rr-09-23.pdf

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# Part I

Section 126 .- Certain Cost-Sharing Payments
Forest Health Protection Program

26 CFR 16A.126-1

Rev. Rul. 2009-23

# ISSUE

Is the Forest Health Protection Program (FHPP) substantially similar to the type
of programs described in § 126 (a)(1) through (8) of the Internal Revenue Code, so that
the FHPP is within the scope of § 126(a)(9) and, thereby, all or a portion of cost-sharing
payments received under the FHPP is eligible for exclusion from gross income to the
extent permitted by § 126?

# FACTS

The FHPP, authorized under the provisions of § 8 of the Cooperative Forestry
Assistance Act of 1978, Pub. L. No. 95-313, 92 Stat. 368, as amended by Title XII,
§ 1218 of the International Narcotics Control Act of 1990, Pub. L. No. 101-624, 104 Stat.
3525, 3531, is a program to protect forests, trees, and wood products, stored wood, and

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wood in use directly on the National Forest System and, in cooperation with others, on
other lands in the United States.

The U.S. Forest Service administers the FHPP on behalf of the U.S. Department
of Agriculture (USDA), by working in partnership with state forestry and agriculture
agencies. The state agencies work with nonindustrial private forest landowners to
identify and implement appropriate management practices. The FHPP includes cost-
sharing assistance to landowners that volunteer to participate in the program.

A landowner who wishes to participate in the FHPP must enter into a contract or
cooperative agreement with the USDA pursuant to which the landowner agrees to
establish an acceptable integrated pest management strategy as determined by the
Secretary of Agriculture that will prevent, retard, control, or suppress gypsy moth
infestations, southern pine beetle infestations, spruce budworm infestations, or other
major insect infestations and receives cost-sharing payments in exchange. The cost-
sharing payments under the program are not less than 50 percent and not more than 75
percent of the cost of implementing the pest management strategy.

The Secretary of Agriculture has determined that cost-sharing payments under
the FHPP are primarily for the purpose of conserving and restoring woodlands
resources. In addition, the Secretary of Agriculture has informed the Treasury
Department that the USDA believes that the FHPP is a small watershed program.

# LAW AND ANALYSIS

Under § 126(a), gross income does not include the excludable portion of
payments received under certain conservation programs set forth in § 126(a)(1)

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through (8). Section 126(a)(9) provides that a small watershed program administered
by the Secretary of Agriculture also is eligible for § 126 treatment if the Secretary of the
Treasury or his delegate determines that the program is substantially similar to the type
of programs described in § 126(a)(1) through (8). See § 16A.126-1(d) of the Temporary
Income Tax Regulations Relating to the Partial Exclusion for Certain Cost-Sharing
Payments for rules permitting the Commissioner to make these determinations and
announce them in the Internal Revenue Bulletin, and for the definition of "small
watershed."

If the Commissioner has determined that a program is substantially similar to the
type of programs described in § 126(a)(1) through (8), taxpayers receiving
cost-sharing payments under that program must determine what portion (if any) of the
cost-sharing payments is excludable from gross income under § 126. Under § 126(b),
the excludable portion of a payment is limited to the portion that (1) is determined by the
Secretary of Agriculture to be made primarily for the purpose of conserving soil and
water resources, protecting or restoring the environment, improving forests, or providing
a habitat for wildlife, (2) does not increase substantially the annual income derived from
the property, and (3) is not properly associated with a deductible expense. See
§ 126(b) and § 16A.126-1, relating to the partial exclusion of certain cost-sharing
payments, to determine what portion of the cost-sharing payments is excludable from
gross income under § 126.

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# HOLDING

The Internal Revenue Service accepts the USDA's conclusion that the FHPP is a
small watershed program. Accordingly, the FHPP will be treated for purposes of § 126
as a small watershed program administered by the Secretary of Agriculture. In addition,
the Commissioner has determined that the FHPP is substantially similar, within the
meaning of § 126(a)(9), to the type of programs described in § 126(a)(1) through (8).

Payments received under the FHPP are limited to a percentage of the cost of
implementing an integrated pest management strategy and qualify as cost-sharing
payments. The cost-sharing payments received under the FHPP are eligible for
exclusion from gross income to the extent permitted by § 126.

See § 126(b) and § 16A.126-1 to determine the extent to which cost-sharing
payments under the FHPP are excludable from gross income under § 126.

# DRAFTING INFORMATION

The principal author of this revenue ruling is Jennifer C. Bernardini of the Office
of Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this revenue ruling, contact Ms. Bernardini at (202) 622-3110 (not a toll-free
call).