Academic journal article Journal of Accountancy

General Welfare Exclusion: An Opportunity to Exclude Some Payments?

Academic journal article Journal of Accountancy

General Welfare Exclusion: An Opportunity to Exclude Some Payments?

Article excerpt

In 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. …

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