Information at Source

Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 200616031
Release Date: 4/21/2006
CC:ITA:4
POSTS-154417-05
Third Party Communication: State
Government
Date of Communication: November 2, 2005
UILC: 61.00-00, 6041.00-00 date: December 21, 2005 to: James E. Cannon
Associate Area Counsel
(Small Business/Self-Employed)
CC:SB:5:KCY from: Robert M. Brown
Associate Chief Counsel
(Income Tax and Accounting)
CC:ITA subject: ---
This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.
You have received inquiries concerning the federal tax treatment of payments made under ---
---) (hereinafter
“the statute”).

# FACTS

---recently enacted the statute providing for payments to certain individuals who filed ---personal income tax returns. Qualifying individuals received payments based on the adjusted gross income (AGI) and total number of exemptions shown on their ---personal income tax returns. The amount of a payment decreases as AGI increases and as the number of exemptions decreases. For example, the maximum payment is $--- to an individual with AGI under $---and -- or more exemptions, and the minimum payment is $--- to an individual with AGI over $---and --exemption.
POSTS-154417-05 2
Individuals were not eligible to receive a payment if (1) they were a dependent of another individual during the --- tax year, (2) they were not a resident of --- on the last day of the --- tax year, or (3) they were an inmate of a public institution for more than six months during the --- tax year. ---made the payments during ---.
The payments were made from surplus state funds. The Governor’s reason for calling the legislature into special session, and the legislature’s response to that call, indicate that:
• The payments were made to most of ---residents rather than to a narrow class of residents who are in economic need (needs-based general welfare payments).
• The payments were not income tax refunds of current and prior years’ state income taxes.
• The payments were not intended to be gifts.

# DISCUSSION

Income Tax Consequences to Recipients
Section 61(a) of the Internal Revenue Code provides that, except as otherwise provided, gross income means all income from whatever source derived. Rev. Rul. 85-39, 1985-1 C.B. 21, holds that recipients were required to include in gross income under § 61 a state’s payments of a part of its mineral wealth to all state residents that were made, in part, to reduce the harmful effects of population turnover by providing an incentive for residents to remain in the state. The payments provided for under the recently enacted ---statute are analogous to the payments described in Rev.
Rul. 85-39. See also Rev. Rul. 76-131, 1976-1 C.B. 16. In addition, there are no other provisions of the Code that would exclude the payments from gross income.
Therefore, the payments that ---made during ---are includible in the recipients’ gross income under § 61.
Information Reporting
You also asked us whether the payments are subject to information reporting. Section
6041(a) provides 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 of $600 or more in any taxable year shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the POSTS-154417-05 3 amount of such gains, profits, and income, and the name and address of the recipient of such payment. Section 6041(d) provides that every person required to make a return under § 6041(a) shall furnish certain information to each person with respect to whom such a return is required. Section 1.6041-1(b)(1) and (g) of the Income Tax Regulations provide that payments made by a state or a political subdivision are subject to this reporting requirement.
Pursuant to the statute, the state paid less than $600 to each individual. (The statute’s maximum payment is $---.) Accordingly, there is no reporting requirement under § 6041 for the payments if these are the only payments from the state to the individual for the year in question. We note, however, that if ---provides an individual with the payments described in this memorandum and other payments of income reportable under § 6041, such payments may be required to be aggregated for information reporting purposes. See § 1.6041-1(a)(1)(i)-(ii).
Please call ---at --- if you have any further questions. cc: Thomas R. Thomas CC:SBSE
Carol A. Campbell CC:WI
Martin B. Kaye CC:SB:5