Is it legal to receive/send "gifts" of Non-Trivial Amounts to a "friend"?

Question

This can be illustrated in many ways. But for the sake of a concrete example, let's assume a sample scenario: We have an employer (Mr-A) and his employee (Mr-B) also happens to be his "good friend". The annual wage is $x which naturally is subject to income taxes. Here's the catch though: $x is a low number by "normal standards" (e.g. ~$5 annual wage, or ~$50 or ~$500 or ~$5000.. it doesn't really matter).

However, Mr-A gifts his friend items and cash amounting to below $14k, or let's just put it at below $10k annually. This can be ~$9000 or below but it doesn't really matter. Mr-A does not expect to get anything in return from Mr-B, so it is a "true gift". (Though perhaps if Mr-B decides to stop working, Mr-A may also arbitrarily decide not to continue his gifts to Mr-B.)

On top of that, Mr-A's spouse also gifts Mr-B items and cash amounting to below $10k annually, and each of Mr-A's other friends and relatives also gifts Mr-B items and cash amounting to below $10k annually.

In other words, in total Mr-B could've received "true gifts" amounting to over $20k, $50k, or even over $100k a year in cash and items.

Is such a thing legal?

Are there any ways to work around it? (akin to the irish tax loophole used by Apple and Linkedin for corporate taxes which used to work)

Answer 1

Am I right to say that no tax needs to be given for the annual ~$130k USD, since they are considered as annual gift tax exclusion?

Not only that you're wrong, but it also looks like a tax fraud, not just mere avoidance. You'll have hard time proving to any judge or jury that the gifts are "in good faith".

By the way, $5 a month is below minimum wage.

Answer 2

This is tax fraud, plain and simple.

I recently wrote an article The Step Transaction Doctrine, in which I explain that a series of events may each be legal, but aggregate to one transaction and the individual steps are ignored.

In this case, it goes beyond that, by accepting $5/mo you are already outside the tax code. As littleadv noted, you can't work for a legitimate business for free and not expect to have some kind of issue. The $14K/yr gift isn't a bona fide gift, but ties to that work.

Answer 3

In almost all cases, gifts from employers are considered taxable compensation, based on the employer-employee nature of the relationship. Furthermore, cash gifts are always considered to be intended as wages, regardless of how you receive the money.

Furthermore, regardless of whether you expect to receive anything in return (such as contractual consideration) or whether the amounts are large enough to be declared as taxable personal gifts, it is likely that the IRS would consider these payments to be "disguised wages", as these payments would fail several tests that the IRS uses to determine whether benefits provided by the employer are non-taxable, including:

1. Must be occasional or infrequent
2. Must be of nominal value (usually below $100.00, my company's guidelines are even lower)
3. Can never be in cash, with the exception of travel & meals to facilitate overtime.

I'd recommend reviewing IRS publication 535 here, as well as publication 15-B here for more on what constitutes taxable wages & benefits.

It seems very unlikely to me that you could make a persuasive legal defense in which you claimed to be working full-time for $60.00 per year and just happened to be receiving large personal gifts of $130,000.00. In my opinion it seems much more likely that these payments would be found to be taxable wages for services rendered.