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Sunday, July 7, 2013

Tax Consequences of Aaron's Last Wish

Aaron's Last Wish _ $500 Tips for Waiters and WaitressesNPR, Year Later, 'Aaron's Last Wish' To Leave A $500 Tip Lives On:

Sunday brings a sad memory for the family of Aaron Collins. It marks one year since the 30-year-old Kentucky man died. But the heart warming story of "Aaron's last wish" continues.

As we wrote last July, the family discovered after Aaron's death that his will asked them to "leave an awesome tip (and I don't mean 25%. I mean $500 on a f***ing pizza) for a waiter or waitress."

Aaron's brother Seth took on that challenge. Videos of the surprise and delight on servers' faces when he gave them $500 in cash went viral. Donations started to pour in to the Aaron's Last Wish website. As of this week, more than $60,000 was in the account — money donated by people from around the nation and world who want Seth to continue fulfilling his brother's wish.

Weekend Edition Sunday checked in with Seth to ask about what's happened over the past year. It's all been much more than expected.

Exam Question: What are the tax consequences to the waiters/waitresses who receive the $500?

A.  Income as a tip under Olk v. United States, 536 F. 2d 876 (9th Cir. 1976)
B.  Excluded from income as a gift under § 102
C.  Excluded from income as a bequest under § 102

(Hat Tip: Ann Murphy.)

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Comments

Most likely A. Factually, the $500 tips cannot be a bequest from the late Aaron because the money does not originate from his estate; rather, Seth has collected the funds via donations from the public. (To the extent any of the $500 tips actually came from Aaron's estate, there may be a solid argument the payments are bequests excludible under section 102, but this does not seem to be the fact pattern.)

Seth could argue that the portion of the $500 payment exceeding a commercially normal tip (20% or 25%) is a gift excludible under section 102. Obviously the payment far outstrips any normal tip for a pizza. Arguably, giving motivation the primacy it is due under Duberstein, "a detached and disinterested generosity" most logically accounts for the lion's share of the payment. My gut tells me this argument would lose in court, however.

Seth could improve the facts from a tax perspective; first, by paying the waiter a normal 20% tip, preferably documented on a credit card slip; and, second, on the way out of the restaurant, giving the waiter $500, declaring loudly to all patrons and staff that it is a gift.

Posted by: Jake | Jul 7, 2013 6:01:22 AM

This one is a tough call. Could argue both sides. I would tend to lean on "income from whatever source derived" as the money was received in a business context. But Section 102 could also be argued. This one would need to be decided by a judge since it is such a close call.

Posted by: Steven J Fromm | Jul 7, 2013 7:54:12 AM

Jake:

Seth is one step ahead of you. At the 2:05 mark of this video, he says to the waitress, "I left a tip on the bill, so this is really a gift for you." http://www.youtube.com/watch?v=HyH1O0OQZes

Posted by: Anonymous | Jul 7, 2013 10:11:56 AM

Jake,

After reviewing a couple of articles on the story, it might seem that you are correct. Which the wish was spelled out in his will, the tip did not appear to come from his estate, but rather from donations from outside parties. This would be a murky one to be sure.

Posted by: Chris | Jul 7, 2013 10:58:58 AM

My reaction is that it has to be a gift. Why? Because it makes no logical sense to call money received that was more than the cost of the service a "tip". That's not the etymology of the word, which refers to a small portion of something larger usually the point of an extremity. Since it cannot be a bequest (at least the donation portion) by POE we are left with gift. The solution is mechanical and doesn't even relate to intention.

Posted by: Daniel | Jul 7, 2013 11:02:00 AM

NBC reported last August, "Collins didn’t have the financial means to honor the request, so his family set up a website to help attract donations."

http://www.today.com/id/48736731/ns/today-today_news/t/family-man-who-willed-tips-he-wanted-bring-joy-people/#.UdmojDu1Fpg

So we know it's not an inheritance. But the funds come not from Aaron, or his family, or those who consume the pizza. Rather, they come from donors acting out of detached and disinterested generosity. This, of course, suggests an analogy to the 50s TV Series "The Millionaire," in which benefactors received million-dollar checks, "tax-free" from their (to them, anonymous) benefactor John Beresford Tipton, Jr. Presumably, Tipton owed gift taxes because of his generosity, much as Nelson Rockefeller paid gift taxes on amounts donated to (and not reported as income by) Henry Kissinger.

A contemporary law school exam would instead ask, whether the IRS folks in Cincinnati would allow the Collins website collection effort to be considered tax exempt under section 500(tip).

Posted by: Bob | Jul 7, 2013 11:07:12 AM

I do not know U.S. tax law, but if Aaron wished that his brother leave an "...awesome TIP...", and if the public contributed to that cause, and the brother carried it out, the amount received would be a "tip". If Aaron wanted a $500 gift to be given he could have specified so - say, "I want you to make an awesome gift (and I don't mean $5 or $10. I mean $500 to a tramp sleeping on a sidewalk)". Instead, it was to specifically be a payment made to waitress/waiter after a meal. Indeed, gifts of $500 are not unknown, tips of such value are - and the point about the will is that such outlandish TIP was to be given. I would also presume that under U.S. tax law it is not the quantum of an amount which decides its character, but the circumstances surrounding its payment/relationship between the parties. As Bob says, the more interesting question would be about the collections through the website.

Posted by: Renganath P.R. | Jul 8, 2013 1:30:03 AM

Answer D. Bifurcate the payment; part was compensation and part was a gift under section 102. Because the service worker is not an employee of the tipper, the presumption against employee gifts contained within the statute does not apply. That's my thirty second answer.

Posted by: HTA | Jul 8, 2013 1:26:44 PM

Should Form 1099s be issued if it is non-employee compensation? Best to keep the tips/gifts at less than $600.

Posted by: NOLA | Jul 9, 2013 12:48:31 PM