and substantial improvement to the home that is more
than just an incidental benefit to homeowners. Homeowners obtain the tangible
benefits of a safer and more desirable home better able to withstand B. An H reduces
the possibility of E in the event of an F, and minimizes the duration of any E. Thus,
grants that Taxpayer provides to or on behalf of homeowners under Program to H their
homes to better withstand B are accessions to wealth that are includible in the
recipients’ taxable income under § 61, unless excluded from income under the general
welfare exclusion or § 139(g).

General Welfare Exclusion

Although § 61 provides for broad includability in gross income, the Service has
consistently held that payments made to or on behalf of individuals by governmental
units under legislatively provided social benefit programs for the promotion of general
welfare are not includible in a recipient’s gross income (general welfare exclusion). To
qualify under the general welfare exclusion, payments must (i) be made from a
governmental fund, (ii) be for the promotion of the general welfare (that is, based on
individual or family need), and (iii) not represent compensation for services. See Rev.
Rul. 2005-46, 2005-2 C.B. 120. In Bailey v. Commissioner, 88 T.C. 1293, 1300 (1987),
acq. on another issue, 1989-2 C.B. 1, the court noted that the general welfare exclusion
has been applied when “the grant was received under a program requiring the individual
recipient to establish need” and that the exclusion did not apply to “[g]rants received
under social welfare programs that did not require recipients to establish individual need
….”

Rev. Rul. 76-144, 1976-1 C.B. 17, holds that a grant received by individuals under the
Disaster Relief Act of 1974 to alleviate the suffering and damage resulting from a
disaster is in the interest of general welfare and not includible in gross income. Rev.
Rul. Rul. 2003-12, 2003-1 C.B. 283 (Situation 1), holds that payments individuals
receive under a state's program to pay or reimburse unreimbursed reasonable and
necessary medical, temporary housing, or transportation expenses they incur as a
result of a flood are excluded from gross income under the general welfare exclusion.

Although, in general, payments to businesses do not qualify under the general welfare
exclusion because the payments are not based on individual or family need, Rev. Rul.
77-77, 1977-1 C.B. 11, provides that nonreimbursable grants made under the Indian
Financing Act of 1974 to Indians to expand profit-making Indian-owned economic
enterprises on or near reservations are excludable from gross income under the general

PLR-122082-17 4

welfare exclusion. In addition, Rev. Proc. 2014-35, 2014-26 I.R.B. 1110, conclusively
presumes that the individual need criterion of the general welfare exclusion is met for
payments under certain programs of Indian tribal governments in recognition of the
unique circumstances of Indian tribes and tribal governments, including their inherent
sovereignty and government-to-government relationship with United States and their
unique social, cultural, and economic issues.

The grants provided by Taxpayer to or on behalf of homeowners under Program to H
their homes to better withstand B are not based on individual or family need. Instead,
Taxpayer’s grants up to $x, are based on the location of the home in State in areas
susceptible to F, the home’s age and physical characteristics, and the grant recipient
having an insurance policy with Taxpayer.

In addition, by contrast with the grants described in Rev. Rul. 76-144 and Rev. Rul.
2003-12 (Situation 1), the grants provided by Taxpayer to or on behalf of homeowners
under Program are not paid as a result of a disaster. Rather, they are paid to eligible
homeowners regardless of income to mitigate the effects of future disasters, not to
alleviate suffering and damage resulting from a disaster.

The conclusions applying the general welfare exclusion in Rev. Rul. 77-77 and Rev.
Proc. 2014-35 are based on the “unique social, cultural, and economic issues” of Indian
tribes and their members. See section 2.03 of Rev. Proc. 2014-35. Program, however,
is neither a program of an Indian tribal government nor designed to help members of
Indian tribes. Thus, Program does not meet the general welfare exclusion as applied
under Rev. Rul. 77-77 or Rev. Proc. 2014-35.

Accordingly, Program grants are not excludable from gross income under the general
welfare exclusion.

Qualified Disaster Mitigation Payments

Section 139(g)(1) provides that gross income shall not include any amount received as
a qualified disaster mitigation payment. Section 139(g)(2) defines qualified disaster
mitigation payment as meaning any amount which is paid pursuant to the Robert T.
Stafford Disaster Relief and Emergency Assistance Act (as in effect on the date of the
enactment of this subsection) or the National Flood Insurance Act (as in effect on such
date) to or for the benefit of the owner of any property for hazard mitigation with respect
to such property.

The grants provided by Taxpayer to homeowners under Program to H their homes to
better withstand B are not paid pursuant to the Robert T. Stafford Disaster Relief and
Emergency Assistance Act or the National Flood Insurance Act. Thus, consistent with
the principle the Supreme Court stated in Schleier, that “exclusions from income must

PLR-122082-17 5

be narrowly construed”, the grants are not excludable from gross income under
§ 139(g)(1).

Information Reporting

Section 6041(a) and § 1.6041-1(a)(1)(i) of the Income Tax Regulations provide, with
exceptions not applicable here, that all persons engaged in a trade or business and
making payment in the course of such trade or business to another person of rent,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable gains, profits, and income, aggregating $600 or more in the
taxable year must file an information return with the Internal Revenue Service. Under
§ 6041(d), the payor is required to furnish an information statement to the payee.
Forms 1096 and 1099 are used for this reporting. Section 1.6041-1(a)(2).

The § 6041 information reporting requirement applies to payments made during the
calendar year to another person of “fixed or determinable income.” Section 1.6041-1(a).
Section 1.6041-1(c) provides that income is fixed when paid in amounts definitely
predetermined. Income is determinable whenever there is a basis of calculation by
which the amount to be paid may be ascertained. As used in § 6041, “income” means
“gross income”.

The information reporting requirements of § 6041 may also apply to payments made by
the United States or a state. Section 1.6041-1(b)(1) clarifies that the term “persons
engaged in a trade or business” in § 6041 includes not only organizations engaged for
gain or profit, but also organizations the activities of which are not for the purpose of
gain or profit, for example, the organizations referred to in paragraph (i) of section
1.6041-1. Section 1.6041-1(i) provides, in part, that information returns on Forms 1096
and 1099 of payments made by a state, or political subdivision, agency or
instrumentality thereof, shall be made by the officer or employee of such state or
political subdivision, agency or instrumentality thereof, having control of such payments
or by the officer or employee appropriately designated to make such returns.

Each grant of $600 or more that Taxpayer, which is described in § 1.6041-1(i), provides
to homeowners under Program to H their homes to better withstand B is gross income
to homeowners that is fixed in amount under § 1.6041-1(c).

                                 CONCLUSION

Based strictly on the information submitted and the representations made, we conclude
that Taxpayer is subject to the information reporting requirements of § 6041(a) and (d)
with respect to homeowners for the grants Taxpayer provides to homeowners under
Program to H their homes to better withstand B because they are includible in the
homeowners’ gross income.

PLR-122082-17 6

This letter ruling is directed only to the taxpayer requesting it, and does not express or
imply an opinion on the federal tax consequences of any aspect of this transaction other
than that expressed in the preceding sentence. Section 6110(k)(3) provides that this
letter ruling may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations that
Taxpayer submitted under penalties of perjury. While this office has not verified any of
the material submitted in support of the request for rulings, it is subject to verification on
examination.

Taxpayer must attach to any income tax return to which it is relevant a copy of this letter
or, if it files its returns electronically, include a statement providing the date and control
number of this letter ruling.

In accordance with the Power of Attorney on file with this office we are sending copies
of this letter to your authorized representatives.

                                       Sincerely,



                                       Michael J. Montemurro
                                       Chief, Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)