Merely receiving a 1099 (or some other tax form) does not dictate whether it is taxable (or how it should be taxed). Although 1099s and other tax forms give us a pretty good idea for how something is PROBABLY taxed, whether (and how) something is taxed depends on the specific circumstances.
As of now, there is no agreement and no response from the IRS about whether this is taxable for Federal purposes or not. The links I gave you above discuss it a bit, and many feel it may be non-taxable. But nothing is certain at this point.
You may consider presenting the facts and options to the client and let them decide. But if you treat it as non-taxable and later the IRS states it is taxable, you probably need to amend. But if you treat it as taxable and later the IRS says it is not taxable, it might not be worth the time and expense to amend.
