Case — Payment from Employer: Gift or Taxable Income?

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TL Case Summ

THE QUESTION

Is a payment received from an employer as the result of a personal relationship a non-taxable gift or taxable compensation?

THE DISPUTE

Taxpayer Says: A payment of $160,000 received from her employer was due to a personal relationship and romantic interest, and is a non-taxable gift.

Internal Revenue Service Says: The payment was a bonus, and is taxable income.

THE LAW

From Internal Revenue Code Section 61(a): Gross income is income from whatever source derived unless otherwise excluded.

From Internal Revenue Code Section 61(a)(1): Gross income includes compensation from services.

From Internal Revenue Code Section 102(a): Gross income does not include the value of property acquired by gift.

From Internal Revenue Code Section 102(c)(1): Generally, amounts transferred by or for an employer to, or for the benefit of, an employee are includable in gross income.

From Williams v. Commissioner, T.C. Memo. 2003-97: A payment from an employer to an employee solely for personal reasons can still be a gift if the payment is completely unrelated to the employment relationship and reflects no expectation of a business benefit.

THE CAUSE OF THE DISPUTE

To be considered a gift under tax law, and therefore qualify for exclusion from your income, the giver must be motivated by detached and disinterested generosity, and give the gift to you out of affection, respect, and admiration.

Though there are narrow exceptions for gifts given to you by your employer due to purely personal reasons (such as small birthday presents), payments from employers to employees typically fail to meet ‘the detached and disinterested’ requirement.

In this case, the taxpayer stated the money resulted from the close social relationship she shared with her employer, and was intended as a gift. The IRS counters that the employer issued Form 1099-MISC, Miscellaneous Income, which indicates the payment was not intended as a gift.

WHAT WOULD YOU DECIDE?

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

For the or for the

THE COURT’S DECISION

Download (PDF, 22KB)

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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 TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. The taxpayer failed to establish that the payment was not motivated by business reasons.
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