Phoenix lawyer Bob Kamman, an occasional guest blogger and frequent commenter, turns 74 this week. He tells us that his clients won’t allow him to retire. And, some of them must file California returns, so he keeps up with developments west of the Colorado River.
Mr. Charles Rettig
I bet it feels great to be back in California, even with the recent bad weather and worse mass shootings. At least you are thousands of miles from the Capitol, where IRS is not always welcome or appreciated. Now that you are back among friends, though, you probably are expected to answer their tax questions. I can guess which one comes up the most: the MCTR.
Californians wish you had pushed IRS to answer this question before you left office November 12. After all, IRS should have anticipated it when Governor Newsom signed AB 192 into law on June 30, 2022.
More than 30 million beneficiaries know about Middle Class Tax Relief, but the rest of the country might want some details. It provided payments ranging from $200 to $1,050 for residents who filed a 2020 state income tax return with AGI less than $250,000 (single) or $500,000 (joint). Yes, in California that’s middle class.
But these were not tax rebates or tax refunds, because they weren’t based on whether tax was paid or how much. The General Assembly explained the purpose:
“Increased costs for goods, including gas, due to inflation, supply chain disruptions, the effects of the COVID-19 emergency, and other economic pressures have had a significant negative impact on the financial health of many Californians. The Legislature hereby finds and declares that the payments authorized . . .as added by this act, serve the public purpose of providing financial relief for Californians who may have been adversely impacted by these economic disruptions and do not constitute gifts of public funds within the meaning of Section 6 of Article XVI of the California Constitution.”
The state initiated direct deposits to more than 7 million filers, and then mailed another 9 million debit cards. Total cost: about $9 billion. And they haven’t finished yet.
The state law made it clear that these payments were not subject to state income tax. But apparently no one was sure how IRS would view them. So with an abundance of caution, envelopes and postage, the Franchise Tax Board (that’s what California calls its Department of Revenue) decided to send 1099-MISC forms to anyone who received $600 or more. The FTB explained it was doing this because “The MCTR payments may be considered federal income.”
Or, they may not be. Don’t ask them, ask IRS. It must be a difficult question, because so far there is no answer. And it has now become a subject of debate for tax practitioners.
There are those for whom “may be considered federal income” means “must be, if there is a 1099.” They are preparing and electronically filing returns already because they don’t want their clients to receive a CP-2000 notice proposing an assessment next year.
But there are others who reason that these payments come under the category of “general welfare.” The Internal Revenue Service has consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not includible in a recipient’s gross income (“general welfare exclusion”). See, e.g., Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 840. To qualify under the general welfare exclusion, payments must: (i) be made from a governmental fund, (ii) be for the promotion of general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Rev. Rul. 75-246, 1975-1 C.B. 24; Rev. Rul. 82-106, 1982-1 C.B. 16.
You see the problem here? And why it would be helpful to have a respected tax expert from California push IRS to decide how to answer this question, before the Taxpayer Service phone lines are jammed with Californians calling to ask what to do with their 1099 from the FTB?
The San Francisco Chronicle tried to get an answer from IRS in December. But it reported:
“The IRS could not provide a clear answer. ‘I can tell you, we are aware of it. California is not the only state doing this,’ IRS spokesman Raphael Tulino said. The only answer Tulino provided was this excerpt from IRS Publication 525. ‘In most cases, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but isn’t taxable.’”
Fortunately, there is still one Great California Hope left in D.C. who might be able to push for an IRS answer. She is National Taxpayer Advocate Erin Collins. Her job is to listen to everyone, but she might pay more attention to you if you could explain to her the importance of this matter. Please, send her a text or give her a call.
Thanks in advance,
P.S. Do you ever hear from Kevin McCarthy or Nancy Pelosi? They might also encourage IRS to provide guidance for their constituents.