Tax Treatment of Bloggers' "Tips" Redux

Earlier this week, we blogged the tax consequences of the increasingly common practice of law professor bloggers (like The Volokh Conspiracy, ProfessorBainbridge, and InstaPundit) soliciting "tips" from their readers.  Eugene Volokh prompted the discussion by asking:

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)?

In my prior post, I quoted the Bittker & Lokken treatise's conclusion regarding "gifts" to entertainers that "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," as well as Jack Bogdanski's view that bloggers have to report tips as income.

Eugene has pressed the point in asking whether bloggers can rely on Goodwin v. United States, 67 F.3d 149 (8th Cir. 1995), to treat the tips as gifts rather than income:

As I read Goodwin -- which of course held that a congregation's gift to its pastor was indeed income -- the court rejected the government's test, which is that any payment "directly attributable to the services that taxpayer performed" for the giver would be income and [not] a gift. The court seemed to suggest that a "twenty dollar gift spontaneously given by a church member after an inspiring sermon" would *not* be income; the court's rationale for treating the payments as income was that they were motivated not just by spontaneous individual generosity, but rather by congregation's desire to "retain the services of a popular and successful minister."

If that's so, then wouldn't small individual payments to a blog be almost identical to the "twenty dollar gift spontaneously given . . . after an inspiring [communication]," and thus gifts? True, if there was reason to think that the tips would materially help keep the blog running, that might be more like the "retain the services" motivation. But if it's clear that the tips mean very little (for instance, because they're nothing compared to ad revenue), or at least no more than the twenty dollars mentioned by the Goodwin court, then it would be a gift.

Or am I misreading Goodwin or, perhaps, is Goodwin an outlier?

The TaxProf Discussion Group sprang into action, with folks defending the view the tips should be income to the bloggers:

• Jack Bogdanski: In the Ninth Circuit, we (and Prof. Volokh) have Olk v. United States, 536 F.2d 876 (9th Cir. 1976), which held that craps dealers' "tokes" are gross income, not gifts, as a matter of law. The opinion, written by one-time tax prof Judge Joseph T. Sneed, included this passage:

Generalizations are treacherous but not without utility. One such is that receipts by taxpayers engaged in rendering services contributed by those with whom the taxpayers have some personal or functional contact in the course of the performance of the services are taxable income when in conformity with the practices of the area and easily valued. Tokes, like tips, meet these conditions. That is enough.

• Mike McIntyre: The statement in Goodwin is dicta. I'm speculating here, but I doubt that any parishioner has ever come up to a member of the cloth and given $20 as payment for an inspired sermon. I've personally seen tips to priests for performing wedding hundreds of times, and occasionally (but VERY occasionally) for performing funerals. Never, ever, have I seen the gift hypothesized by the court in Goodwin. So I do not have a firm view on the proper treatment of an event that I think would never occur.

I'm stopped by a policeman. He says I'm going 45 in a 30 mph zone and gives me a ticket. As he starts to leave, I call him back and say that I appreciate his courtesy and his fearless enforcement of the law, and here is $20 as a gift to show my appreciation. Income to the cop? What is going on? Am I secretly hoping he now will not show up when I contest the ticket? Am I genuinely being generous?

Well, I think the gift for the inspiring sermon is even more unlikely than the copper tipper. Well, lets get personal. I give inspiring lectures to my students all the time. I've gotten the occasional nutty gift at the end of the term. But never, in 30 years of teaching, has a student stopped me on the way out of class, congratulated me on a job well done, and slipped me an extra ten spot. If it happened, I guess I might think it might be a gift. Just hard to get my mind around such an implausible hypo. Again, the inspired sermon hypo is even more unreal to me.

In contrast, the blogger tip case is easy to understand. We know it happens, and we know why it happens. Speculation in dicta by the Goodwin court about a case that never arises is not authority for upsetting the apple cart IMHO.

• Jim Maule: The blogger puts "if you like this and want more, drop me a few bucks" tag on the web site. Most preachers, I think, do not end sermons with "if you liked it and want more, drop a twenty in the collection plate when it comes around." Does the "fishing" for the money make a difference?

In the end, aggressive bloggers may choose to rely on Goodwin to justify not reporting the tips as income and instead treating them as gifts.  Indeed, one can make the case that the the blog reader tipper and blogger tippee lack the "personal or functional contact" required under Olk. But of course, the very lack of personal contact could be turned against the bloggers to argue that the tips should be treated as income rather than gifts.  Bloggers who take that reporting position run the risk that, if audited, Goodwin may not carry the day with the IRS or a court.