INTRODUCTION II. INCOME AND GIFTS--THE DUBERSTEIN STANDARD III. THE DUBERSTEIN STANDARD AND THE POLICY JUSTIFICATIONS FOR EXCLUDING GIFTS IV. DOES DUBERSTEIN SUPPORT THE EXCLUSION RATIONALES? V. DUBERSTEIN/OLK AND GOFUNDME VI. CONCLUSION I. INTRODUCTION
In 2016, prior to the presidential election, the Federal Bureau of Investigations (FBI) began an investigation into Russian meddling in the 2016 U.S. elections. (1) That investigation included looking into any ties that the Trump presidential campaign may have had with the Russian government. (2) One of the FBI agents involved in that investigation was Peter Strzok. In 2017, Strzok was removed from the investigation when his personal texts came under scrutiny. In the text messages that he sent to FBI lawyer Lisa Page (with whom he was having an affair), the two evidenced disdain for then-candidate Trump and, in one message, Strzok stated that Trump would not become president because "we'll stop it." (3) Republicans have used those text messages to suggest that Strzok was biased against Trump and that bias affected the investigation. (4)
Recently, Strzok's FBI career came to an end. The text messages Strzok sent were the basis for terminating his employment. (5) Within a week of the termination, "Friends of Special Agent Peter Strzok" set up a GoFundMe.com website page soliciting funds to help with his "legal costs" and to replace his "lost income." As of December 3, 2018, the fund has raised nearly $450,000. (6)
In other recent high-profile political news, Michael Cohen, President Trump's former personal attorney, pleaded guilty to breaking campaign finance laws when he admitted that he arranged payments to women in order to buy their silence about affairs that they allegedly had with Trump. (7) A GoFundMe.com page was set up by the "Michael Cohen Truth Fund" soliciting donations "to help Michael Cohen and his family." (8) As of December 3, 2018, this fund had collected nearly $180,000 in donations. (9)
GoFundMe.com is a for-profit crowdfunding website. It allows people to raise money online through the solicitation of donations via the website. It can be used for anything, but typical campaigns involve raising money for medical expenses, youth sports, or education costs. (10) According to its website, over $5 billion has been raised using the GoFundMe platform. (11) Using Strzok's and Cohen's campaigns as examples, the question this Article addresses is what are the tax consequences for the recipients of GoFundMe donations. (12) As part of the analysis of that specific question, the Article will discuss the current standard for determining whether a transfer qualifies as a nontaxable gift under the income tax system and the policy rationale for the exclusion of gifts.
INCOME AND GIFTS--THE DUBERSTEIN STANDARD
Section 61 of the Code states, "Except as otherwise provided ..., gross income means all income from whatever source derived." (13) The definition itself is not particularly helpful, but the real key to section 61 is the "except as otherwise provided" language. The section sets the default that economic gains are usually going to be considered income and therefore taxable, unless the taxpayer finds another provision that provides an exclusion. Therefore, unless an exception applies, the GoFundMe donations should be considered income to the recipient.
The pertinent exclusion provision is for gifts. Under section 102, gifts are excluded from income. (14) GoFundMe itself takes the position that "Donations made to GoFundMe campaigns are usually considered to be 'personal gifts' which, for the most part, aren't taxed as income." (15) However, even GoFundMe admits that there may be circumstances where "the income is in fact taxable," and so users should consult a tax professional. However, GoFundMe states it will not be reporting "the donations as income, or issue any tax documents." (16)
So what is a gift for purposes of the income tax system? The Code does not define the term, so it has fallen to the courts to provide guidance on what qualifies as a gift and what therefore is excluded from income. The Supreme Court provided the seminal definition in its decision in Duberstein v. Commissioner. (17) In that case, Duberstein provided business referrals to a business associate. In appreciation of those referrals, the associate sent Duberstein a Cadillac. Duberstein excluded the value of the Cadillac from his income contending that it was provided to him as a gift. (18) The government argued that he should include the value as income. (19)
The Tax Court held for the government, (20) and the Sixth Circuit reversed. (21) The Supreme Court granted certiorari and, in reversing and holding for the government, set up the test for determining whether a transfer qualifies as a gift for purposes of the income tax system and therefore is excluded from income. Although Duberstein is the case that is cited to define gifts, the case itself mostly restated factors and standards from previous opinions. The key language from the case states:
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.... 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. 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.... 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 ... "out of affection, respect, admiration, charity or like impulses." Robertson v. United States.... And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." Bogardus v. Commissioner, 302 U.S. 34, 43. (22) Since Duberstein, the standard "detached and disinterested generosity" is universally used by the courts to determine whether a transfer qualifies as a gift. The standard itself is not helpful in determining close cases. The Eighth Circuit correctly stated, "Many courts nevertheless give talismanic weight to a phrase used more casually in the Duberstein opinion ... To decide close cases using this phrase requires careful analysis of what detached and disinterested means in different contexts. Thus, the phrase is more sound bite than talisman." (23) In those close cases, it is better to understand the policy justifications for excluding gifts to see if the transfer fits within those considerations and thus should receive nontaxable treatment.
THE DUBERSTEIN STANDARD AND THE POLICY JUSTIFICATIONS FOR EXCLUDING GIFTS
The determination of what types of transfers qualify as a gift for income tax purposes should conform to the policy reasons for excluding gifts from taxable income. A number of commentators have contended that there is no justification for excluding gifts and they should be taxed to the donee. (24) But even most of those make an exception for minor items to be excluded (25) or for interfamily transfers to be excluded under the single tax unit concept. (26)
The single tax unit concept is both a rationale and consequence of the current income tax gift exclusion treatment. Under that theory, it is appropriate to treat the transferor and transferee as members of a single tax unit for a specific and limited purpose, but not otherwise. Essentially, one party (the transferor) is taxed on the income used to make the gift, and the other party (the transferee) enjoys the consumption of the item without incurring any additional income tax. (27) This treatment is further bolstered by the basis rules of section 1015. Under that section, the donee typically inherits the same tax basis in the donated property that the donor had. (28) While there is an exception to this rule for property that has a fair market value that is less than the donor's basis at the time of the gift, (29) that provision was enacted to disallow the deduction by one party of a loss that occurred while the property was held by another party. This limited exception does not detract from the general applicability of the single tax unit theory that applies to most gifts. (30)
In the gift context, should the single-unit tax concept apply only to spouses or close family members? There is no policy justification for any such limitation. There are numerous examples of unrelated people having a deeper and closer relationship than many related persons. A standard for determining what constitutes a gift should accommodate that fact. Here, the Duberstein standard works fairly well, although not perfectly as we shall see. If the donor has the appropriate intent--detached and disinterested generosity--then the tax system usually should condone the single-unit tax treatment for the two parties, whether or not they are close family. (31) In...
GOTAXME: CROWDFUNDING AND GIFTS.
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