Municipal homeowner grants were taxable and reportable

Plain-English summary

A municipal corporation offered grants to eligible owner-occupants for installing approved home systems intended to address a local problem. Homeowners selected contractors and systems from approved lists and could receive the grants directly or direct payment to contractors. The IRS ruled that homeowners retained enough dominion and control for the grants to be gross income under section 61. The general welfare exclusion did not apply because eligibility was not based on individual or family need. Grants of at least $600 were reportable to homeowners on Form 1099-G, and direct contractor payments were separately reportable when the municipality's approval and inspection functions made it the payor for section 6041 purposes.

Ruling snapshot

• Question: Are the municipal grants excluded from homeowners' income, and may the municipality avoid information reporting for payments to homeowners or contractors?
• Outcome: denied
• Key authorities: IRC §§ 61, 6041; Treas. Reg. § 1.6041-1; Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955); Bailey v. Commissioner, 88 T.C. 1293 (1987); Rev. Rul. 2005-46

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202016001                                             Third Party Communication: Congressional
 Release Date: 4/17/2020                                       Date of Communication: May 16, 2019
 Index Number: 61.40-00, 6041.00-00
                                                               Person To Contact:
 ----------------------------                                  ----------------------------------------,
 ------------------------------------                          ID No. -----------------
 ----------------------------------                            Telephone Number:
 -------------------------------------------                   --------------------
  ---------------------------------                            Refer Reply To:
                                                               CC:ITA:B04
                                                               PLR-108847-19
                                                               Date:
                                                               January 15, 2020

LEGEND:

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

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

A=                        --------------------------------------------------------------------------

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

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

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

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

Department =              -------------------------------------------------------------

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

$x =                      -----------

$y =                      -----------

$z =                      -------------
PLR-108847-19                                            2

System F =                ------------------------------------------------------------------------------------------
                          ------------------------------------------------------------------------------------------
                          -------------------------------------------------------------------------

System G =                ----------------------------------------------------------------------

H=                        -------------------

%a =                      ------

$b =                      -----------


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

This is in reply to your request for rulings on behalf of Taxpayer that it is not subject to
an information reporting obligation under § 6041 of the Internal Revenue Code (Code)
with respect to grants it provides to homeowners under Program to assist with the costs
of installing new Systems and that the grants are not includible in the gross income of
the homeowners under § 61.

                                                    FACTS

Taxpayer is a duly formed municipal corporation formed under the laws of State.
Taxpayer has been experiencing A, although B. Taxpayer has determined that C and D
are the largest contributors to A. Taxpayer established Program under E with the intent
of reducing A. Department administers Program.

Program provides grants up to $x or $y on or behalf of eligible homeowners with
combined Federal adjusted gross income less than $z1 who install a System F. Under
E, homeowners residing in H that have Cs or Ds are not required to install new System
Fs or System Gs.2

Under Program, homeowners who have C or D and meet certain requirements can
apply for grants to assist with the costs of installing a new System F. The homeowner
and residence must meet a number of requirements to be eligible for a grant, including
the following:

1 Grant applicants with combined Federal adjusted gross income less than $z are eligible for grant awards

up to $x. Grant applicants with combined gross household income less than or equal to %a of the most
current area median income as established by the United States Department of Housing and Urban
Development (HUD) are eligible to receive grant awards up to $y; for 2018, %a of the current area median
income of E as established by HUD is $b.
2 Homeowners who replace a C or D are not allowed to install another C or D, but are not required to

install a System F. Instead, they are allowed to install a System G (at minimum), although Program does
not provide grants for the purchase or installation of a System G.
PLR-108847-19                                3


   i.   the homeowner’s residence is located in H;
  ii.   the residence is not a rental property;
 iii.   the residence is single-family, owner-occupied year round, and the homeowner’s
        primary residence;
 iv.    the homeowner is current on payment of property taxes on the residence; and
  v.    the homeowner does not use the property as a place of business, other than a
        home office that does not require additional kitchen use or customer access.

A homeowner applying for a grant must complete a grant application and select an
approved System F and approved contractors to design and manufacture/install the
System from lists approved by Department. Taxpayer represents that the list of
approved Systems F and G and the list of approved contractors are the same whether
or not a homeowner applies for a grant under Program. In other words, any homeowner
who decides to replace a C or D must select an approved System F or G and use an
approved contractor. As part of the grant application process, homeowners must
submit to Department for review and approval their choice of contractor(s) and plans for
the new System F. The on-site construction of a System F is designed and supervised
by the contractors (various design professionals, installers, and manufacturers) in
coordination with the homeowner. Taxpayer has the right to inspect all System Fs (and
System Gs) installed by homeowners under its jurisdiction, regardless of whether the
homeowner receives a grant award under Program.

