SIPPED IT ALL TO START FRESH
There has been a LOT of back and forth on this. And I even got a bit curt with the OP about "opinion shopping", which may or may not have been called for or appropriate. I thought I'd take a quick minute and try to summary the crux of the issue -
Compensation is taxable.
Compensation is the word used to describe paying someone for doing something for you.
Gifts are monies given, freely with no strings and for which NOTHING was received.
The waitress who gave you great service, provided you with a service - your tip IS income to her.
The neighbor who's kid has cancer and to whom you give money to help out is treated as a gift as he did nothing for you and on which you based your gift.
The item you bought at auction, paying what you thought it was worth, creates compensation to the recipient.
The money paid to an employee as a Christmas bonus, even though given in the spirit of the holiday IS compensation because you would NOT have given that money to stranger off the street. Had it NOT been for them being an employee they would not have gotten the bonus.
When you give me your old car, because I said I liked it, its a gift - UNTIL I give you $5K on your birthday. At which time IT MAY BE considered a Quid Pro Quo exchange and would likely be reportable and maybe even taxable.
The KEY is to define why something happened, not just how it happened. There are two basic rules of law that govern everything - form over substance (where most attorneys live) and substance over form (where the tax world lives).
The car lease you see on TV shows an "amount due at signing" not a down payment. It shows the lease payment and the number of payments but it does NOT show an interest rate BECAUSE under the legal theory of form over substance it is NOT a purchase contract, its a lease. BUT every tax pro here knows that we have operating leases (true leases) and capital leases (disguised purchase contracts) and we better know how to tell them apart if we want them to survive an examination. SIDE NOTE - when a lease has a buyout clause that is generally less than 10% of the initial cash purchase price it is usually considered a capital lease and treated as a purchase requiring the item be capitalized and depreciated rather than just writing off the lease payments. This requires that we impute the interest rate and allocate the lease payment between interest, which is deductible, and principal, which is not deductible, though we are depreciating the underlying the calculated cost.
For us in the tax world we MUST follow substance over form - the OP had a web site where he made stuff available. His customers could take what they wanted and pay whatever the liked for it, or pay nothing at all. In the end he made something of value available and was compensated for it. Hence, it is reportable income to him.
Gene E. Utterback, EA, RFC, ABA