Archive for the ‘Gift Tax’ Category

When You Have to Report a Gift

Tuesday, December 2nd, 2008

One question that I’m often asked are about gifts. I’ve just received a large gift or inheritance; must I pay tax on it? The good news is that gifts aren’t taxable to the recipient (if the gift is interest bearing, such as a gift of money in a savings account, you will owe tax on the interest received).

Unfortunately, there are gifts that must be reported even though they’re not taxed. If you receive a gift of more than $100,000 from a non-resident alien individual, or a gift of more than $13,258 from a foreign corporation or a foreign partnership, it must be reported to the IRS on Form 3520. The penalty for not reporting the gift is 5% of the value of the gift per month late, up to a maximum of 25%. There are special rules if you are the recipient of a gift from a foreign trust.

Note that Form 3520 is filed separately from your tax return but is due on the same date as your tax return (including extensions). The IRS has more in this release. Note that the link in the release to the Form 3520 instructions is invalid; the link I have provided works.

Hat Tip: Roth Tax Updates

An Affair in Tax Court

Thursday, April 20th, 2006

The scene is the doctor’s office, where the doctor is romancing his patient. Just a little problem: the patient is married to a policeman. The policeman finds out and vows to sue the doctor, or get paid a large sum. The doctor doesn’t have it, so he makes a counteroffer. And then someone takes out a gun….Well, no, this is a tax blog. But this case does make its way into Tax Court, not a mystery novel.

The salient facts (above) are true (except for the gun). Throw in one more—the doctor eventually pays the policeman $25,000 as “free money” in the hopes that this affair blows over. As the Court noted,

“Petitioner then stated: “Now Doc, this isn’t blackmail money”, to which [the Doctor] replied: “No, I didn’t say it was blackmail money; I said I hope it helps you, both of you.” At the end of the meeting, petitioner warned [the doctor] that he should never again speak to or look at [his wife] or come to their home.”

The petitioner and the doctor contacted his state medical board and reported the affair. The doctor apologized. The doctor’s accountant then prepared a Form 1099-MISC reporting the $25,000 payment. The question before the court: is the payment a gift or income for the petitioner? The IRS held it was income; the petitioner believed it was a gift. (Gifts are tax-free to the recipient.)

Believe it or not, the Supreme Court has issued an opinion on point. In Commissioner v. Duberstein, 363 U.S. 278, 285-
286 (1960), the Court held, “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, Bogardus v. Commissioner, 302 U.S. 34, 41, it is not a gift.”

The Tax Court concluded,

“the $25,000 payment by [the doctor] was not the result of detached and disinterested generosity or paid out of affection, respect, admiration, or charity. Instead it was paid to avoid a lawsuit, to avoid public and professional embarrassment, and to assuage his own feelings of guilt or moral obligation. Therefore, the $25,000 payment in 1999 is not a gift and is includable in petitioners’ gross income for that year.”

Somehow, a moral for this story seems like an oxymoron.

Case: Peebles v. Commissioner, T.C. Summary 2006-61

Hat Tip: TaxProf Blog