Good analysis, BBO, but the Internal Revenue Code (found in Title 26) requires the filing of an income tax return only if you have taxable income, and as you point out, income redeemed in public money is not taxable, thus no return is required. Basically, for all the reasons you point out (re-venue status), public money is not revenued (it is already in this venue), thus public money is not within the purview of Title 26. Thus, no income, no income tax return, no tax.