That 2003 IRS notice is certainly an odd way to answer the question. It’s an explanation of why payments to local businesses affected by 9/11 are taxed. Its only relevance is the paragraph (out of 10 pages) that distinguishes payments to individuals. So, let’s take a look at that:

“The Internal Revenue Service has consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not includible in a recipient’s gross income (“general welfare exclusion”). See, e.g., Rev. Rul. 74-205, 1974-1 C.B. 20; Rev. Rul. 98-19, 1998-1 C.B. 840. To qualify under the general welfare exclusion, payments must: (i) be made from a governmental fund, (ii) be for the promotion of general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Rev. Rul. 75-246, 1975-1 C.B. 24; Rev. Rul. 82-106, 1982-1 C.B. 16. Payments to businesses generally do not qualify for the exclusion because they are not based on individual or family needs . . .[with citations].”

As I understand it, California will not express an opinion on whether these payments are income on the 1040; their opinion is only that to stay out of trouble with IRS, they are issuing 1099's with them. “The United States government has a tax on income, not on pieces of paper.” [Kamman] . Will IRS rule on this issue by next week, before the tsunami of returns? I doubt it. I prepare a few California returns, but not until March or April. So I have time to think about it. For now, my opinion is that the payments are not taxable.

Having said that, what are the states doing, that are distributing a budget surplus by sending out “rebates” of income tax collected, based roughly on how much each person paid? For example, Idaho and South Carolina. Are they reporting these to IRS as refunds? Should they? The California payments were based not on tax paid, but on AGI. Several other states did the same.