n-99-3.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

Treatment of Certain Payments Received as Temporary Assistance
for Needy Families (TANF)

## Notice 99-3

### SECTION 1. PURPOSE

This notice addresses the federal income and employment tax
consequences of payments received by individuals with respect to
certain work activities performed in state programs under part A
of title IV of the Social Security Act, as amended by the
Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (PRWORA), Pub. L. No. 104-193, 110 Stat. 2105 (August 22,
1996) (TANF payments) . The notice sets forth certain conditions
under which TANF payments are not income, earned income, or wages
for federal income and employment tax purposes. The Treasury
Department and the Internal Revenue Service intend to issue
regulations that will address the federal income and employment
tax consequences of TANF payments. It is generally expected that
the regulations will be consistent with this notice and,
therefore, will be effective retroactively, to this extent, to
December 17, 1998.

SECTION 2. SCOPE

This notice addresses only the treatment of TANF payments
under certain income and employment tax provisions of the
Internal Revenue Code. Because this notice is based on the
"general welfare doctrine" (see section 4.01, below), which is
unique to the determination of federal tax liability, this notice

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does not determine the treatment or effect of TANF payments (or
determine whether an employment relationship exists) under any
other provision of law, including the Fair Labor Standards Act
and other federal and state employment laws. For purposes of the
analysis set forth herein, however, it is assumed that the
recipient of the TANF payments is a common law employee. This
notice does not reach a determination as to whether the recipient
of TANF payments is a common law employee or is self-employed.
SECTION 3. BACKGROUND

Congress reformed the welfare system through the enactment
of PRWORA, which replaced Aid to Families with Dependent Children
(AFDC) with Temporary Assistance for Needy Families (TANF) . AFDC
required individuals to perform some work activities in order to
continue to receive public assistance. TANF provides states with
more flexibility than they had under AFDC to determine basic
eligibility rules and benefit amounts. TANF also requires that
specified percentages of individual recipients engage in work
activities and imposes penalties on the states for non-compliance
with that requirement.

For purposes of TANF, the term "work activities" is defined
under $ 407 (d) of the Social Security Act, 42 U. S.C. § 607 (d) ,
as:

(1) unsubsidized employment;

(2) subsidized private sector employment;

(3) subsidized public sector employment;

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(4) work experience (including work associated with the
refurbishing of publicly assisted housing) if sufficient private
sector employment is not available;

(5) on-the-job training;

(6) job search and job readiness assistance;

(7) community service programs;

(8) vocational educational training (not to exceed 12 months
with respect to any individual) ;

(9) job skills training directly related to employment;

(10) education directly related to employment, in the case
of a recipient who has not received a high school diploma or a
certificate of high school equivalency;

(11) satisfactory attendance at secondary school or in a
course of study leading to a certificate of general equivalence,
in the case of a recipient who has not completed secondary school
or received such a certificate; and

(12) the provision of child care services to an individual
who is participating in a community service program.

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

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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."

. 02 Application of General Analysis to Certain TANF Payments.
Due to the flexibility TANF affords states to determine
basic eligibility rules and benefit amounts, a TANF payment may
be made both for the promotion of the general welfare and as

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compensation for services. In these cases, it is extremely
difficult to characterize the basic purpose of the payments. It
is also not practically feasible to determine the relative
proportion of the payment each purpose represents.

In many of these cases, TANF payments are received in lieu
of (and generally in amounts no greater than) payments the
individual formerly received or would 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

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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 conditions 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:

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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) 622-6060 regarding the EIC and employment
tax issues in this notice (not toll-free calls) .