Federal grants that are spent on elevating homes and protecting other properties against possible floods must be reported by property owners who benefit from them as income, the IRS said in an internal legal memorandum.

The agency made the memorandum public in late July.

None of the property owners receives any cash under the program. Rather, the federal government gives the money to state and local governments, which pay private contractors directly to do the work.

Nevertheless, the IRS said that property owners who benefit from the work are better off and have to report the spending on their properties as income. The tax agency recognizes a “general welfare exception” to having to report income. However, it said the exception does not apply here; it only applies to grants to cover “expenses or serious needs in the aftermath of a major disaster” or an economic need such as where payments are made to low-income elderly to help with fuel costs during the winter. It said payments to businesses are almost never covered by this exception.

Recipients of gifts ordinarily do not pay tax on them. However, the IRS said the grants are not a gift because the federal government is not making them from a “detached and disinterested generosity,” but rather in the hope of saving money in the long run on disaster payments. The memorandum is ILM 200431012.

Keith Martin