IG_C05 - CHAPTER 5 GROSS INCOME EXCLUSIONS LECTURE NOTES ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME(See Exhibit 5-1 in the text GIFTS 1 Gifts

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CHAPTER 5 GROSS INCOME: EXCLUSIONS LECTURE NOTES ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME (See Exhibit 5-1 in the text ) GIFTS 1. Gifts . The major reason for excluding gifts from income is to prevent the tax laws from interfering with an individual's decision to make gifts, especially gifts to family members. If the donee were required to pay an income tax upon receipt of a gift, this would be equivalent to exacting a toll charge on the intra-family transfers. Such a charge would be despised by the voters and, probably, seldom paid. a. Definition of a gift . In deciding whether a gift has been made, the courts look to reasons for making the payment or transferring the property. Was the payment made out of "love, affection, or generosity ?" The answer to this question requires an analysis of the facts to determine the donor's intent. b. Past services . (1) If the payments are to the estate , the employer is not indicating the desire to benefit a particular person. (2) If there is an obligation to make the payment , there can be no gift. (As discussed under gifts, the lack of an obligation will not make the payment a gift, but the presence of an obligation could mean there was no gift.) c. Contractual obligation . In Robertson v. U.S ., 52-1 USTC ¶ 9343, 41 AFTR 1053, 72 S.Ct. 994 (USSC, 1952), a "prize" case which preceded § 74, the Court found that a cash award offered for the best musical composition was taxable. Under contract law, the sponsor was under a legal obligation to make the payment. 5-1
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5-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes Although the sponsor did not receive a direct benefit and, thus, in a nontechnical sense the payment appeared to be a gift, the existence of the contractual obligation rendered the payment not a gift for tax purposes. (1) Thus, if the amount is received pursuant to a contract, the payment is not a gift. (2) But the absence of the legal obligation does not render the payment a gift. d. Business association . Generally, the taxpayer will have a difficult task of proving a gift if the amount is received from one who conducts business with the taxpayer. However, the payment may be considered a gift if the taxpayer is needy (e.g., a flood victim). e. Employees . A payment (or any other transfer of property) by an employer to an employee cannot be treated as a gift , regardless of the employer's motivation for the payment. (1) The only exception to this rule occurs in the case of employment achievement awards under § 74(c) of tangible personal property (e.g., a watch, but not money) with a value of not greater than $400 ($1,600 if the award is a qualified plan award) per employee. See § 102(c) that was added to the Code in 1986. f.
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This note was uploaded on 03/17/2009 for the course ACC 483 taught by Professor Susankuniyoshi during the Spring '08 term at University of Phoenix.

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IG_C05 - CHAPTER 5 GROSS INCOME EXCLUSIONS LECTURE NOTES ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME(See Exhibit 5-1 in the text GIFTS 1 Gifts

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