California's Middle Class Tax Refund is a federal income?

Technical topics regarding tax preparation.
#21
Posts:
964
Joined:
10-Jul-2022 9:41am
Location:
Northern California
HenryDavid wrote:Why does California think it’s income? Why is California issuing a 1099?

Actually, the Franchise Tax Board doesn’t know for sure whether it's income. They're saying that it "may be." I think that they’re just being cautious by issuing the 1099. They say this:

The MCTR payments may be considered federal income. As such, 1099-MISC for MCTR payments of $600 or more will be issued. You should consult the IRS or your tax professional regarding the federal tax treatment of these payments.

https://www.ftb.ca.gov/about-ftb/newsroom/middle-class-tax-refund/help.html

Spidell Publishing, a private company that offers tax advice, is the one saying it’s taxable for Federal purposes. But many of us think that they’re wrong and that they haven't considered the general welfare exclusion.

SumwunLost wrote:What is the disaster that caused the payments to be made?

While most of the rest of the country was paying $5.00 for a gallon of gasoline, Californians were paying $6.50 to $7.50. It was higher in certain parts of CA than others. This, along with the high cost of diesel, caused prices of everything that had to be trucked, from construction materials to groceries, to shoot up, and they’re still pretty high.
 

#22
Beagle  
Posts:
192
Joined:
16-Jan-2020 3:15pm
Location:
Freelander
HenryDavid wrote:Why does California think it’s income? Why is California issuing a 1099?


YEP. The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it. At this point the IRS isn't pointing to a rule and saying it applies and until they do, it's income.
 

#23
Posts:
964
Joined:
10-Jul-2022 9:41am
Location:
Northern California
Beagle wrote:The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it.

The "specific rule" here is the general welfare exclusion.
 

#24
Beagle  
Posts:
192
Joined:
16-Jan-2020 3:15pm
Location:
Freelander
NoCalCPA85 wrote:
Beagle wrote:The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it.

The "specific rule" here is the general welfare exclusion.


So you are saying the IRS has ruled on this?
 

#25
Nilodop  
Posts:
19187
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
I don't think "income" is defined in Code or Regs., but maybe in cases, etc. Absent a definition, it's what the word commonly means. And if it's not "income", what else is it? Where would it go in a financual statement on GAAP?

But that does not necessarily mean it's taxable income. There are many exclusions from gross income, both statutory and otherwise, such as the general welfare one.
 

#26
Posts:
964
Joined:
10-Jul-2022 9:41am
Location:
Northern California
Beagle wrote:So you are saying the IRS has ruled on this?

Not specifically regarding the payment that we're discussing here, but in many other similar types of situations, the IRS has applied the general welfare exclusion, so the IRS has provided us with rules to follow to see if that exclusion applies. I cited two Rev. Procs. in my posts above.
 

#27
JAD  
Posts:
4106
Joined:
21-Apr-2014 8:58am
Location:
California
Beagle wrote:
HenryDavid wrote:Why does California think it’s income? Why is California issuing a 1099?


YEP. The IRS still has to rule but when you receive a 1099Misc it is INCOME and must be reported unless there is a specific rule to site which excludes it. At this point the IRS isn't pointing to a rule and saying it applies and until they do, it's income.


Not always true. This is a perfect example. CA will issue 1099s in case it is income. CA is punting the issue to each individual and his/her tax preparer to take a position. The fact that the state issues 1099s in case it is income does not mean that the issue is resolved.
 

#28
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
the 1099-Misc is for reporting “income” - the payer has to make the call for issuing the 1099, not the payee

Whether it’s taxable to the payee (for whatever reason) is a separate discussion
 

#29
EZTAX  
Posts:
1635
Joined:
24-Apr-2014 6:48pm
Location:
California
I really don't understand why someone high up at the FTB cannot reach out to the IRS and get a definitive ruling on this. Think about how many countless hours of IRS staff and tax preparer energy would be saved if this was just resolved one way or another.

About 12% of the US population lives in Califronia. Think of how much more efficent it would be for everyone involved to get this resolved before tax season begins, Even better to stop the 1099's from being issued in the first place. How many thousands of phone calls would this prevent?
 

#30
Nilodop  
Posts:
19187
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
It's known as the "not my job" syndrome.
 

#31
Posts:
756
Joined:
15-Jun-2019 8:24am
Location:
Virginia
EZTAX wrote:I really don't understand why someone high up at the FTB cannot reach out to the IRS and get a definitive ruling on this.


I think the FTB (Franchise Tax Board) probably did, it might be the IRS who refuse to provide a clear answer. After all, it is more work to issue 1099-MISC than get a clarification from the IRS. Do they (the FTB) have more access than us, and can get a written response?

I vaguely remember seeing a state stated in their website that they could not get an answer from the IRS when I looked up the federal taxability of a state income issue.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#32
Posts:
506
Joined:
10-Feb-2015 12:14pm
Location:
California
I didn't see a mention of when is it taxable income. I assume when it's received. CA has been late in issuing the payments and some were supposed to be mailed out by December 31. I assume clients will receive a 1099 but it may not be taxable until 2023.
 

