Rev. Rul. 65-18

Advice has been requested whether patients and members in Veterans Administration hospitals and domiciliaries must include in gross income amounts they receive for services performed under the Veterans Administration's therapeutic or rehabilitative program and whether such amounts are wages for purposes of the Federal Insurance Contributions Act, chapter 21, subtitle C, of the Internal Revenue Code of 1954, and withholding of income tax at the source on wages, or are subject to the reporting requirements of section 6041 of the Code.

On December 9, 1962, the Incentive Therapy Program went into effect under Public Law 87-574, August 6, 1962, 38 U.S.C. 618. The purpose of that law is to effect various adjustments in administrative procedure which experience had indicated to be desirable. Section 2 of the law authorizes the utilization of the services of patients and members in Veterans Administration hospitals and domiciliaries for therapeutic and rehabilitative purposes without conferring an employee status upon them.

Prior to the enactment of Public Law 87-574, it had long been the practice of the Veterans Administration to appoint patients and members under Civil Service Rule VI so that, technically, they were Federal employees, although they were paid only a nominal stipend and were not covered under certain benefit programs.

Congress, in its Committee Reports to Public Law 87-574, indicates that the purpose of this law is to avoid confusion and controversy which has arisen in connection with the application to such persons of various statutes, regulations, or bills relating to Federal employees. The law enables the Veterans Administration to prescribe the conditions and benefits which will best serve the therapeutic and rehabilitative objective of the program. See Senate Report No. 1693, 87th Congress.

Section 61 of the Code defines gross income as all income from whatever source derived unless otherwise specifically excluded by law. The remuneration a patient or member receives for the work he performs for the Veterans Administration is a payment for services rendered even though it is intended for therapeutic or rehabilitative purposes. Payments for services are includible in the recipients' gross income. See section 1.61-2(a)(1) of the Income Tax Regulations.

Public Law 87-574 does not provide an exclusion from gross income of the remuneration paid under this program. The amount the patients and members in Veterans Administration hospitals and domiciliaries receive for services performed under the Veterans Administration's Incentive Therapy Program is includible in gross income.

Since an employer-employee relationship does not exist between the hospitals and the individuals involved, the taxes imposed by the Federal Insurance Contributions Act are not applicable with respect to the remuneration which is paid these individuals for their services, nor is liability incurred by the hospitals under the income tax withholding provisions of section 3402 of the Code with respect to the payments made under the circumstances described.

Section 1.6041-1(g) of the regulations provides that returns on Form 1096, U.S. Annual Information Return, and Form 1099, U.S. Information Return, of payments made by the United States, or a State, Territory, or political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing shall be made by the officer or employee of the United States, or of such State, Territory, or political subdivision, or of the District of Columbia, or such agency or instrumentality, as the case may be, having control of such payments or by the officer or employee appropriately designated to make such returns. Accordingly, payments for services rendered aggregating $600 or more in any calendar year to any one patient or member in Veterans Administration hospitals and domiciliaries received under this Act are required to be reported on information return, Form 1099.