For-profit medical care providers that receive CARES Act grants to provide funds for healthcare-related expenses or lost revenues attributable to the coronavirus (COVID-19) may be taxed for those receipts. Because Congress did not otherwise exclude or address the tax treatment of these grant payments, taxability would be determined based upon applicable tax law and guidance, which require that such funds be reported as taxable income. For-profit healthcare providers that received these grants should consider this issue and its resulting tax implications.
Morgan Lewis is forming a coalition in an attempt to bring this unintended consequence to the attention of Congress and the relevant agencies. Please contact us if you wish to be included in information relating to this important matter.
The Public Health and Social Services Emergency Fund provisions of the CARES Act, found in Division B—Emergency Appropriations for Coronavirus Health Response and Agency Operations—create a $100 billion fund designed “to prevent, prepare for, and respond to coronavirus, domestically or internationally, for necessary expenses to reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus” (Relief Payments). (Emphasis added).
The CARES Act anticipated that the Secretary of Health and Human Services (HHS) would “review applications and make payments under this paragraph in this Act.” HHS began issuing Relief Payments, without applications from recipients, on April 10, 2020. HHS made the first tranche of Relief Payments based upon each healthcare provider’s share of total Medicare fee-for-service reimbursements in 2019. Within 30 days of receipt, recipients must sign an attestation confirming receipt and agreeing to the Relief Payment Terms and Conditions. Noncompliance with any of HHS’s Terms and Conditions for the Relief Payments is grounds for the Secretary to recoup some or all of the payment made.
In enacting the CARES Act, Congress did not address the taxation of the Relief Payments. In the absence of guidance otherwise, the taxability of the Relief Payments would be determined by applying the applicable provisions of the Internal Revenue Code, published guidance, and case law.
Income Inclusion Resulting from Receipt of Relief Payment
Under 26 USC § 61(a), gross income includes all income from whatever source derived unless specifically excluded by law. For corporations, prior to the passage of the Tax Cuts and Jobs Act (TCJA), some grants from governmental entities may have been excludible from gross income as a contribution to capital. The TCJA repealed this exclusion, unless the grant is part of a plan approved before the passage of the TCJA. With respect to individuals, certain government grants are specifically excluded from gross income in certain circumstances, including educational grants when used for qualified tuition and related expenses under 26 USC § 117 and grants issued to low and moderate-income individuals to assist them in their individual needs are nontaxable under general welfare principles (see CCA 200431012).
As enacted, the CARES Act does not specifically exclude the Relief Payments from recipients’ gross income and the Internal Revenue Code does not contain a specific income exclusion for the Relief Payments. Additionally, grant payments reimbursing taxpayers for lost revenues or operating expenses are generally held to be includible in gross income. Accordingly, without additional guidance, the Relief Payments would be includible in a recipient’s gross income for federal income tax purposes.
Timing of Income Inclusion Resulting from Receipt of Relief Payment
The Internal Revenue Code provides that the amount of any gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless such amount is to be properly accounted for as of a different period.
In situations where a taxpayer has received funds and its right to retain such funds is unclear, courts have looked to the “claim of right” doctrine to determine when and in what amounts a taxpayer should recognize an income inclusion for tax purposes. Under the claim of right doctrine, if a taxpayer receives money under a claim of right and without restriction as to its disposition, then the taxpayer has received income that is required to be reported even though it may be determined at a later date that the taxpayer is not entitled to retain the money and may be ordered to restore its equivalent. The claim of right doctrine is based on the concept of annual reporting of income. Under this concept, income is determined at the close of the taxable year regardless of possible subsequent events.
Based on the restrictions placed on the use of the Relief Payments, the recipients do not have perpetual control over the funds and are not without restriction as to their disposition. However, an entity that has received funds—either through an automatic disbursement from the government or based upon an application for funds—presently has access to and the ability to use such funds. Claim of right cases are inherently factual, and without guidance from Congress, the Internal Revenue Service (IRS), or the US Department of the Treasury, specifically addressing the timing of the taxability of the Relief Payments, recipients should assume that they are taxable in the year of receipt under 26 USC §§ 61 and 451.
As discussed above, a legislative fix may be needed if Congress intended to treat the Relief Payments as not taxable for all recipients. Morgan Lewis is currently working with clients in an effort to seek clarification on both the taxability of the Relief Payments, and if taxable, the timing of the income inclusion. If you are interested in learning more or joining these efforts, please contact Tim Lynch at 202.731.2021 or via email.
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 26 USC § 118.
 26 USC § 61(a); see also Brokertec Holdings, Inc. v. Commissioner, T.C. Memo. 2019-32 (citing cases but finding the grants at issue qualified for the exclusion under 26 USC § 118), appeal docketed, 19-2603 (3d Cir.).
 26 USC § 451.
 North American Oil Consolidated v. Burnet, 286 U.S. 417, 424 (1932).