III. IF TRANSFERRED MONIES ARE CHARACTERIZED AS “GROSS INCOME,” DO ANY EXCEPTIONS OR EXCLUSIONS (e.g., gift, loan) APPLY?

A. EXEMPTION/EXCLUSION FROM GROSS INCOME (e.g., GIFTS, LOANS) CONSTRUED NARROWLY

Polone v. C.I.R., 449 F.3d 1041 (C.A.9, 2006) (headnote):
Exemptions from Internal Revenue Code's broad definition of "gross income" as "all income from whatever source derived" are construed narrowly. 26 U.S.C.A. §§ 61(a), 104.

Umbach v. C.I.R., 357 F.3d 1108 (C.A.10, 2003) (headnote):
Internal Revenue Code broadly defines gross income, such that any gain constitutes gross income, unless taxpayer demonstrates that it falls within a specific exemption. 26 U.S.C.A. § 61(a). Note: of course, as you will see later, since this is a criminal prosecution, the government must prove beyond a reasonable doubt that the payments are income (and thus negate that the payments are gifts or loans).

Fortune v. U.S., 4 Cl.Ct. 670 (Cl.Ct., 1984) (headnote):
Deductions or exclusions from gross income are matters of legislative grace and are not matters of right or equity.

B. WHAT IS A “GIFT” FOR TAX PURPOSES?

C.I.R. v. Duberstein, 363 U.S. 278 (1960) – This is the style case by the US Supreme Court laying out the “gift” test for tax purposes.

Pages 285-86

The course of decision here makes it plain that the statute does not use the term ‘gift’ in the common-law sense, but in a more colloquial sense. 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. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 730, 49 S.Ct. 499, 504, 73 L.Ed. 918. And, importantly, if the payment proceeds primarily from ‘the constraining force of any moral or legal duty,’ or from ‘the **1197 incentive of anticipated benefit’ of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, 58 S.Ct. 61, 65, 82 L.Ed. 32, 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.’ Robertson v. United States, 343 U.S. 711, 714, 72 S.Ct. 994, 996, 96 L.Ed. 1237.FN7 A gift in the statutory sense, on the other hand, proceeds from a ‘detached and disinterested generosity,’ Commissioner of Internal Revenue v. LoBue, 351 U.S. 243, 246, 76 S.Ct. 800, 803, 100 L.Ed. 1142; ‘out of affection, respect, admiration, charity or like impulses.’ Robertson v. United States, supra, 343 U.S. at page 714, 72 S.Ct. at page 996. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's ‘intention.’*286 Bogardus v. Commissioner, 302 U.S. 34, 43, 58 S.Ct. 61, 65, 82 L.Ed. 32. ‘What controls is the intention with which payment, however voluntary, has been made.’ Id., 302 U.S. at page 45, 58 S.Ct. at page 66 (dissenting opinion). FN8

FN7. The cases including ‘tips' in gross income are classic examples of this. See, e.g., Roberts v. Commissioner, 9 Cir., 176 F.2d 221.

FN8. The parts of the Bogardus opinion which we touch on here are the ones we take to be basic to its holding, and the ones that we read as stating those governing principles which it establishes. As to them we see little distinction between the views of the Court and those taken in dissent in Bogardus. The fear expressed by the dissent at 302 U.S. at page 44, 58 S.Ct. at page 66, that the prevailing opinion ‘seems' to hold ‘that every payment which in any aspect is a gift is * * * relieved of any tax’ strikes us now as going beyond what the opinion of the Court held in fact. In any event, the Court's opinion in Bogardus does not seem to have been so interpreted afterwards. The principal difference, as we see it, between the Court's opinion and the dissent lies in the weight to be given the findings of the trier of fact.

[9] [10] [11] The Government says that this ‘intention’ of the transferor cannot mean what the cases on the common-law concept of gift call ‘donative intent.’ With that we are in agreement, for our decisions fully support this. Moreover, the Bogardus case itself makes it plain that the donor's characterization of his action is not determinative-that there must be an objective inquiry as to whether what is called a gift amounts to it in reality. 302 U.S. at page 40, 58 S.Ct. at page 64. It scarcely needs adding that the parties' expectations or hopes as to the tax treatment of their conduct in them have nothing to do with the matter.

[12] It is suggested that the Bogardus criterion would be more apt if rephrased in terms of ‘motive’ rather than ‘intention.’ We must confess to some skepticism as to whether such a verbal mutation would be of any practical consequence. We take it that the proper criterion, established by decision here, is one that inquires what the basic reason for his conduct was-in fact-the dominant reason that explains his action in making the transfer. Further than that, we do not think it profitable to go.

U.S. v. Terrell, 754 F.2d 1139 (5th Cir.(Tex.) Feb 14, 1985)

< >