bill brown wrote:

- quote -

Hmmm... Sounds to me like you are trying to run a
"discriminatory" medical reimbursement plan. If any of the
other similarly situated company employees get wind of this,
and have a good attorney on their side, just wait and see
what happens. <g
- quote -

I believe that situation is distinguishable because it
involves a family member. People frequently give gifts to
family members. They don't so frequently give gifts to
people with whom they have a business relationship.

MTW

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- quote -

There is no such thing as a non-taxable business "gift" to
employees outside the context of employer/employee
relationship. It's not a hard concept to understand.

- quote -

Well you can't put a "gift" in a 401(k). If you received
the money, it's not 401(k) eligible.

- quote -

Please explain to me how the corporation can deduct a gift
made by its president? If it is made by a non-shareholder
president to an employee, it's not a corporate expense. If
it is made by a shareholder president, then it is a
corporate expense and income to the recipient.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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- quote -

If they think it's in any way "related" to his employment,
they might challenge it. If you can show that it's personal
and not related to his work, you'll probably be ok.

That's the reason tips are income and not gifts - while they
are supposedly voluntary, they are related to a person's
performance of his occupation.

- quote -

Where the money comes from is largely irrelevant.

Stu

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"bill brown" <bill[at]squires.com> wrote

- quote -

You're changing the situation more than slightly, and making
it a completely different one than the one I originally
answered. That said, I think 102 is a problem even in most
of the scenarios you present.

Re your question (What would you say if the employee was the
child of the president?) the proposed regs provide that the
IRS will consider the possibility of excludible gift
treatment for gifts to employees that are "a natural object
of his bounty." Thus, it's possible to have gifts to
employees, but in pretty limited situations, such as
children of employee/owners.

There are several problems with the rest of your analysis.
You say it's a short leap from situaion A to situation B and
from situation B to situaion C, and so forth. Under that
analysis there would no reason to even have section 102(c)
since you have only a few short leaps to get from a
reasonable answer to an unreasonable one. That sort of
argument won't go far.

Your statement that "unless there is case law that deals
with this I would think there is nothing legally or morally
wrong with doing it" is puzzling. Case law is important
where the application of the law is not clear. The Internal
Revenue Code states clearly that section 102 does not
exclude gifts from the income of employees, and it includes
amounts paid for the employer, not just amounts paid by the
employer. If you're going to take a position contrary to
that, you need to have some pretty solid support. The Code
says it's income so YOU need case law to support that it's
not; you can't recommend that IRS needs to get some case law
to support the Code. I don't think that your guess that the
government probably comes out ahead and the employees
probably didn't want profit-sharing plan contributions
anyway would go far. The taxpayer doesn't have the luxury
of estimating the effect on goverment revenue as his primary
support for an offbeat tax return position.

You comment that the president may be giving the employees
gifts since they are friends outside work. That might work
in very rare situations. If it were one employee and there
is a long history of friendship it might be plausible. On
the other hand, gifts to a number of employees (which was
the original question posed) looks pretty fishy. If the guy
is giving big gifts to lots of different people that are not
family, including employees and non-employees maybe you
could make a case, but it should be a really clear
situation. If the guy's only friends that are close enough
to get large gifts happen to also be employees, that looks
pretty fishy.

Further, the president presumably is getting reasonable pay
for his work. By adding the employee bonsuses to his pay
and having him make gifts to the employees his pay is going
up substantially. The compensation may then be deemed to be
unreasonably high, and therefore nondeductible.

For situations where the employees are "natural objects of
his bounty" the proposed regulations look to Com. v.
Duberstein, Mose, (1960, S Ct) 5 AFTR 2d 1626.

All that is to say, I think that paying the owner/president
a bonus and having him make tax free gifts to the employees
won't work as a tax strategy. Further, it could create a
variety of serious tax, penalty, and employee benefit
problems. In the limited situations where it is truly a
gift because of the affection for (as the courts describe
it) "the natural objects of the employer's bounty" it can
still be treated as a gift.

Brian Bivona, CPA

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Stuart Bronstein wrote:
- quote -

(snipped)

all this puts me in mind of a client who is treasurer of his
newly spun off Baptist congregation. (Southern churches DO
that quite requently - "reorganize" into two separate
churches.) Anyway, I reminded him that the preacher would
have to get a W2 end of year, and that he was an employee of
the church, going on to mention how social security is
treated, etc. etc.

The preacher is already retired and just serves to preach,
that's about all, and the preacher "desires" no salary,
instead to set up a retirement plan for him! no kidding.

ChEAr$,
Harlan Lunsford, EA n LA

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- quote -

Let me change the situation slightly. I am the president of
the corporate and one of the corporation's employees is also
a neighbor. I have done well in the stock market this year
and my neighbor/employee has had a string of health problems
and is having a hard time. Out of the goodness of my heart I
gift him $11,000. In no way is this ...paid for by the
employer...that is the "C" Corporation. I can't believe the
IRS would challenge this. (What would you say if the
employee was the child of the president?)

