Authors

Mark W. Cochran

Journal Title

Akron Tax Journal

Volume

5

Issue

1

First Page

27

Document Type

Article

Publication Information

1988

Abstract

To eliminate uncertainty for taxpayers and inconsistency from the courts, Congress passed the Tax Reform Act of 1986, which is applicable to “gifts” from employers to employees. Congress added three Internal Revenue Code provisions applicable to such gifts. First, Section 102 sets forth a general rule that property transferred by an employer to an employee shall not be excluded from the employee’s gross income as a gift. Second, Section 74 potentially excludes certain retirement awards. Third, Section 274 limits an employer’s deductions for such retirement awards. These three provisions should mark the end of many years of uncertainty for taxpayers and inconsistency on the part of the courts, Congress, and the Commissioner. At the same time, the new provisions, like any new legislation, give rise to new uncertainties.

Historically, uncertainty and inconsistency have characterized the tax treatment of gifts to employees. Courts, Congress, and the Internal Revenue Service have all contributed to the confusion over whether an employee may exclude from gross income the value of a gift from his employer, and whether the employer may deduct the cost of such a gift as a business expense. Even with the guidance provided in Commissioner v. Duberstein, holding that an excludible gift must proceed from “detached and disinterested generosity,” courts continued to reach widely varying results in seemingly similar fact patterns.

Shortly after Duberstein was decided, Congress enacted a dollar limitation on the deductibility of gifts as a business expense. This implied that a gift might be both deductible by the donor and excludable by the doneee. Next, Congress adopted a blanket rule that transfers to employees are not excludable from the employee’s gross income as gifts, which finalized the Tax Reform Act of 1986 and resolved much of the uncertainty that previously existed.

Recommended Citation

Mark W. Cochran, Cadillacs, Gold Watches, and the Tax Reform Act of 1986: The Continuing Evolution of the Tax Treatment of Gifts to Employees, 5 Akron Tax J. 27 (1988).

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