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![handle is hein.crs/goveknq0001 and id is 1 raw text is: Congressional Research Service
Informing Ih legisIative debate sine 1914
The IRS's General Welfare Exclusion
February 9, 2023
The Internal Revenue Service (IRS) has concluded that
certain payments under legislatively provided social benefit
programs that promote the general welfare are excludable
from a recipient's gross income and thus are not subject to
tax. The general welfare exclusion is not based on any
specific statutory or regulatory authority. However, courts
and the IRS have long recognized this non-statutory
exception to the general rule that all income is subject to tax
unless specifically exempted by Congress. The general
welfare exclusion provides the IRS with flexibility to
address unanticipated issues arising from legislatively
provided social benefit program payments. This In Focus
discusses the origins and rationale behind the IRS's general
welfare exclusion; provides an overview of instances in
which the general welfare exclusion has been applied; and
reviews examples of Congress's intervention to partially
codify the general welfare doctrine or overturn a past IRS
exclusion.
Origins of the General Welfare Exclusion
Since the 1930s, the IRS has contended that the general
welfare exclusion is an administrative exception to the
statutory definition of gross income. Internal Revenue Code
(IRC) Section 61(a) defines gross income for federal
income tax purposes as all income from whatever source
derived except as otherwise provided in IRC Subtitle A,
which contains the rules specific to federal income taxes.
The Supreme Court has often stated that the broad
phraseology in IRC Section 61, and its predecessors, is
evidence of Congress's intent to use the full measure of its
taxing power to reach undeniable accessions of wealth.
Treasury Regulation Section 1.61-1(a) clarifies that gross
income includes income realized in any form, such as
money, property, or services. In 1995, the Supreme Court
explained in Commissioner v. Schleier, 515 U.S. 323
(1995), that the corollary to the sweeping scope of IRC
Section 61(a) is that exclusions from gross income are
narrowly construed.
The IRS and commentators trace the origin of the general
welfare exclusion to a series of IRS office decisions issued
in 1938, following the 1935 passage of the Social Security
Act (P.L. 74-271). One of the act's purposes was to
provide for the general welfare by establishing a system of
Federal old-age benefits, and by enabling the several States
to make more adequate provision for aged persons, blind
persons, dependent and [disabled] children, maternal and
child welfare, public health, and the administration of their
unemployment compensation laws. Without providing an
explanation, the IRS announced in Office Decision 3194
that lump-sum payments made under Section 204(a), Title
II, of the Social Security Act to aged individuals were not
subject to income tax in the hand of the recipients. Again,
without providing an explanation, the IRS announced in
Office Decision 3229 that lump-sum payments to a
deceased employee's estate under Sections 203 and 204(b),
Title II, of the Social Security Act also were not subject to
income tax. Then, the IRS announced in Office Decision
3230, also without an explanation, that unemployment
compensation paid by a state agency from the Federal
Unemployment Trust Fund established by Section 904,
Title IX, of the Social Security Act was not subject to
income tax in the hands of the recipient. Beginning in 1984,
Congress partially eliminated the exclusion of Social
Security benefits from gross income under IRC Section 86.
Then, in 1986, Congress made unemployment
compensation includible in gross income under IRC Section
85.
In 1975, the IRS issued General Counsel Memorandum
36470, in which it took a hard look at its prior applications
of the general welfare exclusion. In its review, the IRS
explained that it believed it was well within its authority
to apply the general welfare exclusion where Congress
intended for a payment to be excluded, including where
Congress did not explicitly state its intent in legislation. The
IRS also announced that it could exclude analogous state
payments from federal gross income if the payments were
not in the nature of compensation.
Later, in an IRS Field Service Advisory dated March 24,
1998, the IRS clarified that its rationale for the general
welfare exclusion was that Congress intended for certain
federal payments to be exempt from gross income even
though Congress did not expressly exclude the payments in
legislation or state that intent in legislative history. The IRS
also acknowledged that the extension of the general welfare
doctrine to state payments that were analogous to federal
payments was initially problematic because state
legislatures could not create federal income tax exclusions.
Still, the IRS claimed the general welfare exclusion
evolved to exclude analogous state payments by
administrative fiat.
Application of the General Welfare
Excdusion
Over the years, the IRS has excluded various payments
from gross income under the general welfare exclusion via
administrative rulings, such as state payments to blind
persons (Revenue Ruling 57-102, 1957-1 C.B. 26); job-
training program payments to unemployed and
underemployed individuals to enhance employability
(Revenue Ruling 68-38, 1968-1 C.B. 446); state payments
to crime victims (Revenue Ruling 74-74, 1974-1 C.B. 18);
state payments to adoptive parents for support and
maintenance of their adoptive child (Revenue Ruling 74-
153, 1974-1 C.B. 20); replacement housing payments
(Revenue Ruling 74-205, 1974-1 C.B. 21); payments to](ViewImageLocal?handle=hein.crs/goveknq0001&div=1&collection=&method=preview&ext=.png&size=3)