|  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.
However, there 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. GWE REQUIREMENTS
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 disaster. To qualify under the GWE, payments must
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. The IRS’s 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 heating costs. 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 need.
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.  —Nick Fiore
The Tax Adviser Notice to Readers:
Members of the AICPA tax section may subscribe to The Tax Adviser at a reduced price. Contact Judy Smith at 202-434-9270 for a subscription to the magazine or to become a member of the tax section. | | 
