'Gifts, Gafts, and Gefts' - the Income Tax Definition and Treatment of Private and Charitable 'Gifts' and a Principled Justification for the Exclusion of Gifts from Income
86 Pages Posted: 14 Mar 2003
What is the proper definition of gifts for purposes of the exclusion from income? The authors consider whether there is a principled policy justification for excluding gifts. Concluding that there is, that policy becomes the base from which the proper definition is ascertained.
The raison d'etre for taxing income is that it represents the market value of current consumption plus the present value of future consumption. Tax law is indifferent as to the identity of who enjoys the future consumption. Once income has been taxed, taxpayer is entitled to use it to purchase consumption without incurring any additional income tax. Taxpayer should be permitted to vicariously enjoy someone else's consumption, and the exclusion of gifts permits him to do so. A single tax could be obtained by taxing the gift to the donee and giving the donor a deduction, but that would do violence to the goals of progressivity.
The principle of allowing vicarious enjoyment conflicts with the principle of taxing persons according to their ability to pay (horizontal equity), and so the two must be balanced against each other. The authors believe that the scales favor gift exclusion, or is in equilibrium.
The Duberstein standard of detached and disinterested generosity for determining what constitutes a gift is appropriate in most cases. While those conditions typically favor allowing vicarious enjoyment, other conditions can exist which change the weight accorded to either of the competing principles in favor of horizontal equity. There are circumstances where the role of the transferee makes the principle of horizontal equity dominant. Duberstein should be modified to reflect that consideration.
The article questions whether costs of making a gift, including gift taxes, regardless of who paid, should be added to the donee's basis. Also, the authors criticize the Supreme Court's treatment of net gifts in the Diedrich case.
The last issue concerns the standard for determining what constitutes a gift for purposes of the charitable deduction. The authors conclude that the Duberstein standard is inappropriate. The purposes for allowing a charitable deduction are quite different from the reason for excluding private gifs from income. The test should be whether the transferor received a financial benefit of a lesser value in return. A difference in value will be deductible if the transferor can prove that it was intentional.
Perhaps, the most difficult issue in this area is what treatment should be accorded a transferor who receives a religious benefit in exchange. The article examines that issue and the problem of valuing a religious benefit.
Keywords: Gifts, Taxation, Charity, Charitable Gifts, Income
JEL Classification: H2, H20, H21, H24
Suggested Citation: Suggested Citation