Rev. Rul. 71-425

Advice has been requested whether payments of amounts derived from funds supplied by a State welfare agency, made to participants in programs under Title V of the Economic Opportunity Act of 1964, Public Law 88-452, 42 U.S.C. 2701, and similar programs are includible in the gross incomes of the recipients for Federal income tax purposes and are "wages" subject to the withholding of income tax and the taxes under the Federal Insurance Contributions Act.

The State welfare agency requires individuals on a welfare roll who are able to work to participate in work experience projects that it sponsors or administers under Title V of the Economic Opportunity Act of 1964. The agency makes the work assignments and makes the only payments the participants receive in connection with the work. A participant receives payments at a rate equal to the prevailing hourly rate for similar work in the community or the minimum rate established by the State law for such work, whichever is higher. The participant works only the number of hours that produce a payment equal to the relief allowance he and his family would receive in any one month period. If a participant incurs transportation expenses to and from work or other expenses, such as the cost of safety equipment required for the work, the additional cost is met by an increase in the number of hours worked by him.

The question is whether the payments received while the participant is engaged in the work related program are compensation for services performed or are in the nature of welfare payments.

Section 61(a)(1) of the Internal Revenue Code of 1954 provides that, except as otherwise provided, gross income means all income from whatever source derived, including compensation for services. However, disbursements from a general welfare fund in the interest of the general welfare, which are not made for services rendered, are not includible in gross income. See Rev. Rul. 63-136, C.B. 1963-2, 19, which holds that benefit payments made under either the Area Redevelopment Act or the Manpower Development and Training Act of 1962 are not includible in the gross income of the recipients.

The Senate Committee report on the Economic Opportunity Act of 1964 (Report No. 1218, 88th Congress, 2nd Session) states on page 35 that Title V will stimulate the expansion of work experience and other needed training, including basic education, for needy individuals who are currently receiving some type of public assistance. This report points out that studies of unemployed persons aided under the public assistance programs indicate that in general these persons lack sufficient education and work skills to compete in the labor market. Many are either so lacking in knowledge and skills or in self-confidence because of prolonged unemployment they are not ready for training programs such as those offered by the Manpower and Development Training Act.

Some examples of constructive work experience in Title V projects are: simple maintenance in public roads, recreation areas and facilities; routine and general office clerical work; untrained aides and assistants in institutions, including such occupations as helpers, bus boys, and kitchen workers; trained practical nurses and nurses' aides, laboratory assistants and orderlies.

An assignment to work in an unskilled job may be a form of training to an individual who has never before held a job. Such a program may be designed to teach the participant work habits such as regular attendance, promptness, appearance, job discipline, etc. Thus, in most Title V programs the elements of work and training combine and overlap to such a degree that it is extremely difficult to characterize any program as being primarily work or primarily training. In most cases it would not be realistically feasible to dissect a program to determine the relative proportions of work and training contained therein.

However, in many cases the payments received under a work-training program are received in lieu of (and in amounts no greater than) payments that the participant was receiving based upon personal and family subsistence requirements from a public welfare agency prior to his participation in the work-training program. In such cases, the primary measure of the amount received is the personal or family need of the recipient rather than the value of any services performed and thus seems more in the nature of a welfare payment in connection with participation in a training program than a payment for services rendered.

Accordingly, amounts received by a participant in a work-training program, such as a program under Title V of the Economic Opportunity Act, are neither includable in gross income under section 61(a)(1) of the Code nor considered "wages" for purposes of the withholding of income tax at sources on wages or the taxes under the Federal Insurance Contributions Act, provided that:

(1) participation in such work-training program was arranged and financed by a public agency from which the participant was receiving public welfare benefits based upon personal or family subsistence requirements, and

(2) the payments received under the work-training program (exclusive of any extra allowance that may be provided for transportation or other costs related to participation) are not greater than the amount of such public welfare benefits that he would have been receiving.

In the event that the amount received under the work-training program (exclusive of allowances, as described above) is greater than the amount that would have been received by the participant had there been no work-training program, the entire amount received will be considered as taxable gross income and "wages", except to the extent that it can be demonstrated that the amount received exceeds the fair market value of the services performed under the program.

Revenue Ruling 67-144, C.B. 1967-1, 12, is hereby modified to the extent it holds that the payments received under the facts therein are includable in income.