It is a short leap from this example to the situation where
the money was not made in the stock market, but came from
the presidents savings. And another short leap gets you
giving it to all your employees because you are friends with
them outside of work. If your salary or saving are enough to
make the gift, then isn't that reasonable too?

The IRS and State actually come out ahead. The presidents
tax bracket would be much higher than the employees. Since
the gift is not part of the employee's compensation, the
unemployment taxes match the potential unemployment payout.
FICA is also a push for the same reason. The profit sharing
money would be in the employees hands today rather than
years from now, which many employees would prefer. They
could always IRA, 401K, Roth, 529 or put it in an annuity.

You need to properly document the gift when it is given.
Because it is under $11,000 the president would not be
required to report it anywhere. The "C" corporation has
properly deducted it as reasonable payroll expense. The
employee has no requirement to report the receipt of a gift.
I don't even think there is a form for doing that. Unless
there is case law that deals with this I would think there
is nothing legally or morally wrong with doing it.

-bill

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"Will5144" <will5144[at]aol.com> wrote

- quote -

I suppose that you did not read my response that was posted
shortly after your original post. Your friend and his
employer both have a problem!

Section 102 generally excludes gifts from income. On the
other hand, section 102(c)(1) provides that the exclusion
from income for gifts does NOT include amounts that are
transferred by or *for* an employer to or *for the benefit
of* an employee.

Thus is doesn't have to be a transfer directly from an
employer to the employee to fall outside the general
exclusion. A transfer by the president to the 10 other
employees as a gift would probably be treated as paid "for"
an employer, even though it was not transferred "by" the
employer. Thus, the scheme WOULD NOT WORK.

Further, if this were unwound on audit, the profit-sharing
plan would probably have an excess contribution for the
president and would have underfunded the other 10. It could
result in excise taxes or possible disqualification of the
plan. The employer will also likely end up with a nasty
penalty dispute over the payroll taxes that were not
withheld.

Brian Bivona, CPA

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Will5144 wrote:

- quote -

This has nothing to do with justifying the situation. The
problem is that we don't have all the relevant information.
As a result we very soon came to the end of what we could
say about the precise situation, and then launched off into
esoteric discussions of related aspects of the tax law.

If you read through all the replies carefully you will
likely find an answer to your question. But it's only
because so many various aspects were discussed that the
precise situation may have, due to random chance, been one
of the aspects discussed.

Stu

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"Harlan Lunsford" <hlunsford[at]bellsouth.net> wrote:
- quote -

Well for discussion purposes only, I suspect it would be
classified as income. If its a gift, then there should be
harm in identifying the donor (gift tax consequences
notwithstanding). The presumption is ALWAYS that it is
income unless shown otherwise. A true gift is easy enough
to establish as such.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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- quote -

I am the original poster of this message. You might recall I
was trying to get some evidence to show my friend that this
"gift" from his employer is really taxable income and not a
gift. In reading your replies, I was not very successful. In
fact, several of you "professionals" seem to be dwelling
more on the fact that the IRS will never find out, rather
than whether it's right or wrong. I am really disappointed
in your replies. This employer is avoiding payroll taxes and
my buddy is not reporting $8500 in taxable income every
year, and you folks don't seem to find anything wrong with
it. Ok, you're the pros, so I'll take your word for it. My
friend will be thrilled.

================================================== ==========
Moderator:
You have gotten the wrong impression or maybe you haven't.
But I am an auditor, my wife is an auditor, and some of my
best friends are auditors. And everyone of us will hang
him and his boss out to dry. For the money received from
an employer to be a gift, the money had to have been paid
from his/her personal checking/savings account. A gift
from a company is either a bonus or a dividend - and
both are taxable.

On an occassion, my partners were summarily angered with
our office manager and refused to give her a Christmas
bonus. I wrote her a check for $400 from my personal
checking account. That was a gift because I had to pay
taxes on it.

When my partners demanded she be fired, I got her a job
with one of our clients. To prove no good deed goes
unpunished, we lost the client as soon as she had enough
influence to recommend a competitor.
================================================== ==========

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Harlan Lunsford wrote:

- quote -

The burden of proof would be on the taxpayer. So, if the
taxpayer refuses to identify the source, I would expect an
assessment by the IRS to be upheld on appeal.

