Sigh.  Aren’t gifts wonderful?  And with the Holiday season approaching, who isn’t excited about getting gifts.

But, as we already know, we must report our income.  And by that, the Internal Revenue Code says that we must report all income from whatever sources earned.

Nooo!  Not my gifts!

Relax.  There are certain items that are excluded from income.

Umm, translation please?

You do not have to include gifts as income.  Now, take note that there do exist certain GIFT TAX rules, and I don’t plan on covering them here.  But as far as reporting the brand new Benz that your Uncle Saul got you for Hanukkah or the SUV that Uncle Aziz got you for Eid,  you don’t have any obligation to report it. 

Well, that’s in basic and general terms.  In tax law, there exist exceptions to the exceptions to the exceptions to the excep….you get the picture. 

You can’t get away calling something a “gift” if it is not meant to be a “gift.” 

Here’s an example:

Annie owned a marketing firm.  Zara owned a PR firm.  Zara and Annie frequently had business lunches and over the course of the year, Annie sent many spectacular clients over to Zara’s firm. 

Of course, Zara was thrilled.  And, in order to keep Annie happy for the coming year and to sweeten the relationship, Zara sent Annie a fabulous Hermes bag, totalling $20,000.

 

Now, that’s easy, you say.  Of course, it’s a gift!  Annie shouldn’t have to report the $20,000 as income!

Think again.  The IRS certainly won’t let Annie off the hook that easily.  Especially not for a $20,000 bag.  The IRS will want to know what Zara’s motivation was in giving that handbag.  Did Zara deduct it as a business expense?  Was the handbag more of a “compensation” for Annie’s services, even if Annie didn’t expect it?

In an old case called Commissioner v Duberstein, those questions are exactly what the IRS asked.  And the Court decided that such a gift really would not be considered a “gift”. 

Why, you ask.  Well, in this case, the Court said that a gift is characterized by

“a detached and disinterested generosity out of affection, respect, admiration charity or like impulses.”

So, what lesson do we take away?  Well, before you accept a large and substantial gift, ask yourself whether it is really a gift that is motivated out of sheer generosity.  If there are strings attached or if it has any hint of compensation, then you need to think about reporting it.  Of course, that’s when you decide to speak to your tax lawyer or accountant, because it really is a case-by-case scenario.