Under the terms of Program, Taxpayer inspects the new System after installation is
complete. Once the installed System F is inspected and approved by Taxpayer and the
grant agreement is executed, the grant award is paid to the homeowner or the
contractors. Some grants are paid to homeowners and some homeowners exercise the
option to have their grants paid directly to the contractors who design and/or
manufacture/install the System Fs. Some homeowners have also received additional
grants funded by the State and administered by Taxpayer. In addition to the cap on
grant amounts ($x or $y), the grant amount awarded to each homeowner is limited to
reimbursement of specified costs actually incurred by the homeowner in connection with
the design, purchase, and installation of a System F.

Under the terms of the grant, the homeowners agree that they are responsible to
maintain, at their own expense, the System F once installed on their properties. The
executed grant documents include property descriptions so that the same can be
recorded in the County Clerk’s office (to achieve public notice of the representations of
the grant recipient regarding the use of funds), acceptance of the obligations associated
with enhanced System F maintenance, and the right for Taxpayer to access the
property for the purposes of inspecting the System F and related testing. Homeowners
who agree to the terms of the grant do not grant an easement or other property right to
Taxpayer. Any homeowner grant recipient under Program that is found to have made a
material misrepresentation in the grant application, negligently or intentionally failed to
operate a maintain a System F to the point that it is damaged beyond repair, or has
PLR-108847-19                                 4

removed a System F without prior written approval of Department, is obligated to repay
the entire grant amount.

Taxpayer has requested rulings that the proceeds of the grants paid by Taxpayer under
Program are not includible in the homeowners’ gross income pursuant to § 61 of the
Code, and therefore Taxpayer is not required to file Forms 1099-G, Certain Government
Payments, reporting the grants paid to the homeowners, or furnish payee statements to
the homeowners. Taxpayer’s ruling request relates to two situations:

   a. The grant is paid directly to third party contractors, and not directly to the
      homeowner
   b. The grant is paid directly to the homeowner

                                  LAW AND ANALYSIS

Income Taxation

Section 61(a) of the Code provides that, except as otherwise provided, gross income
means all income from whatever source derived. The term “income” is broadly defined
as “instances of undeniable accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion.” Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 429-433 (1955). It is well-established that the payment of the expenses of a
taxpayer by another is includible in the taxpayer’s gross income. See, e.g., Old Colony
Trust v. Commissioner, 279 U.S. 716, 729-730 (1929).

In Bailey v. Commissioner, 88 T.C. 1293 (1987), acq. on another issue, 1989-2 C.B. 1,
the court held that the recipient of a façade grant lacked complete dominion and control
over the façade because (i) the recipient was required to grant an easement to the city's
urban renewal agency, and (ii) the city's urban renewal agency maintained substantial
control over the rehabilitation work performed on the façade by selecting the contractor,
negotiating the terms of the contract, and paying for the work that was performed on the
façade. Further, the recipient did not know the amount of the façade grant when he
signed the agreement and did not receive any of the grant payments. Accordingly, the
cost of the rehabilitation work performed was not included in the recipient's gross
income and was excluded from the recipient’s basis in the property. Id. at 1301.

These grants of up to $y that Taxpayer provides to or on behalf of homeowners under
Program to assist with the costs of installing System Fs are accessions to wealth that
are includible in their gross income under § 61, unless an exclusion applies.
Commissioner v. Glenshaw Glass Co., 348 U.S. at 429-433.

Here, the terms of Program indicate that the homeowners retain significant dominion
and control over selecting and constructing their System Fs and negotiating the terms of
contracts with contractors. The homeowners also do not grant an easement to
Taxpayer. Additionally, the homeowner grant recipients have dominion and control over
PLR-108847-19                                5

the payments; they can choose to receive the funds directly or to have the funds paid on
their behalf to their contractors. Therefore, the grant payments are includible in the
gross income of the homeowners, unless an exclusion applies. Our analysis is the
same whether the grant payments are made to the homeowners or to the contractors.
See Old Colony Trust v. Commissioner, 279 U.S. at 729.

General Welfare Exclusion

Although § 61 provides for broad includability in gross income, the Internal Revenue
Service (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. at 1300, 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”.

In Rev. Rul. 76-395, 1976-2 C.B. 16, the Service ruled that payments made to low-
income individuals primarily in order to subsidize home improvements necessary to
correct building code violations and thereby provide safe and decent housing were
excluded from the recipients’ income under the general welfare exclusion. Payments
based on disability also have qualified for exclusion under the general welfare doctrine.
Rev. Rul. 57-102, 1957-1 C.B. 26 (state grants to the blind). Additionally, Rev. Rul. 76-
144, 1976-1 C.B. 17, holds that grants 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.

Conversely, in Rev. Rul. Rev. Rul. 76-131, 1971-1 C.B. 16, the Service ruled that the
general welfare exclusion does not apply to bonuses paid by state to long-time
residents because the bonuses were payable to any State resident that met the age and
residency requirements and were not based on need.

