How to report non-taxability of mitigation payment under Code Section 139

The money from the Feds was given for distribution to States, which gave it to Counties and local government entities and even agencies, such as for Homeless Shelter organizations and Food Banks.

It might be nontaxable to your State; that has to be codified (in the law somewhere or stated as a regulated authority), but what makes you consider it nontaxable for Feds?

I've had this link on my browser open for over a year, now:

https://commerce.mt.gov/Montana-Coronavirus-Relief/Awarded-Grants

Because I've been watching the Live Entertainment grants. This is pointed out there:

https://mtrevenue.gov/2021/01/25/covid-business-grant-income-taxable-in-montana/

and that includes this IRS link:

https://www.irs.gov/newsroom/cares-act-coronavirus-relief-fund-frequently-asked-questions

And for the pdf link you provided, did you read:

"Decisions about who to support should be fair, is not in perception or actuality discriminatory, must avoid self-dealing, cannot benefit a specific person, and cannot go to groups of people who do not have charitable need."

You stated this: "Individual who does work for a non-profit."

Grants to individuals would be taxable. That specific grant states giving to that person would be Disallowed.

So, perhaps you have a person who "runs a business" such as Self-Employed artist, and this was "to them as their business."

I recommend you read the links.