Is it a gift or not?

Question

IRS rules are not always black or white, and something that I find myself struggling with is what is considered a gift.

Hypothetically, suppose I am moving soon and have a broken leg so I cannot do it myself, or even assist. I get a quote from two different moving companies and they are both exactly $300. Consider the following scenarios:

1. My friend, upon hearing that I am going to pay $300 to move, offers to move me for $150. I agree and pay him $150.
   My Assumption: this is not a gift. My friend should declare the $150 as income.
2. My friend, upon hearing that I am going to pay $300 to move, offers to move me for free. I happily agree, but since I know my friend is hurting for money right now, afterwards I give him $150 since he really helped me out. I still come out ahead compared to if he didn't do me the favor.
   My Original Assumption: My initial reaction would have been to say this is a gift. My friend had zero expectation of receiving anything, so from his point of view he received a generous gift from me.

But after thinking about this more, (as strange as it feels to me), I now think my friend should declare the $150 as income in both scenarios. My thinking now is that a gift is defined from the point of view of the giver, not the receiver. The IRS defines a gift as:

What is considered a gift?
Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

Based on that definition, from my point of view, I received "consideration" from my friend that was worth $300 to me. (Arguably it would be some amount less than $300 since the moving companies probably are insured and my friend is not, but if nothing was damaged, for the purposes of this hypothetical let's assume the value of what my friend provided was worth about $300 to me.)

My New Assumption for #2: Since I did receive "full consideration" and then some (I received twice as much consideration compared to what I paid), my payment should not be considered a gift from my point of view, and therefore my friend should treat it as income.

3. Now suppose the same scenario as #2, except this time I'm feeling really nice and since I know my friend is hurting financially, and I'm so moved by his willingness to help me for free that I decide to give him $1,000!
   My Assumption: Since the consideration I received is worth at most $300, I did not receive "full consideration" and therefore this is considered a gift.

My question: Are my conclusions correct that my friend should declare #1 and #2 as income, but #3 should be considered a gift? If yes, in scenario 3, is the entire $1,000 treated as a gift, or should $300 be declared as income and $700 of it is considered a gift? (My gut tells me the latter would be more fair but I can't find any evidence of that being the case.)

Note: I realize the numbers used in these scenarios are too small to practically matter. If it's easier to conceptualize, you could multiply them all by 10 or 100. (Though if you use 100 I hope the answer would not be tainted by entering into the Gift Tax realm.) I'm more interested in the proper definition of income vs gift, instead of the practical application for the amounts in question.

Update: I found it more difficult than usual to choose a correct answer to this question, particularly because there are two plausible answers which are the exact opposite of each other. (Everything is a gift vs everything is income.) I found the accepted answer more persuasive mainly due to the idea that what matters most is not what the parties involved are thinking (or are attempting to accomplish), but what a 3rd party (such as an IRS auditor) would think when looking at the situation from an omniscient point of view.

Answer 1

There are a few things that this question prompts -

• The step transaction doctrine. I wrote a full page on it, but it's defined as "In short, the tax liability should be determined by viewing the transaction as a whole, disregarding one or more non substantive, intervening transactions taken to achieve the final result.” The original question that let to this one was "Is this investment opportunity problematic?" The linked question contains multiple issues, but the very trail of money suggests there's a profit for the lender and the profit is taxable.
• Quid Pro Quo - On my blog or at this site, the person reading often gets value for their time. There are tax situations, for example, where the wrong move results in a huge tax bill (say, in an IRA withdrawal, vs letting it ride, and taking small withdrawals). If a grateful reader were to send a member a "gift," it's easy to feel that there was no consideration, but in fact, quid pro quo means "this for that," and what looks like a gift from a stranger is really taxable income.
• Bartering - also taxable, with the same gray area of the one time exchange of favors, vs the organized time banks where multiple neighbors are bartering their expertise and time.
• The reality - When friends help friends move and a small amount of money is given, I doubt many actually declare it on their taxes. I don't know how many 12 year olds claim the $10 they got for babysitting. But I do know that when I saw my daughter getting $10/hour, I told her to track it all in a notebook. It was worth declaring the $2000 she made, as it enabled her to open a Roth IRA. The blogger getting a one time $25 might not think twice, but if he has a "tip jar" on his site and regular funds coming in, he's taking a risk avoiding the taxes due.

Answer 2

Part of 'consideration', I imagine, would be the obligation of either party to follow through on an agreement, not only fair market value.

Look at the thought experiment from the opposite perspective.

• If you did not pay him $150 (maybe just $50 or even $0), would you be breaking a contractual obligation to him?

• If he left after 2 hours because he forgot about a family event and did not finish your move, would he be breaking a contractual obligation to you even if you gave him $150?

It seems it can be considered a gift (Update: in all cases)

There was no agreement of what either party viewed as full consideration in a mutual exchange.

To put it another way: From your examples, there is no evidence that the performance of either party hinged on receiving mutual consideration from the other.

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More Updates from comments:

Patterns Matter

Similarly to how the IRS may determine W2 employee vs independent contractor, patterns do matter.

If your friend has a pattern of helping people move in exchange for tens of thousands of dollars in gifts every year, the IRS would view that in a different light. A waitress/waiter has a pattern of accepting 'gifts' of tips in exchange for good service as a part of their established job duties.

If you gifted your friend with $150/week when they watched your kids every Monday-Wednesday, that would be different. You are establishing a pattern, and I would suggest you may be establishing mutual consideration. In that case, consult a professional if you are worried.

Amounts Matter

This is why the gift tax exemption was created. The IRS does not care about the amounts in question here. It is too much of a burden to track and account for transactions that are this questionable and this small.

You gift your friend with a $20k car? Now you need to pay attention. Consult your CPA.

You gift your friend $1k for helping build your new deck? The IRS does not care.

Intent Matters

Even in the first case, it is not necessarily true that your friend considers $150 to be mutual consideration for his services. Would he open a business where he offers that rate to the general public? I doubt it. He intends to gift you services out of his own free will, not because there will be an equitable exchange of value.

The intent of both parties is to give a gift. There is no evidence that would suggest otherwise to the IRS, it seems, even if they cared in the first place.

Answer 3

The IRS definition of gift you quoted has "full consideration ... received in return". If your friend's help is not contingent upon your monetary offer (as is the case in all your scenarios I believe?), then it shouldn't be viewed as consideration in return of your money, right?