What is a “gift”? Webster’s Dictionary defines “gift” as “something voluntarily transferred by one person to another without compensation” (I kid, I kid). In GoTaxMe: Crowdfunding and Gifts, Professor Jeffrey Kahn challenges the reader to define “gift” for federal income tax purposes in a more robust fashion than simply as transfers made with detached and disinterested generosity. Anyone who has taken a basic federal income tax class knows that § 102 excludes gifts from gross income but fails to define what gifts are. The Supreme Court filled this gap with the Duberstein “detached and disinterested generosity” standard, noting that in determining whether any particular transfer is a gift, “the most critical consideration . . . is the transferor’s ‘intention.’” Professor Kahn uses the example of the (currently) $448,162 donated by 11,709 people to former FBI agent Peter Strzok through the crowdfunding site GoFundMe.com to argue that the Duberstein standard’s focus on the transferor’s intention fails at the edges.
TThe analysis begins by offering two policy justifications for excluding gifts from gross income: the single tax unit justification and the optimum utility of consumption justification. Under the former, transfers between members of a single tax unit don’t make the tax unit better off, so no income occurs. Under the latter, one round of tax “purchases” one round of personal consumption, and if a taxpayer would prefer to transfer that round of consumption to someone else, then that transfer should be allowed—tax-free—in order to optimize the utility generated by that consumption. These justifications are sound enough assuming we can identify single tax units and that one does not consume the “warm glow” of charity, and Kahn concludes that the Duberstein standard incorporates both.
The article then shifts gears to consider whether funds received through crowdfunding campaigns should be treated as gifts. Kahn advocates for a more delicate balancing of policies when conducting gift analysis than Duberstein implies. Despite concluding that such funds are often transferred in such a way as to meet the Duberstein standard and the policy justifications detailed above—particularly the optimum utility of consumption justification, Kahn ultimately rejects gift treatment for such funds because the transferee (or her agent) solicited those funds. This solicitation standard seems workable enough with respect to crowdfunding; after all, from the perspective of the transferee, this active solicitation is similar to active participation in a trade or business. Large scale crowdfunding campaigns seem the easier case though, raising the question of where to draw the line in other cases. For instance, does the college student begging for gas money from his parents cross the solicitation line when they relent? One would think not based on the single tax unit justification, and it would be interesting to see the article explore the relationship between the single tax unit justification and the solicitation standard (or other reasons for including gifts in income) a bit further.
Perhaps the Duberstein standard does better than it appears at first glance by implicitly adopting a single tax unit standard for gifts. A seemingly major source of tension in the analysis is that the tax consequences to the transferee are defined by the actions and intent of the transferor. This leaves open the door for someone to earn a living off of gifts, especially now that crowdfunding sites allow for widespread solicitation of detached and disinterested donations. However, the Code’s default rule is that accretions to wealth are included in gross income, including treasure trove. To qualify for gift treatment, a transferee must prove the transferor’s intention. That task can be quite difficult without having access to the transferor; as a practical matter, a transferee must have a close enough relationship to the transferor to understand (and prove) the transferor’s intention, creating the implicit single tax unit standard. If a transferee has enough of a relationship with a transferor to prove their intention, then they will be presumptively treated as a single tax unit for gift purposes. With this in mind, I wish good luck to Mr. Strzok in tracking down and proving the intention of his 11,709 benefactors; better just to accept Kahn’s conclusion.