New Models Challenge Tax Laws

A gift box with banknote wrapping paper isolated on white.

You may have heard the news report that a women in Omaha, battling cancer, received about $50,000 from strangers after she set up an account with GoFundMe. It was also reported that the IRS is seeking $19,000 of income taxes from her on this amount. [See ABC8, 4/27/15 story and KETV.]

The power of the Internet to easily reach many people throughout the world enables vendors to have a larger market, writers to have more readers, and people seeking funds to potentially raise a lot. Crowdfunding websites can generate funds for many purposes and many of these purposes result in taxable income to the recipient. However, not always. What the woman in Omaha received is a gift under the income tax law.

A well-known US Supreme Court defines “gift” for tax purposes (Commissioner v. Duberstein, 363 US 278 (1960)). Per the Court:

“A gift in the statutory sense … proceeds from a “detached and disinterested generosity,” Commissioner v. LoBue, 351 U. S. 243, 246; “out of affection, respect, admiration, charity or like impulses.” Robertson v. United States, supra, at 714. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor’s “intention.” 286*286 Bogardus v. Commissioner, 302 U. S. 34, 43. “What controls is the intention with which payment, however voluntary, has been made.” Id., at 45 (dissenting opinion).”

Basically, if the giver expects nothing in return and the transfer is not for goods or services provided in the past, it is a gift. Clearly, the $50,000 was given with detached and disinterested generosity.

But, how does GoFundMe know that?  It is liable for penalties if it fails to report information under any rules it may be subject to. While the law is not entirely clear on what reporting is required by the crowdfunding sites, it likely issues a Form 1099-K to recipients of the funds because it handled the transfer of funds.

It would be helpful for the IRS to create a new form or schedule allowing recipients of information returns that may be incorrect or improperly sent, to report them, explain them, AND back them out of their income. This would prevent the IRS computers from finding unreported income when it matches a 1099 with the recipient’s return and sends out a notice. The new reporting form or schedule would prevent the computer from doing this.

New approaches are sometimes needed for new transactions and this simple solution should work here.  Congress also needs to update information reporting laws to make it clear to web-based businesses when they are required to issue a 1099 (and which type) for funds they collect and transfer to someone.  This would help many companies today beyond the crowdfunding platforms – for example, Uber, Lyft, Amazon Mechanical Turks, Task Rabbit, and more.

What do you think?

Original Post By:  Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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