MTW

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"Harlan Lunsford" <hlunsford[at]bellsouth.net> wrote:
- quote -

What would the IRS do? They'd consider it unreported
income! Remember who has the burden of proof - the
taxpayer. Without documentation, deposited funds that
exceed the income reported on a return are almost always
considered unreported income, at least in all the audits
I've been involved with. And every auditor who every caught
such a deposit made is very clear that it would be
considered unreported income until sufficient documentation
could be presented that proved otherwise. In most of the
cases, the excess cash has been either transfers from other
accounts, insurance reimbursements, accountable plan
reimbursements (I remember a case a few years back where the
IRS auditor had "never heard of any such animal as an
accountable reimbursement plan and included this as income -
of course, it took about 30 seconds with manager to get that
fixed).

Only once in my 21+ years has the issue of gift money come
up. And fortunately, the client in that case had followed
my instructions and gotten mom and dad to send her a card
along with their check where they stated that they knew she
needed some help and they wanted to have $X as a token of
their love and affection. When I gave the card to the
auditor she commented that my client and her parents must
have an extraordinary relationship for my client to have
kept the card for almost 3 years.

Gene E. Utterback, EA

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MTW wrote:
- quote -

For sake of argument then, let's assume it was the owner of
the company who made the gift out of his personal funds,
therefore no tax deduction, much less any gift tax return
filed (under 11,000 naturally)

AND, assume the employee is audited for any other reason
imaginable. AND, IRS decides to reconcile bank accounts
with income and expenditures, and asks where that ....
$6,500 came from. Employee replies "a gift" without
identifying the donor, and when pressured, refuses to
identiy the donor.

I wonder what IRS would do...... Compell his testimony?
Assume it's income? And if the latter, what would happen
on appeal?

Just wondering.

ChEAr$,
Harlan Lunsford, EA n LA

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Stuart Bronstein wrote:

- quote -

I agree. Unless one of the parties is audited, the "error"
will never be discovered.

MTW

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- quote -

Section 102 generally excludes gifts from income. On the
other hand, section 102(c)(1) provides that the exclusion
from income for gifts does not includes amounts that are
transferred by or *for* an employer to of *for the benefit
of* an employee. Thus is doesn't have to be a transfer
directly from an employer to the employee to fall outside
the general exclusion. A transfer by the president to the
10 other employees as a gift would probably be treated as
paid "for" an employer, even though it was not transferred
"by" the employer. Thus, the scheme would not work.

Further, if this were unwound on audit, the profit-sharing
plan would probably have an excess contribution for the
president and would have underfunded the other 10. It could
result in excise taxes or possible disqualification of the
plan.

Brian Bivona, CPA

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MTW wrote:
- quote -

You're absolutely right. I've seen a lot of court cases
dealing with similar facts. A payment seemed like a gift,
though it was somehow related to work - e.g. tips. As I
recall the courts hold that if a payment is at all related
to services, it's taxable income.

And if the employer deducts the payment from its own taxes,
it is certainly taxable income.

The question in my mind is, if the employer doesn't deduct
the payment, it will, as a practical matter, ever even come
up as a blip on anyone's radar.

Stu

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Harlan Lunsford wrote:
- quote -

Hey! I wasn't born yesterday, you know.

Stu

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bill brown wrote:

- quote -

I think the IRS could nevertheless challenge whether this
was truly a "gift." The fact that a number of "employees"
are all benefited in a similar manner makes this look
suspicious to me.

MTW

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"Stuart Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

I ran across an interesting case several years ago where it
almost would have worked out. The "C" corp president wanted
to give out bonuses to 10 employees that would cost the
company $100,000 . Note: the condition was that the total
cost to the company would be $100,000 which is a lot
different than giving the employees $100,000. In both cases
the company would deduct the $100,000 as reasonable
expenses.

If he gave it directly as bonuses direct to the employees
the costs would be:

7.65% employers FICA
7.65% Employees FICA
3% State Unemployment (some might have been over the limit)
2% Workers Comp
15% for the profit sharing plan (very generous but the
profits were there)
Assume 28% employee Fed taxes (Most had working spouses)
Assume 9% State Taxes (Oregon)
0.7% FUTA (Actually most everyone was over the limit ($7000
if I remember right))

On the other hand if the president took it as a
salary/bonus, paid his taxes and gifted it, it looked like
this:

1.65% Employers Medicare (He was over the SS limit)
1.65% Employees Medicare
0% State unemployment (over the limit)
0% Workers Comp (Oregon caps W/C for owners at about $100,000)
0% Profit sharing (over the cap also)
39.6% Federal taxes
9% State Taxes
0% FUTA (over the cap)

It's a little more complicated than just adding up the
percentages, and the profit sharing plan is unusual, but it
was pretty close to a draw. Eventually it was done the first
way because of fears of the bonus causing a problem. If it
was an "S" corp this problem wouldn't be there. Can you
think of any other reasons why this wouldn't work?

-bill

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Stuart Bronstein wrote:

(re "gift" from employer not on W2" or otherwise.

- quote -

How about a side bet, Stu, as to whether (or not) employer
IS deducting the gift? (grin

ChEAr$,
Harlan Lunsford

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