Gifts to Employees Fields v. Commissioner

Being in the midst of the holiday season, many people are making gifts to friends, family members, employees, and others important to them. Rarely is much thought given to the income tax consequences of such gifts. A recent case from the Tax Court illustrates how gifts between an employer and employee are treated.[1]

Income Tax Exclusion[2]

As a general rule, an individual’s taxable gross income includes “all income from whatever source derived.”[3] In order to avoid being taxed on income, an exclusion must apply. One such exclusion applies to gifts.[4] When there is a gift, as defined for income tax purposes, the value of the gift is excluded from the taxable gross income of the recipient.[5]

Given that exclusion from income, it is critical to understand what constitutes a gift for income tax purposes. As the Tax Court stated in the Fields case, “a gift must proceed from a detached and disinterested generosity, motivated by affection, respect, admiration, charity, or the like for income tax purposes.”[6] The Tax Court has previously noted that the critical inquiry is the transferor’s intent.[7] However, while that is the critical inquiry, the transferor’s characterization for tax purposes is not determinative, but rather the transferor’s intent in making the transfer.[8]

Employer-Employee Gifts

Purported gifts between an employer and employee are more complicated. The income tax exception applicable to gifts “shall not include any amount transferred by or for an employer to, or for the benefit of, an employee.”[9] As such, while the income tax exclusion applicable to gifts applies generally, there appears to be a statutory prohibition to excluding income related to gifts from employers to employees.[10]

Notwithstanding the seeming clarity of the statute, the Tax Court has continued to recognize that gifts from an employer to an employee may continue to be excluded from income in certain instances:

a payment between an employer and an employee may be a gift when the relationship between the employer and the employee is personal and unrelated to work. Caglia v. Commissioner, T.C. Memo. 1989-143; Harrington v. Commissioner, T.C. Memo. 1958-194. The personal relationship may be indicated by after-work social interactions or activities such as gambling trips. See Caglia v. Commissioner, supra; Harrington v. Commissioner, supra.[11]

Based on this authority, although it appears Congress attempted to establish a clear rule that employers may not make income tax free gifts to employees, the Tax Court has recognized that having relationships outside of work may allow such tax free gifts to be made.[12] However, there is a “strong presumption” that such transfers are not gifts.[13] Ultimately, the question is one of fact.[14]


In the Fields case, Jennifer Fields was employed by the Canadian counterpart to Paragon Gaming, working in Vancouver, British Columbia. In 2012 and 2014, payments were made to her by Paragon which were not classified as salary at that time. In 2017, Ms. Fields’ employee relationship with Paragon terminated. At that time, Ms. Fields and Paragon appear to have negotiated as to how the 2012 and 2014 advances would be treated.

Initially, Ms. Fields was presented with a Severance Agreement which stated the “advances that are currently outstanding with the company and owed by you will be written off. You will provide the company with a complete W-9 form. The company will subsequently issue you a 1099, and you will be responsible for remitting any applicable taxes.” A revised Severance Agreement was prepared that classified the advances as loans to Ms. Fields that would be reduced from her severance payments, provided she complied with certain conditions. This Severance Agreement was never signed. Ultimately, Paragon issued a 1099-MISC to Ms. Fields reporting the advances as income in 2017.

Ms. Fields did not report the amount of these advances in income on her 2017 personal income tax return. Rather, she argued that the advances (or the 2017 decision of Paragon not to collect the prior advances) was a gift due to her personal relationship with Paragon’s CEO, Scott Menke. In support of this argument, Ms. Fields produced emails, text messages, and other  correspondences which she purported illustrated the transfer to be a gift for income tax purposes. However, the Tax Court did not find that Ms. Fields’ personal relationship with Mr. Menke supported this treatment. Rather, the Tax Court found the evidence to show Paragon’s clear disagreement with treating payments as a gift. The forgiven amount was described in Ms. Fields’ Severance Agreement and was reported on a Form 1099-MISC. Not only that, the Tax Court found Ms. Fields lacked good faith and a reasonable basis for her reporting position. As a result, she was subject to accuracy related penalties.


