When is a "gift" (like a restaurant tip) considered income to the recipient?

Question

What prompted this question is a personal gift to a member of the clergy.

A friend's parents were multi-millionaires. Before they died, they gave millions to Boston College and the Catholic Church (The mom had 6 priests and a bishop at her funeral) and other charities. But in addition, the mom gave money directly to certain priests who had assisted her in her final years. The priests, in turn, used the funds for their personal use like a Rolex Watch, Mercedes, first class tickets to Hawaii for themselves. One priest alone received over $300k over the course of five years.

Isn't this similar to a waiter's tip? The gift was given as a reward for services rendered, just like a tip. Unlike a waiter's tip, however, these gifts are not normally expected.

Other than a waiter's tip, at what other transactions is a discretionary gift considered income to the recipient?

Stuart A. Bronstein · Accepted Answer

The basic rule is that if something is given in response to services rendered and not "disinterested generosity," even if discretionary, it is considered taxable income. The rule is not always easy to apply. In your friend's case something given to a priest who had been good to the donor for years, might be seen as disinterested generosity and not specifically as a result of the services rendered per se. It will depend on all the facts and circumstances.

___ Stu

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JoeTaxpayer · Answer

In the case of the priest who received $300K over 5 years, shouldn't the amount over $13,000 have been reported each year and either (a) tax paid by giftor or (b) a deduction against lifetime exemption noted? A gift to church is a donation, a gift to the priest, under disinterested generosity can't also be a donation, certainly not when spent as OP described. Disclaimer - I am not judging, just trying to parse out the facts.

Stuart A. Bronstein · Answer

Thanks. That's an excellent point. So if the money given to the priest didn't qualify as a charitable contribution or as pay for services, it should be brought back into the estate for estate tax purposes.

___ Stu

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When is a "gift" (like a restaurant tip) considered income to the recipient?

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