Question

Required: Ignoring capital gains tax, discuss whether Ross’s receipt of the laptop constitutes assessable income.

Stacey enters into a contract with a builder for some major renovations on her main residence. However, she finds that much of the work undertaken by the builder is substandard. She wished to take the builder to court. To save costs, Stacey did not engage a lawyer. Rather, she handles a lot of the legal work herself and often seeks the informal guidance of Ross for advice. Ross is a full-time lawyer and has been friends with Stacey for over 20 years. Stacey will often speak to Ross about what her next step should be in the legal proceedings against the builder. When Stacey prepares written correspondence and official documentation relating to the case herself, she gets Ross to review it. Ross does all this for free. For a few months, Ross typically spends about 2 hours a week on this.

Ultimately, Stacey’s case with the builder is settled out of court for an amount that Stacey is very happy with. Stacey, as a show of gratitude for Ross’s help, buys him a brand-new laptop worth $4,000 as a present, which Ross reluctantly accepts.

Answer 1

Note :- The solution has been provided keeping in mind the Gift Tax Rules in United States. All the countries have their own different tax policies and different tax governing authorities regarding Gift Taxability Rules.

According to the Chapter 12, Subtitle B of the Internal Revenue Code, U.S. , this tax is imposed by Section 2501 of the Code.

Definition: - For the purpose of taxable income, the definition given as per the rule for a “Gift” is as follows-

· Gift means any sum of money, movable property or immovable property which is received without consideration in return.

· Gifts are often given out of affection, respect, admiration, charity and other similar purposes.

· A Gift is considered as a gift only when the donor receives nothing of any value in exchange for the given gift.

Facts:-

When a taxable gift in the form of cash, stocks, real estate, or other tangible or intangible property is made, the tax is usually imposed on the Donor (the giver) unless there is a retention of an interest which delays completion of the gift.

The person who is getting the gift (the receiver) typically doesn’t have to pay the gift tax. Only the giver will file the annual gift tax return in case the gift amount exceeds the annual gift tax exclusion amount, which is $15,000.

Solution to the above case:-

Stacey has gifted his lawyer friend, a brand new-laptop worth $4,000 as a present for helping her in winning the case against the builder. The giver (Stacey) has made the transaction without any consideration in return, so Stacey is not going to receive anything in exchange of gifting the laptop to Ross. She has given this gift as a token of gratitude to Ross who has selflessly dedicated his time and efforts towards her legal matter. Since, the amount of the gift doesn’t exceed the minimum amount to be eligible for taxable income; there is no need for Stacey to pay any gift tax.

Conclusion: - Ross’s receipt of the laptop doesn’t constitute assessable income here.