Taxing Lessons Case Summaries

Case — Income Exclusion under the General Welfare Doctrine

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TL Case Summ


Are payments received from a state for the care of a disabled child includable in income?


Taxpayer Says: Amounts received from the state for the care of an adult disabled son are not income under the general welfare doctrine.

Internal Revenue Service Says: The payments were for services, and are taxable income.


From Internal Revenue Code Section 61(a): Provides that, except as otherwise provided, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items.

From Bannon v. Commissioner, 99 T.C. 59, 60 (1992): The Court held that, because the taxpayer was not the recipient of the governmental aid, the payments were taxable as compensation income.

From Revenue Ruling 2005-46: The Internal Revenue Service has consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not included in a recipient’s gross income (“general welfare exclusion”). To qualify under the general welfare exclusion, payments must (i) be made from a governmental fund, (ii) be for the promotion of the general welfare (i.e., generally based on individual or family needs), and (iii) not represent compensation for services. Payments to businesses generally do not qualify under the general welfare exclusion because the payments are not based on individual or family needs.


Under the broad wording of Internal Revenue code section 61, income you receive from almost any source is taxable, unless specifically excluded. Yet some payments received from the government can escape taxation under a narrow set of circumstances not found in the law. Known as the general welfare exclusion, this doctrine, which originated at the time the Social Security Act became law, excludes certain government benefits from gross income.

In this case, the taxpayer was the court appointed guardian for her adult disabled son. She was paid by the county where she lived (Lane County, Oregon) to take care of her son’s everyday needs and care, and received a Form W-2 at year end for the payments. She did not report the payments as income because she believed they were excluded under the general welfare doctrine. She argues the care she provided her son was the same care she had provided him all his life without payment from the county. Additionally, she says she is not in the business of providing care for disabled persons and that she is not an employee of the government or of her son.

The Internal Revenue Service says the taxpayer was not the recipient of the government aid (her son was), and that the payments to her were for her services in caring for her son. Therefore, the payments are taxable.


Make your selection, then see “The Court’s Decision” below for a full explanation

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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Sorry, wrong answer :(
Right answer!
For the IRS. The payments were for services, and compensation for services is included in gross income. (Editorial Note: Certain payments to foster care providers are excluded from gross income under section 131 of the code. Section 131 applies only to payments for foster care, not to the care of a child by a parent. Congress would need to enact legislation to exclude from gross income payments that a parent receives for providing care to a disabled child.)