Section 102(a) excludes from gross income property acquired by “gift, bequest, devise, or inheritance.” The oft-quoted standard for determining whether an uncompensated transfer qualifies as a gift is set forth in the Supreme Court’s 1960 decision in Commissioner v. Duberstein, as a transfer preceding from “detached and disinterested generosity” and not in return for past or future services. The crucial factor in applying the Duberstein standard is the intention that the transferor had in making the transfer; however, there are situations in which that standard should be modified by taking into account the circumstances of the transferee.
In the Tax Reform Act of 1986, Congress added subsection (c) to section 102 to replace the subjective Duberstein standard with a more objective rule in one specific situation. Section 102(c) provides that the exclusion from income of section 102(a) cannot apply to a transfer from an employer to, or for the benefit of, an employee. The focus of this Article is to examine the following questions: (1) whether, despite its unrestricted language, section 102(c) does not apply to some gratuitous transfers to an employee; (2) if so, what are the exceptions to section 102(c); and (3) when section 102(c) does not apply to a transfer, whether it will be excluded from income.
If section 102(c) does not apply to an inter vivos transfer to an employee, the transfer must then satisfy the Duberstein standard to qualify as a gift. Part II of this Article examines the conditions under which a gratuitous transfer to an employee will be excluded from income under the Duberstein standard and under the normal tax treatment of testamentary transfers—in other words, how the section 102(a) gift and bequest exclusion from income is applied when section 102(c) is inapplicable. Part III examines the operation of section 102(c).
Before examining the application of the Duberstein standard to employee gifts, it is useful to put that standard in context by considering a policy justification for excluding gifts from the donee’s income. The determination of whether a specific transfer qualifies as a gift for tax purposes should consider whether treating the transfer as a gift would be consistent with the policy reasons for allowing an exclusion. Professor Jeffrey Kahn and I examined that issue in a 2003 article and proposed a principled rationale for the exclusion. The brief discussion of this issue in Part I is drawn from that article, and the position of the Author on that issue and response to contrary views are set forth more thoroughly in that earlier article.