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My husband just received a $700,000 "gift" from the partners at the organization he has worked for for over 13.5 years.

These particular partners sold their share of the partnership, making an extraordinary profit and the "gift" was given to my husband on the day the sale transaction closed, out of a non-business account.

I am struggling with calling this a "gift" and not reporting it as taxable income, but he is adamant that the gift was not at all related to his 13.5 years of working with these partners (who would not know if he never worked for them...). I do not want to get caught up in tax fraud.

Can you please reply so I can show my husband I am not crazy for wanting to claim this amount as income?

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    Boy are you ever correct! I will let an expert answer with citations, but gift or not, taxes are due. I assume this happened in the US? – MrChrister Jul 25 '13 at 4:05
  • A related discussion we had on a similar topic before: money.stackexchange.com/questions/22165/… – littleadv Jul 25 '13 at 4:31
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    There's no separating the 'gift' from the work. Only if the partner(s) die and leave to hubby in their will. That's an exception. The "quacks like a duck" rule applies here. $450K is also a nice 'gift'. Enjoy your post-tax money. – JoeTaxpayer Jul 25 '13 at 14:09
  • Also see related question at money.stackexchange.com/q/22165/3590 although the numbers are smaller and the payment is not "one-off". – Pacerier Jul 9 '16 at 17:15
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You're right about your suspicions. I'm not a professional (I suggest you talk to a real one, a one with CPA, EA or Attorney credentials and license in your State), but I would be very cautious in this case.

The IRS will look at all the facts and circumstances to make a claim, but my guess would be that the initial claim would be for this to be taxable income for your husband. He'd have to prove it to be otherwise. It does seem to be related to his performance, and I doubt that had they not known him through his employment, they'd give him such a gift. I may be wrong. So may be an IRS Revenue Officer. But I'd bet he'd think the same.

Did they give "gifts" like that to anyone else? If they did - was it to other employees or they gave similar gifts to all their friends and family? Did those who gave your husband a gift file a gift tax return? Had they paid the gift tax? Were they principles in the partnership or they were limited partners (i.e.: not the ones with authority to make any decision)? Was your husband instrumental in making their extraordinary profit, or his job was not related to the profits these people made?

These questions are inquiring about the facts and circumstances of the transaction. Based on what he can find out, and other potential information, your husband will have to decide whether he can reasonably claim that it was a gift.

Beware: unreasonable claims lead to equally unreasonable penalties and charges. IRS and your State will definitely want to know more about this transaction, its not an amount to slide under the radar.

This is not a matter where you can rely on a free opinions written by amateurs who don't know the whole story. You (or, rather, your husband) are highly encouraged to hire a paid professional - a CPA, EA (enrolled agent) or tax attorney with enough experience in fighting gift vs income characterization issues against the IRS (and the State, don't forget your State).

An experienced professional may be able to identify something in the facts and the circumstances of the situation that would lead to reducing the tax bill or shifting it to the partners, but it is not something you do on your own.

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    +1 for "hire a paid professional." This entire situation seems very suspicious. – mbhunter Jul 25 '13 at 4:48
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    How about asking the partners if they handled the gift tax? Since they would be responsible for the tax, I'm sure they'd be happy to document they have it covered. (Obviously, that won't happen. Yes, Tax is due) – JoeTaxpayer Jul 25 '13 at 14:05
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You should be aware that the IRS considers all gifts of cash or cash equivalents from an employer (the partnership in this case) to an employee (your husband in this case) to be wages, regardless of what the transfer is called by either party, or how it is transferred. I'd strongly recommend that you review IRS publications 535 and 15-B, which are linked in my response to the question that littleadv referred to above.

I would also recommend speaking with a lawyer, as in this case, you have knowledge of the income and would not be able to claim an "innocent spouse" provision if he is convicted of tax evasion/fraud.

Good luck.

  • +1 for mentioning that "innocent spouse" claim is lost. – littleadv Jul 26 '13 at 17:28
  • Would that be in all cases, or would it just be a very strong assumption? For example, if the husband pulled one of the partners out of a burning car and then received a present, from the partner or from the company? Or if the husband received a present to pay for an expensive operation on a child, or the wife? Both cases where you might argue that it is a genuine present. – gnasher729 Jul 4 '14 at 12:36
  • @gnasher729 The primary issue is not the intention of it being a gift or not. In your examples, this could really be treated as a gift. However, the IRS considers any cash payments or gifts to an employee to be compensation, not a gift, and that is the key distinction. Many companies do not even allow managers to give employees relatively inexpensive gifts as thank-you/appreciation, as they could be considered compensation which has tax implications, which is why small cash bonuses are given at my company rather than small gifts. The IRS pubs I mentioned go into more detail on this. – JAGAnalyst Jul 10 '14 at 16:36
  • My primary point is that you'd be taking an awful lot of risk if you had to defend this in front of a judge. Probably would not be nearly as much of a risk in the cases you mentioned. However, if my employer "gave" me 100% of my salary as a "gift", it would be tough for me to make a real case that this was not in fact compensation. In the cases you mentioned, it might be better for the employer to pay an employee's medical bills directly or send them on a nice trip if they really wanted to do something out of gratitude, versus cutting a check. – JAGAnalyst Jul 10 '14 at 16:38

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