n general, income
includes all kind of remuneration, from money
earned to money found to money won. Both the IRS
and the courts have defined income as broadly as
possible; exclusions are narrowly construed and
have generally been limited to those specified in
the Internal Revenue Code.
is a little-known administrative
exception, called the general welfare
exception (GWE), which allows some payments not to
be included in income. This is an area
practitioners should examine to see whether the
exception may be used to exclude payments received
by their clients from income.
The IRS has consistently concluded that
payments to individuals by government units, under
legislatively provided social benefit programs,
for the promotion of the general welfare, are not
includible in a recipient’s gross income. The
classic example of this type of payment is a
government payment made to victims of a natural
To qualify under the GWE,
Be made from a government fund.
Be for the promotion of the general
welfare, based on individual or family need.
Not be made as payment for services.
ORIGIN OF PAYMENT
The payment must be made on the basis of
need, either an individual’s or a family’s;
payments to businesses generally do not qualify.
Sometimes, the government authority looks to the
recipient’s income level (presumably as a means of
assessing need) or to individuals who fall below
certain income thresholds.
determination of what makes up a needs-based
payment varies, depending on what the payment is
being made for. Typically, to be excluded, these
payments must be to pay or reimburse expenses for
essential items such as medical, housing or
However, what any
individual taxpayer “needs” is a subjective
determination, and the IRS has applied the GWE to
many different contexts, including education
assistance, payments to facilitate adoption,
certain economic development grants and even
payments to compensate crime victims. Note:
Age, in and of itself, is not a demonstrated
Payments to others. In
some situations government payments do not go
directly to the person in need of the assistance;
rather they go to a parent or legal guardian. The
applicability of the GWE does not hinge on the
fact that some portion of a payment goes to
another, albeit a related person, rather than
directly to the affected individual.
NOT FOR SERVICES
While a requirement that a person provide
services will disqualify a payment from meeting
the requirements of the GWE, the performance of
training is allowed. Thus, the issue may be
whether the activity required to be performed is
more in the nature of training, rather than in the
nature of services. Consequently, vocational and
occupational training provided to recipients, in
order to upgrade basic skills (such as remedial
education) should qualify; work training, when
payments are made by a state agency based on need
and not on the value of the service performed,
should as well. In contrast, if the training is
on-the-job experience, the payments may need to be
included in income.
For more information,
see “The GWE, a (Not So New) Tax Exclusion Worth a
Look,” by Robert Wood, JD, in the May 2006 issue
of The Tax Adviser.
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