Document Type

Article

Publication Date

2010

Keywords

income tax, gifts

Subject Category

Taxation-Federal Estate and Gift | Tax Law

Abstract

Amounts received by gratuitous transfer—either as gifts given during the life of the donor or by will or intestate succession following the transferor’s death—are broadly excluded from the base of the U.S. federal income tax. Because this has been true since the inception of the modern income tax in 1913, it may well not strike the reader as at all puzzling that this would be so. The rule is nevertheless at odds with the usual understandings of the nature of gross income in our tax system.

The puzzle of gifts may thus be stated, Why is it that the federal tax system departed so quickly, and with so little evident debate, from the Haig–Simons income definition on this issue? And further, why is it that this departure is so comfortable, so deeply ingrained, that it is not generally described as a “loophole,” nor even mentioned in most accounts of “tax expenditures” or similar expressions of the ways in which the actual tax rules have strayed from the ideal?

The central argument of this article is that the answer to the gift riddle buried in the background rules lies in what might be described as a paradox: although it is intuitively appealing to regard value received by gift as an element of the income of the individual receiving it, it is completely unappealing to regard value received by gift as an increment to income in the aggregate.

This article will begin with a description and analysis of the several possible donor- and donee-linked rules regarding income-tax treatment of gifts. Following that will be discussions of the background rules of the U.S. tax system regarding gifts, as well as two areas at the edges of gift doctrine that have received, ironically, more attention from Congress and the courts than the core puzzle of gifts has received: first, the treatment of gratuitous transfers that have been determined to fall outside the protection of section 102, which, after considerable bumbling, has come to what appear to be the correct conclusions; and second, the treatment of gifts made in the form of appreciated property, which has created a variety of conundrums in the contexts of both charitable and noncharitable gifts, and which has not achieved so successful an outcome. Finally, a brief concluding section will include recommendations for changes in some of the more troublesome areas discussed.