Payments from neighborhood restoration program taxable.

• Author: O'Driscoll, David

To restore and preserve older neighborhoods, city (C) operates a program (P) to convert property with multiple dwelling units, originally developed as either single-family residences or duplexes, back to their original use. Owners qualifying for benefits under P receive payments to compensate for conversion costs and lost rental income. If the payments to the benefit recipients are taxable, C will have to file information returns for them.

GWE

Under Sec. 61(a), gross income means all income from whatever source derived, except as otherwise provided. Under the general welfare exclusion (GWE), gross income does not include payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare; see, e.g., Rev. Ruls. 74-205, 1974-1 CB 20, and 98-19, 1998-1 CB 840.

To qualify under the GWE, payments must (1) be made from a governmental fund, (2) be for the promotion of the general welfare (i.e., generally based on individual or family needs) and (3) not represent compensation for services; see Rev. Ruls. 75-246, 1975-1 CB 24, and 82-106, 1982-1 CB 16. Payments to businesses generally do not qualify for the GWE, because they are not based on individual or family needs; see Bailey, 88 TC 1293 (1987), acq., 1989-2 CB 1.

In Rev. Rul. 76-395, 1976-2 CB 16, the Service ruled that payments made to low-income individuals primarily to subsidize home improvements necessary to correct building code violations and provide safe and decent housing were...