National Housing Law Project Housing Law Bulletin

Late last year the Rural Housing Service (RHS) instructed the Rural Development field staff, which administers RHS programs in the field, that it must report to the Internal Revenue Service (IRS) grants received by homeowners under the Section 509(c) compensation for construction defects program/1/ and under the Section 504 home repair program./2/ RHS made the determination after concluding that these grants constituted income to the homeowners./3/ Because the announcement effectively reversed over 20 years of agency practice of not reporting the grants to the IRS, one would have thought that RHS could have postponed its decision for several months until it sought and received clarification from the IRS. While it did not do so, to its credit it did ask the IRS for advice after the fact. On March 2, 1999, the IRS advised RHS that grants made under the Section 509(c) program are not considered income and that RHS did not have to report to the IRS grants made to homeowners under the program./4/

The IRS based its determination on a long-held agency position that payments made under legislatively provided social benefit programs for the promotion of general welfare are not includible in the recipient’s gross income. In support of that position, the IRS cited to a 1976 Revenue Ruling in which it determined that home rehabilitation grants received by low-income homeowners residing in a defined area of a city are in the nature of general welfare and therefore not includible in their gross income./5/

Since Section 509(c) grants are not considered income, the IRS also concluded that RHS is not obligated to report the grants to either the individual or the IRS.

While the IRS letter to RHS does not specifically address grants made to elderly homeowners under the Section 504 home repair program, it is clear that the IRS position is also applicable to those grants. Indeed, RHS staff has verbally informed NHLP staff that it will no longer report either Section 509(c) or Section 504 grants to the IRS.

Notes

1    42 U.S.C. § 1479(c) (West 1978 and 1999 Supp.).

2    Id., § 1474.

3    See RHS to Notify IRS of Borrowers Who Receive Compensation for Construction Defects Under Section 509(c) Program, 28 HOUS. L. BULL. 156 (Sept. 1998).

4    Letter of George Baker, Assistant to Branch Chief, IRS, to Jan E. Shadburn, Administrator, RHS (Mar. 2, 1999).

5    IRS Rev. Rul. 76-395, 1976-2 C.B.16 (1976).

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