The IRS has taken two positions which on the surface appear to conflict with each other.  Is anyone surprised?  On one hand they have given a break to folks getting incentives under the mortage assisance program.  On the other hand unemployment benefits are taxable income.  The IRS issued an official position concerning the taxability of incentive payments received by homeowners under the US Government’s Home Affordable Modification Program or HAMP. Revenue Ruling 2009-19 states that Revenuers will treat any incentives received by already struggling homeowners will fall under the exception carved into tax law that excludes welfare benefits. The law states that income is taxable except:“Payments under governmental social benefit programs for the promotion of the general welfare and not for services rendered, however, are not includible in a recipient’s gross income.” This is a very interesting position since the Service also takes the position that unemployment benefits received by individuals are taxable. Seems like a these positions are in direct conflict with each other. The entire text of the Revenue Ruling is included below:

Rev. Rul. 2009-19
ISSUE
If a homeowner benefits from Pay-for-Performance Success Payments under the
United States Government’s Home Affordable Modification Program (HAMP), are those
payments excludable from income under the general welfare exclusion?
FACTS
The deep contraction in the economy and in the housing market has created
stress for homeowners throughout the country. Large numbers of homeowners are
struggling to afford their current monthly mortgage payments and are at risk of losing
their homes. In response, the United States Government announced the Homeowner
Affordability and Stability Plan (the Plan), which helps at-risk homeowners modify their
mortgages to avoid foreclosure.
HAMP, a key component of the Plan, helps homeowners who have defaulted, or
are at risk of default, on their mortgages because, for example, they are suffering
serious hardships, decreases in income, increases in expenses, and high mortgage
debt compared to monthly income.
Under HAMP, homeowners that make timely payments on their modified loans
are eligible to have incentive payments made on their behalf to lenders/investors. Each
month that a homeowner makes a mortgage payment on time, the homeowner accrues
an amount toward a Pay-for-Performance Success Payment. A payment of the accrued
amounts is made annually, to reduce the principal balance on the homeowner’s
mortgage loan. Homeowners can receive principal reductions of up to $1,000 per year
for up to five years, subject to a de minimis threshold.
The Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation have a substantial role in administering HAMP.
LAW AND ANALYSIS
Section 61(a) of the Internal Revenue Code provides that, except as otherwise
provided by law, gross income means all income from whatever source derived.
Payments under governmental social benefit programs for the promotion of the general
welfare and not for services rendered, however, are not includible in a recipient’s gross
income (general welfare exclusion). See Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul.
98-19, 1998-1 C.B. 840.
Pay-for-Performance Success Payments made under the United States
Government’s Home Affordable Modification Program promote the general welfare by
helping homeowners who are at risk of losing their homes pay the mortgage loans on
their primary residences and do not involve the performance of services. These
payments meet the requirements of the general welfare exclusion.
HOLDING
If a homeowner benefits from Pay-for-Performance Success Payments under the
United States Government’s Home Affordable Modification Program, the payments are
excludable from income under the general welfare exclusion.
DRAFTING INFORMATION
The principal author of this revenue ruling is Sheldon Iskow of the Office of
Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue ruling, contact Mr. Iskow at (202) 622-4920 (not a toll-free
number).

Bookmark: