IRS rules are not always black or white, and something that I find myself struggling with is what is considered a gift.
Hypothetically, suppose I am moving soon and have a broken leg so I cannot do it myself, or even assist. I get a quote from two different moving companies and they are both exactly $300. Consider the following scenarios:
- My friend, upon hearing that I am going to pay $300 to move, offers to move me for $150. I agree and pay him $150.
My Assumption: this is not a gift. My friend should declare the $150 as income.
- My friend, upon hearing that I am going to pay $300 to move, offers to move me for free. I happily agree, but since I know my friend is hurting for money right now, afterwards I give him $150 since he really helped me out. I still come out ahead compared to if he didn't do me the favor.
My Original Assumption: My initial reaction would have been to say this is a gift. My friend had zero expectation of receiving anything, so from his point of view he received a generous gift from me.
But after thinking about this more, (as strange as it feels to me), I now think my friend should declare the $150 as income in both scenarios. My thinking now is that a gift is defined from the point of view of the giver, not the receiver. The IRS defines a gift as:
What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.
Based on that definition, from my point of view, I received "consideration" from my friend that was worth $300 to me. (Arguably it would be some amount less than $300 since the moving companies probably are insured and my friend is not, but if nothing was damaged, for the purposes of this hypothetical let's assume the value of what my friend provided was worth about $300 to me.)
My New Assumption for #2: Since I did receive "full consideration" and then some (I received twice as much consideration compared to what I paid), my payment should not be considered a gift from my point of view, and therefore my friend should treat it as income.
- Now suppose the same scenario as #2, except this time I'm feeling really nice and since I know my friend is hurting financially, and I'm so moved by his willingness to help me for free that I decide to give him $1,000!
My Assumption: Since the consideration I received is worth at most $300, I did not receive "full consideration" and therefore this is considered a gift.
My question: Are my conclusions correct that my friend should declare #1 and #2 as income, but #3 should be considered a gift? If yes, in scenario 3, is the entire $1,000 treated as a gift, or should $300 be declared as income and $700 of it is considered a gift? (My gut tells me the latter would be more fair but I can't find any evidence of that being the case.)
Note: I realize the numbers used in these scenarios are too small to practically matter. If it's easier to conceptualize, you could multiply them all by 10 or 100. (Though if you use 100 I hope the answer would not be tainted by entering into the Gift Tax realm.) I'm more interested in the proper definition of income vs gift, instead of the practical application for the amounts in question.
Update: I found it more difficult than usual to choose a correct answer to this question, particularly because there are two plausible answers which are the exact opposite of each other. (Everything is a gift vs everything is income.) I found the accepted answer more persuasive mainly due to the idea that what matters most is not what the parties involved are thinking (or are attempting to accomplish), but what a 3rd party (such as an IRS auditor) would think when looking at the situation from an omniscient point of view.