Tuesday, February 15, 2005
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."