The General Welfare Exception to Gross Income

Abstract

Gross income is income from whatever source derived, and the breadth of the gross income concept is nearly limitless. Nevertheless, a little known administrative exception exists which circumvents the income inclusion mandate called the general welfare exception ("GWE"). Under the GWE, certain government payments do not constitute gross income to the recipients. While the Internal Revenue Service has applied the GWE doctrine to a handful of disparate government payments, historically, the classic example of the GWE's application is a government payment made to victims of a natural disaster.

Under the GWE doctrine, the IRS has ruled that payments made under legislatively provided social benefit programs for promotion of the general welfare are excludable from gross income. In determining whether the general welfare exception applies to payments, the IRS requires the payments to be:

1. made from a governmental general welfare fund;

2. for the promotion of the general welfare (i.e., on the basis of need rather than to all residents); and

3. not made as payment with respect to services.

The GWE has generally been limited to individuals who receive governmental payments to help them with their individual needs (e.g., housing, education, and basic sustenance expenses). Grant payments that compensate for lost profits or business income (whether to individuals or to businesses) do not qualify for the GWE.