SECTION 4. TREATMENT OF TANF

PAYMENTS

.01 General Analysis. The federal income and employment tax consequences of TANF payments generally are determined under the following analysis.

Payments by a governmental unit to an individual under a legislatively provided social benefit program for the promotion of the general welfare that are not basically for services rendered are not includible in the individual’s gross income and are not wages for employment tax purposes, even if the individual is required to perform certain activities to remain eligible for the payments. See Rev. Rul. 71–425, 1971–2 C.B. 76; Rev. Rul. 75–246, 1975–1 C.B. 24. Similarly, these payments are not earned income for Earned Income Credit (EIC) purposes. If, however, taking into account all the facts and circumstances, payments by a governmental unit are basically compensation for services rendered, even though some training is provided, then the payments are includible in the individual’s gross income and are generally wages for employment tax purposes. Rev. Rul. 75–246, 1975–1 C.B. 24. Similarly, such payments generally are earned income for EIC purposes.

In addition, § 32(c)(2)(B)(v) of the Internal Revenue Code (as added by § 1085(c) of the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788 (August 5, 1997), and effective for taxable years beginning after December 31, 1997) provides that earned income for EIC purposes does not include amounts received for “service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act, but only to the extent such amount is subsidized under such State program.”

January 11, 1999 10 1999–2 I.R.B.

have received under AFDC based upon the individual’s personal and family subsistence requirements. In these cases, the primary measure of the amount received is the personal or family need of the individual recipient rather than the value of any services performed.

These cases typically share, and can be identified by, common characteristics. In cases where the following three conditions are satisfied, TANF payments will be treated as made for the promotion of the general welfare and therefore will not be includible in an individual’s gross income; will not be earned income for EIC purposes; and will not be wages for employment tax purposes:

(1) The only payments received by the individual with respect to the work activity are received directly from the state or local welfare agency (for this purpose, an entity with which a state or local welfare agency contracts to administer the state TANF program on behalf of the state will be treated as the state or local welfare agency); (2) The determination of the individual’s eligibility to receive any payment is based on need and the only payments received by the individual with respect to the work activity are funded entirely under a TANF program (including any payments with respect to qualified state expenditures (as defined in § 409(a)(7)(B)(i)(I) of the Social Security Act)) and the Food Stamp Act of 1977; and (3) The size of the individual’s payment is determined by the applicable welfare law, and the number of hours the individual may engage in the work activity is limited by the size of the individual’s payment (as determined by applicable welfare law) divided by the higher of the federal or state minimum wage. The federal income and employment tax treatment of TANF payments that do not satisfy each of these three conditions is determined under the general analysis described in section 4.01, above.

REQUEST FOR COMMENTS

The Treasury Department and the Service invite comments on this notice and on the future regulations. In particular, comments are requested on the three con

ditions set forth in section 4.02 of this notice. Written comments should be submitted by February 15, 1999. An original and eight copies of written comments should be sent to:

Internal Revenue Service Attn: CC:DOM:CORP:R Room 5228 (IT&A:Br2) P.O. Box 7604 Ben Franklin Station Washington, DC 20044. or hand delivered between the hours of 8 a.m. and 5 p.m. to:

Courier’s Desk Internal Revenue Service Attn: CC:DOM:CORP:R (Notice 99-3) Room 5228 (IT&A:Br2) 1111 Constitution Avenue, NW Washington, D.C. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to: http://www.irs.ustreas.gov/prod/tax_regs/ comments.html (the IRS internet site). All comments will be available for public inspection and copying in their entirety.

FURTHER INFORMATION

For further information, contact Mr. Edwin B. Cleverdon at (202) 622-4920 regarding the income tax issues in this notice and Ms. Jean Casey at (202) 6226060 regarding the EIC and employment tax issues in this notice (not toll-free calls).

26 CFR 601.105: Examination of returns and claims for refund, credit, or abatement; determina- tion of correct tax liability. (Also Part I, sections 6302, 6656; 1.6302–2, 31.6302–1, 31.6302–2, 31.6302–4, 31.6302(c)–3, 40.6302(c)–1, 301.6656–1.)

Rev. Proc. 99–10

SECTION. 1. PURPOSE

This revenue procedure provides guidance with respect to the failure-to-deposit penalty provisions of § 6656 of the Internal Revenue Code, as amended by § 3304(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 742 (1998) (RRA). This revenue procedure describes

how a taxpayer may designate the application of its federal tax deposits for a particular return period in order to minimize the failure-to-deposit penalty under § 6656 with respect to deposits required to be made after January 18, 1999.