A recent Associate Chief Counsel Memorandum (2011-004) discusses the federal income tax treatment of the receipt of excessive payments under Section 1603 of the American Recovery & Reinvestment Act (ARRA). The letter determines that:

  • In the event the IRS determines that a taxpayer’s project did not qualify for all or part of a section 1603 payment, the excessive amount of the payment is includible in the taxpayer’s gross income.
  • A taxpayer that receives a section 1603 payment must include any excessive amount of the payment in gross income in the taxable year that the taxpayer receives the payment. The taxpayer may deduct repayment of the excessive amount in the taxable year of the repayment.
  • A taxpayer’s basis in a project for which the taxpayer receives an excessive amount is not reduced by the excessive amount in either the taxable year of receipt or the taxable year of the repayment.

To read the memorandum, click here.