Question

Ricky is relatively well-known in the world of show business and has connections to many famous musicians. He and Lucy are regularly invited to music award shows and even attended the Grammys this year. Attendees of these award shows are often given gift bags with expensive items. This year, at the Grammys Ricky received a new Rolex watch and Lucy received a pair of diamond earrings. The items were free as long as Ricky and Lucy agreed to use them while being photographed. They want to know if these gifts (estimated value of $13,500) are considered taxable income.

Answer 1

IRS defines the gift to be "any transfer to an individual, whether directly or indirectly, where full compensation (measured in money or money's worth) is not received in return". In case of gift, the tax is usually levied on the donor (and not the receipient) subject to certain exemptions and threshold limits.

However, it has been clarified by the IRS that the gifts received by the celebrities are not out of any affection, respect or similar impuses but the donor is deriving the benefits in terms of publicity and promotion of the brand/product. Hence, such gifts are not "gifts" from taxation point of view and will be treated as incomes of the celebrities right from $1 without any value threshold.  

As the gifts are receivied by Ricky and Lucy with the condition that they will use the same while being photographed, this arrangement will help the donors derive promotional benefits for the product and hence Rolex Watch and a pair of dimond earrings are not "gifts" from taxation point of view. The full amount of $13,500 will be taxed in the hands of Ricky and Lucy as professional income.