#33
EZTAX  
Posts:
1635
Joined:
24-Apr-2014 6:48pm
Location:
California
Still trying to figure out how we are going to deal with this. Hoping for guidance.

Did a quick google search hoping for a miracle. Found this:

"Is middle class tax refund taxable by IRS?
Although the IRS has not issued guidance on California's payments, “because the middle-class tax refund is not considered a return of taxes, it would not be taxable,” Lisa Greene-Lewis, a spokeswoman for TurboTax, which makes tax-preparation software, said via email."

What logic!

I guess that settles it! :lol: :shock: ;)
 

#34
JAD  
Posts:
4106
Joined:
21-Apr-2014 8:58am
Location:
California
I included a couple of items about this in my organizer. I explained that the law is unclear, that professionals do not agree, that there is a general welfare exception that seems to apply that supports not taxing the $$, that we can take a position but if the IRS provides clarity later, they will receive an assessment. Then I ask what tax position they want to take. (a) Nontaxable with the chance that we later learn that this was wrong, and they will have to pay up, or (b) pay up now to avoid any future issues.

The amounts at issue are small. We have a reasonable basis. This is not worth a lot of time. Communicate in the most efficient way possible and let the client make the decision. IMO.
 

#35
Posts:
964
Joined:
10-Jul-2022 9:41am
Location:
Northern California
NoCalCPA85 wrote:Spidell Publishing, a private company that offers tax advice, is the one saying it’s taxable for Federal purposes. But many of us think that they’re wrong and that they haven't considered the general welfare exclusion.

In the manual for their Federal & Calif. Tax Update, Spidell Publishing has changed their position. They are now saying that the general welfare exemption might apply. They say that it is "an open question for which we will need guidance from the IRS. In the interim, tax professionals will have to exercise their best judgement."
 

#36
EZTAX  
Posts:
1635
Joined:
24-Apr-2014 6:48pm
Location:
California
Just took their annual tax workshop and Renee Rodda (VP) said confidently that it was taxable.

I am still not convinced and am upset that this will consume time needlessly.

Our current plan (thanks for those that put this out above) is to tell clients that it is unknown at this time and they can play it either way. We will then have them sign a CYA saying we explained the situation to them and noting the choice they made and reminding them that they will be responsible for interest, penalties and taxes owed if they get a letter in the next few years.

Max taxable should not be much more than $200 so interest and penalties would be minimal.

We will put a copy of the signed letter in their copy so when they call to complain we will be able to remind them!
 

#37
Posts:
964
Joined:
10-Jul-2022 9:41am
Location:
Northern California
EZTAX wrote:Just took their annual tax workshop and Renee Rodda (VP) said confidently that it was taxable.

Why would she say that when she's contradicted by Spidell's own written manual (page 8-2)?
 

#38
Posts:
309
Joined:
7-Jul-2014 6:39pm
Location:
California
My client just sent me a copy of the 1099-Misc. It's box 3 other income. The payer box reads CA FTB - MCTR.
 

#39
Posts:
964
Joined:
10-Jul-2022 9:41am
Location:
Northern California
I think that another argument could be made for exclusion. Sec. 139. It excludes from income a “qualified disaster relief payment.” 139(b)(1) says that this is an amount paid “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” 139(c)(2) says that a federally-declared disaster is a “qualified disaster.”

The CA law (AB 192) says that the purpose of the MCTR was to provide financial relief for the economic disruptions that resulted from the COVID-19 pandemic. COVID-19 was a federally declared disaster. See Notice 2020-18. https://www.irs.gov/pub/irs-drop/n-20-18.pdf

So, doesn’t this exclusion apply as well?
 

#40
JAD  
Posts:
4106
Joined:
21-Apr-2014 8:58am
Location:
California
Spidell is just one opinion, nothing more. I subscribe, and I am grateful for the issues that they call to my attention. But it is not unusual at all for someone to make a statement that is not completely correct and omit the nuances that could cause a professional to come to a different conclusion. Or it seems like they want to conclude on something too quickly, and they get it completely wrong. I was once watching a webcast and they made a firm statement about limitations on the deduction of interest expense on real estate held for investment. I typed in a comment, pointing out flush language in 163 that said opposite of what they were saying. The reply was along the lines of "we are following the IRS's position as indicated in the form instructions." That's fine, but one source is more authoritative than the other, and they should alert the class that the instructions are not consistent with the IRC and there might be some thought that needs to be given to the issue. Just one example.

An instructor that I had at Golden Gate University said that they are good for sound bites. I think that is a little harsh, but even just the conversation here shows that the status of the MCTR as federal income is not settled.
 

PreviousNext

Return to Taxation



Who is online

Users browsing this forum: CaptCook, DavidG, Google [Bot], Google Adsense [Bot], HowardS, RazorbackCPA and 71 guests