Gift or Income?

Doug H. Moy
May 5, 2009 — 2,000 views  
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Copyright 2009. All Rights Reserved

Whether money given to a person constitutes a "gift" or "income" depends on the transferor’s intention. The U.S. Supreme Court in Commissioner v. Duberstein, [363 U.S. 278, 285-286 (1960)], opined that,

This Court has indicated that a voluntarily executed transfer of his property by one to another, without any consideration or compensation therefor, though a common-law gift, is not necessarily a "gift" within the meaning of the statute. For the Court has shown that the mere absence of a legal or moral obligation to make such a payment does not establish that it is a gift. And, importantly, if the payment proceeds primarily from "the constraining force of any moral or legal duty," or from "the incentive of anticipated benefit" of an economic nature, it is not a gift. And, conversely, "[w]here the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it." A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity,"; "out of affection, respect, admiration, charity or like impulses." And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor’s "intention. * * *

Jue-Ya Yang (Ms. Yang) resided in California where she met Howard Shih through a mutual friend, and they began dating. Mr. Shih earned his living as an artist and calligrapher. Eventually, Ms. Yang’s relationship with Mr. Shih became more intimate. She moved into his home, and they cohabited. She did some housekeeping and cooking, but she did not work for Mr. Shih under any form of written or oral contract for services. She did not have any skill or experience in connection with Mr. Shih’s artistic endeavors. During 2005, Mr. Shih gave Ms. Yang checks totaling $10,500 to use for herself. Mr. Shih reported this amount to the IRS on a Form 1099-MISC, Miscellaneous Income, that the $10,500 he paid to Ms. Yang constituted wage income and, ostensibly, he deducted the payments for purposes of computing his income for 2005. The IRS determined that Ms. Yang had received income of $10,500.

Mr. Shih was romantically involved with Ms. Yang, and there were discussions of a formal engagement; and their relationship was intimate. Mr. Shih testified at the trial that his testimony concerning his romantic relationship with Ms. Yang was evasive. Mr. Shih testified on direct examination that Ms. Yang had performed services in his business in exchange for the payments made to her during 2005. On cross-examination, however, after admitting that his relationship with Ms. Yang was more than a professional one, Mr. Shih could not recall taking her out on dates or any intimacy in their relationship, even though their relationship existed only a few years ago.

The court observed that Mr. Shih and Ms. Yang had conflicting interests in the outcome of the controversy and that their positions were diametrically opposed. Mr. Shih structured the payments to Ms. Yang so that they appeared to be wages. He issued a Form W-2, Wage and Tax Statement, and used the notation "salary" or "wages" on some of the checks used for payment. Ms. Yang, however, was forthright in her testimony and answered all questions, whether or not they favored her position. On the other hand, Mr. Shih professed to remember only those things that supported his position that the payments were income to Ms. Yang. The court found his "testimony to be evasive and untrue." The facts show that Mr. Shih made payments totaling $10,500 to Ms. Yang with "detached and disinterested generosity" out of his affection for her at the time of payment. Accordingly, the court held that the $10,500 in payments made to Ms. Yang during 2005 was a gift and not reportable as income. This case evidences the conclusion that whether "...a transfer amounts to a "gift" is one that must be reached on consideration of all the factors and one that is left to the trier of facts" [Jue-Ya Yang v. Comm’r, T.C. Summ. Op. 2008-156 (Dec. 15, 2008)].

Copyright 2009. All Rights Reserved

Doug H. Moy


Doug H. Moy is a nationally recognized author, consulting specialist, seminar instructor and educator. He has an undergraduate degree from Willamette University and a Masters degree from Washington State University. Since 1979, Mr. Moy has consulted to attorneys, tax practitioners and their clients, as well as assisted practitioners representing clients before the IRS Conference of Right and Appeals Division and Settlement Conference Negotiations. He is noted for his ability to communicate his unparalleled knowledge and experience to practitioners at all levels in his field of expertise; namely, estate/gift taxation and planning, with special expertise in living trusts; community property; lottery prize winnings; structured settlement trusts; extricating clients from abusive trust tax shelters; designing effective estate plans; and preparation of Form 706 Estate Tax Returns and 709 Gift Tax Returns. He offers particular assistance and exceptional skill designing creative, practical solutions to challenging and difficult estate planning situations.