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Gifts and taxes: Recent case questions whether gift was income

The line between a gift and income in the eyes of taxpayers is not always clear. A recent case, Felton v. Commissioner, provides an example. In this case, the Internal Revenue Service (IRS) argues a taxpayer’s claimed gift was actually income. As such, it would be subject to a higher tax rate.

The case involved a religious figure — a pastor who received donations from his congregation. The pastor listed these donations as gifts. The IRS took issue with this designation. Instead, the agency claimed the congregation provided donations in exchange for religious leadership. As such, the pastor should claim the funds as income.

The pastor contested the designation. He stated the donations were clearly given as gifts as the congregants used a designated “gift” envelope to provide the contested funds. The IRS states the $250,000 provided during each of the tax years in question should have been counted as taxable income.

So, what is a gift? According to the Supreme Court of the United States, a gift is funds provided through generosity. A detached offering made “out of affection, respect, admiration, charity, or like impulses.” Thus, the designation will hinge on the intention of the individual making the donation. As such, these cases often require individual attention and a careful review of the evidence.

In this case, the court reviewed various factors to determine the donations were in exchange for the pastor’s services. Ultimately, the court sided with the IRS.

Extension to taxpayers: Claim gifts carefully

There are certain risk factors that are more likely to trigger an audit from the IRS. An unusually large gift designation is one. Taxpayers with these filings are wise to keep documents to support the claim in the event of an audit.

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