Based on the facts submitted, we conclude the grants provided and administered by
Taxpayer to or on behalf of homeowners under Program are not based on individual or
family need. Instead, the grant awards of up to $y are based on the location of the
home in H and meeting other eligibility requirements. Additionally, by contrast with the
grants described in Rev. Rul. 76-144, the grants provided and administered by
Taxpayer to or on behalf of the homeowners under Program are not paid as a result of a
PLR-108847-19                                6

disaster. Rather, they are paid to eligible homeowners to encourage construction of
new System Fs to help reduce A.

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

Information Reporting

Section 6041(a) and Treas. Reg. § 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 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. Treas. Reg. § 1.6041-1(a)(2).

The section 6041 information reporting requirement applies to payments made during
the calendar year to another person of “fixed or determinable income.” Treas. Reg. §
1.6041-1(a). Treas. Reg. § 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 section
6041, “income” means “gross income”.

The information reporting requirements of section 6041 may also apply to payments
made by the United States or a state. Treas. Reg. § 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
Treas. Reg. § 1.6041-1. Treas. Reg. § 1.6041-1(i) provides, in part, that information
returns on Forms 1096, Annual Summary and Transmittal of U.S. Information Returns,
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.

As determined above, each grant of $600 or more that Taxpayer, which is described in
Treas. Reg. § 1.6041-1(i), provides to homeowners under Program is gross income to
homeowners that is fixed in amount under Treas. Reg. § 1.6041-1(c). Therefore, the
amount of the grant is reportable pursuant to section 6041. Form 1099-G is used to
report taxable grants from local governments.

The information returns must be filed with respect to the payment of the grant to the
homeowner, regardless of whether the payment is made to the homeowners or to third
party contractors. The homeowner is the recipient of the income. Treas. Reg. §
PLR-108847-19                                7

1.6041-1(f) provides that the amount to be reported as paid to a payee is the amount
includible in the gross income of the payee (which in many cases will be the gross
amount of the payment before fees, commissions, expenses or other amounts owed by
the payee to another person have been deducted), whether the payment is made jointly
or separately to the payee and another person. See Treas. Reg. § 1.6041-1(f)(2),
Example (2). Also see Treas. Reg. § 1.6045-5(f), Example (3).

Taxpayer has also requested a ruling as to whether information reporting under section
6041 is required with respect to amounts paid directly to contractors for work under
Program. Such amounts are paid on behalf of the homeowners and are proceeds of the
homeowners’ grants.

Treas. Reg. § 1.6041-1(e)(1) provides that a person that makes a payment in the
course of its trade or business on behalf of another person is the payor that must make
a return of information with respect to that payment if under all the facts and
circumstances, that person:

      (1)        performs management or oversight functions in connection with the
                 payment (this excludes a person who performs mere administrative or
                 ministerial functions such as writing checks at another’s direction), or
      (2)        has a significant economic interest in the payment that would be
                 compromised if the payment were not made (such as a lien on
                 property to which the payment relates, or loss of collateral).

Whether a person performs management or oversight functions with respect to a
payment is a factual determination. The examples under this regulation indicate that a
person performs management or oversight functions when the person exercises some
or all of the following functions: selecting the contractor, negotiating the amount of the
payments, monitoring the progress of the project, approving payments, and conducting
inspections to determine whether work is completed. See Treas. Reg. §1.6041-1(e)(2),
Examples (1), (4) and (7).

Taxpayer represents that grant recipients select design professionals and
manufacturer/installers from a pre-approved list provided by Taxpayer. E provides that
the work performed under the program must comply with conditions in the Taxpayer’s
approval document and that Taxpayer inspects the work of the contractors prior to
disbursement of the grant proceeds. E further provides that Taxpayer, with the consent
of the grant recipients, may make direct payment of the grant proceeds to contractors,
allocated in such a manner as determined by Department. Under the facts contained in
these representations, Taxpayer performs management or oversight over the payments
made to contractors on behalf of the homeowners, and thus is the payor for purposes of
information reporting.

Accordingly, Taxpayer must file information returns reporting payments to contractors
for work performed for homeowners, and furnish payee statements to the contractors.
PLR-108847-19                                   8

Such payments are reportable under section 6041(a) as nonemployee compensation.
Reporting is not required if the payment is to an exempt recipient described in Treas.
Reg. §1.6041-3(p), such as a corporation. Forms 1096 and 1099 are used for this
reporting. Nonemployee compensation is reported on Form 1099-NEC, Nonemployee
Compensation.3

                                       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 (whether paid directly to homeowners or to third party contractors on their
behalf) because the grants are includible in the homeowners’ gross income under § 61.
If Taxpayer pays third party contractors on behalf of the homeowners, Taxpayer is also
subject to the information reporting requirements of § 6041(a) and (d) with respect to
the third-party contractors because Taxpayer exercises management or oversight
functions over the payments.

The 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.

                                        Sincerely,




                                        Angella L. Warren
                                        Branch Chief, Branch 4
                                        (Income Tax & Accounting)




3 Payments for nonemployee compensation made in 2019 should be reported on Form 1099-MISC,

Miscellaneous Income.