Anecdotally, I have seen situations where employers have claimed cash gifts to employees made during the holidays as “gifts” qualifying to be excluded from income. As stated above, the relevant exclusion statute seems to quite clearly say the exclusion does not apply for gifts between an employer and employee. While Treasury and the Tax Court may be willing to back off that statutory bright-line rule, the situations where the exclusion will apply in an employer-employee relationship will be quite narrow and taxpayers claiming exclusion will be required to overcome a “strong presumption” otherwise. Simply put, cash gifts to an employee will almost always be a taxable bonus for income tax purposes.

Here, it is hard to see how Paragon would have made a gift to Ms. Fields due to her relationship with another employee. Her personal relationship was not with her employer, but rather with another employee of that employer. That other employee may have been the CEO. However, I question whether a relationship with another employee can support a gift by the employer. In such a case, perhaps there would have to have been a deemed payment from the employer to Mr. Menke so that he could make the tax exempt gift to Ms. Fields, thereby taxing Mr. Menke on the transferred amount.

As with many, if not most, areas of tax law, clearly documenting facts and acting consistently with those documented facts can be critical to the results. Here, the facts were not clean at all. As just stated, Ms. Fields’ personal relationship was not with her employer, but rather another employee. Nothing at the time of the transfers indicated any intent to treat the transfers as gifts. The employer, Paragon, issued a 1099-MISC and referenced the amount as due to Paragon from Ms. Fields (i.e. not a gift, but a loan). If the parties had truly intended the transfers to qualify for the income tax exclusion, careful planning “may” have allowed for that treatment. However, given the statutory limitation for cash gifts to employees and the “strong presumption” to be overcome, it would have been necessary to be quite clear in that intention and to support the intended treatment with unambiguous factual evidence to have had any chance whatsoever in achieving Ms. Fields’ intended tax results. That simply was not the case for Ms. Fields and, as a result, she ended up owing not only income tax, but also penalties.

[1] Jennifer Joy Fields et al. v. Commissioner, T.C. Sum. Op. 2022-22 (Nov. 10, 2022).

[2] These issues are not only relevant for income tax purposes, rather they also raise gift tax considerations which are beyond the scope of this writing. For an example of where classification of payments as gifts, and the gift tax consequences, see Mills, Devin, “Original Characterization by Taxpayers Matters, Even When Reporting Improperly,” Aug. 23, 2021,

[3] IRC § 61

[4] IRC § 102

[5] IRC § 102(a)

[6] Fields, T.C. Sum. Op. 2022-22 (Nov. 10, 2022), citing Commissioner v. Duberstein¸ 363 U.S. 278, 285 (1960).

[7] Larson v. Commissioner, T.C. Memo 2008-73

[8] Id.

[9] IRC § 102(c)

[10] Note that this does not apply to non-cash gifts such as birthday or holiday gifts. Treas. Reg. § 1.132-6(e)(1).

[11] Larson v. Commissioner, T.C. Memo 2008-73

[12] See also Prop. Reg. § 1.102-1(f)(2) where Treasury proposed regulations that would have recognized that transfers to an employee who is the natural object of an employer’s bounty may be recognized as excludable gifts for income tax purposes.

[13] Van Dusen v. Commissioner, 166 F.2d 647 (9th Cir. 1948); Botchford v. Commissioner, 81 F.2d 914, 916 (9th Cir. 1936); Jackson v. Commissioner, 25 T.C. 1106, 1111 (1956); Walker v. Commissioner, 25 T.C. 832 (1956); and Laurie v. Commissioner, 12 T.C. 86 (1949).

[14] Alhadi v. Commissioner, T.C. Memo 2016-74


[**Practice Alert: Corporate Transparency Act is Here: What You Need to Know**](
[**Practice Alert: Corporate Transparency Act is Here: What You Need to Know**](