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Tuesday, February 15, 2005

Tax Treatment of Bloggers' "Tips"

Tipjar

The Volokh Conspiracy has joined the growing number of law professors with tip jars on their blogs (see also ProfessorBainbridge and InstaPundit).  Regular readers are asked, but not required, to contribute ("tip").  Eugene asked us about the proper tax treatment of these tips: "Should blog tips be treated by us as income (on the analogy to tips for waiters or cabbies) or as gifts (on the theory that there's no social expectation that people give tips -- we expect no more than 1% of our readers to actually tip us)?"

My initial reaction was that Reg. § 1.61-2(a)(1) and the case law are pretty clear that tips are treated as income and not as gifts. Reg. § 1.61-2(a)(1) (tips to clergy after performance of services); Olk v. U.S., 536 F.2d 876 (9th Cir. 1976) (tips to dealers in a casino, even though dealers prohibited from providing extra services and only 5% of customers tipped); U.S. v. McCormick, 67 F.2d 867 (2d Cir. 1933) (tips by bridegrooms to city clerk after obtaining marriage certificate).  The Klein, Bankman & Shaviro casebook reaches the same conclusion with respect to a traveler in an airport coffee shop who leaves a tip even though she will never be in that airport again.

The Bikker & Lokken treatise leaves the door open a crack in light of the faceless nature of the bloggers' tipjar:

If the link between the parties is not the rendition of services by one to the other in a context normally calling for tips, there is a stronger case for excluding the payment under § 102(a), but it is still far from conclusive. Thus, the courts have determined that "tokes" or "side money" given by successful gamblers to casino dealers is gross income despite the argument that the dealers' services are performed in an impartial and impersonal fashion precluding the rendition of favors to the patrons who reward them. If the payments are not made to reward or elicit special treatment or to avoid embarrassment, a test that focuses on the attitude of the payor tends to weight the scales in favor of tax-free gifts; on the other hand, it is obvious that the recipient views them as supplemental compensation, though from a sporadic source.

The same tension is characteristic of birthday and Christmas "gifts" received by entertainers and other public personalities from their fans. The donors get no special services, since the same performance is rendered to the entire audience. The performers, however, surely consider the receipts a welcome supplement to their regular compensation -- a perquisite of stardom. In some situations, it may be possible to classify the patrons by motive, treating some as generous donors of tax-free gifts and the others as customers paying for services.

I raised the question with the TaxProf Discussion Group, and erstwhile blogger Jack Bogdanski (Lewis & Clark) reports that he raised this issue on his Fall 2004 Income Tax Exam (see question 2), and the students concluded that the bloggers must report the tips as income.  Jack notes: "I tend to agree, even though it's not customary yet.  It's not love.  They're applauding the riffs they've read and hoping for more."

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Comments

Would it help to just relabel the "tip jars" as gift jars. I always see tips as being additional money paid for good service. Since the blogs are free and no money is required any money put in would be a "gift of appreciation".

Or is this just playing with semantics.

Posted by: Baronger | Feb 15, 2005 10:21:47 AM

Could you ask your friend Professor Bainbridge why he hasn't commented on the sentencing of "defrocked" priest Paul Shanley for raping boys?

I know Professor Bainbridge has a lot to say about everything, and I'm sure the Catholic law professor has many interesting insights about pedophilic priests in general and Paul Shanley in particular.

Thanks!

Posted by: lefty | Feb 15, 2005 5:18:44 PM

How does the offering of "thank you" gifts for tips -- newsletters, (old) textbooks, etc. -- cut in this determination? I am not a tax lawyer and do not play one on my weblog, but I would think that it would make the finding of tips being income more likely.

For my take on professors who beg, see tears for the mendicant professor and me and my "pal" prof. B.

Posted by: David Giacalone | Feb 16, 2005 9:02:08 AM

I think of blogs as core free speech and personal in nature to the blog author. If a US Senator can roll over their campaign war chest from one year to the next and then claim only the remaining balance upon retirement as income then a blogger should be able to do likewise. The key thing I would look at it is the non-tax-deductibility from the donor's perspective. If the press is supposed to be the fourth branch of government then bloggers that forswear tax deductibility for donations are merely conduits for the speech of others. The donation is to facilitate that speech no less than a donation to a political party or PR campaign on particular issues are all about core free speech.

I don't know of many apolitical blogs, at least I do not follow any. Some people think that all art is political, which could also apply to blogs. Heck, even a statue – David – can be political. Eugene, of all people, should have looked upon taxes upon non-tax-deductible donations to blogs as an impermissible burden on speech, unless and until it is converted to personal use. Bloggers should be able to maintain a rollover balance for future speech and retain anonymity of their donors, unless they consent to the restrictions imposed as a condition of creating one or another legal entity (profit or non-profit) for tax purposes.

Posted by: ron | Feb 16, 2005 12:18:58 PM

I would assume that if the tips are taxable, the expenses are deductible. And, I'd guess that means a lot of bloggers failing to make money would have tax losses, subject to all the usual restrictions of proving they were 'in business' to make a profit from their blogging.

Posted by: Tom Hanna | Feb 21, 2005 12:50:13 PM

I know of one blogger who didn't just ask for tips, she demanded them. She wrote blog entries telling people they owed her tips after reading her "work" for months. Her Tip Jar tagline was "The best things in life are free. Feel free to tip your hostess."

At one point she was receiving enough tips to take a trip to California, which she claimed she did for her the sake of her readers. Later things got ugly and some posters asked if she was claiming her tips as income. She did not answer but a few months later she changed her Tip Jar tagline to "Gift your hostess." Apparently she thinks that clarifies the donations as gifts instead of income.

What do you think?

Posted by: Ryder | Nov 1, 2006 2:52:49 AM

I think that if the donation is made towards for a noble cause, then it had no need to pay tax... This may apply to the situation like donating for natural disasters... Anyway all other intentional donations should be paid..

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Posted by: Trivani Team | Sep 29, 2008 10:52:40 PM