Robert W. Wood & Richard C. Morris (both of Robert W. Wood, P.C., San Francisco) have published The General Welfare Ecception to Gross Income, also available on the Tax Analysts web site as Doc 2005-20172, 2005 TNT 191-34.  Here is the Introduction:

For decades, tax practitioners have done more than pay lip service to the all-inclusive properties of § 61. Courts have told us over and over that gross income is, after all, income from whatever source derived, be that wages, gains, prizes, or treasure trove. Indeed, $1 million found inside a piano is clearly includable in income to the lucky finder. So is that $20 you found on the street; never mind that the person who lost the money probably can’t claim a deduction. Who said tax is fair?

Recently, we celebrated a milestone birthday for Glenshaw Glass, a case underscoring the nearly limitless reach of the gross income concept. Who can forget its cogent holding? Income exists whenever there is an accession to wealth, clearly realized, and over which taxpayers have complete dominion and control. Although it might appear that Glenshaw Glass is graying a bit on the edges as it turned 50 this year, this pillar of tax law jurisprudence is stronger than ever. 34 cases and 13 law review articles have cited it just since 2004. Historically, the case commands over 1,000 case citations, including 15 from the Supreme Court, and 320 separate law review articles.

Even though most practitioners may find it difficult to remember the facts of the case, there is a persistent symbiosis between Glenshaw Glass and the accession to wealth doctrine. Nearly every tax textbook includes a chapter revolving around it, so tax lawyers start their careers with the case. Glenshaw Glass is a staple of tax doctrine.

Because of Glenshaw Glass, everyone knows that virtually everything constitutes income for tax purposes. In fact, it seems the breadth of the gross income concept is nearly limitless. Nevertheless, a little-known administrative exception exists that circumvents the case law and its income inclusion mandate. It is called the general welfare exception (GWE).

Under the GWE, some government payments do not constitute gross income to the recipients. While the IRS 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. For example, although the IRS has not ruled on this particular issue, payments made by the Federal Emergency Management Agency (FEMA) to hurricanes victims are of the type of payment that historically qualified for relief under the GWE.