T.C. Summary Opinion 2004-102

UNITED STATES TAX COURT

ANNISA M. OWENS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14326-02S. Filed July 28, 2004.

Annisa M. Owens, pro se.

Alan H. Cooper, for respondent.

DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure. 

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.
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1In the notice of deficiency, respondent determined that

petitioner failed to include in income a State income tax refund

of $843 from a prior year. Petitioner has conceded this issue.

Respondent determined for 2000 a deficiency in petitioner's

Federal income tax of $2,245. After a concession by petitioner,1

the issue remaining for decision is whether money given to

petitioner by her supervisor constitutes a taxable bonus or a

tax-free gift. 

Background

The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference. Petitioner

resided in Redwood City, California, at the time the petition in

this case was filed.

During the year at issue, petitioner was employed as an

executive assistant at Fox Paine & Co., LLC (Fox Paine). On or

about December 10, 2000, petitioner received personal check No.

0435 in the amount of $7,500 from her supervisor, James R. Kroner

(Mr. Kroner). Petitioner's signature and account number appear

on the back of the check, which she deposited into her personal

account. Petitioner resigned from Fox Paine on December 29,

2000. 

Fox Paine issued to petitioner a Form 1099-MISC,

Miscellaneous Income, reporting $5,000 in nonemployee

compensation. When respondent inquired about the payment, a Fox

Paine executive confirmed that the Form 1099-MISC should have
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reported the full amount of $7,500. Petitioner timely filed her

Form 1040, U.S. Individual Income Tax Return, for 2000 but failed

to report the amount received from Mr. Kroner.

Petitioner does not dispute receiving the money. She merely

objects to its classification as a bonus and argues that it was a

gift from Mr. Kroner and therefore not includable in income. 

At the end of the trial, respondent orally moved for leave

to conform the pleadings to the evidence under Rule 41(b). 

Petitioner did not object. 

Discussion

The resolution of the issue in this case does not depend on

which party has the burden of proof; therefore section 7491 does

not apply here.

1. Respondent's Motion

As a preliminary matter, the Court must determine whether

respondent's motion to conform the pleadings to the evidence

should be granted. 
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2Rule 41(b)(2) provides:

(2) Other Evidence: If evidence is

objected to at the trial on the ground that

it is not within the issues raised by the

pleadings, then the Court may receive the

evidence and at any time allow the pleadings

to be amended to conform to the proof, and

shall do so freely when justice so requires

and the objecting party fails to satisfy the

Court that the admission of such evidence

would prejudice such party in maintaining

such party's position on the merits.

Pursuant to section 6214(a) and Rule 41(b),2 respondent

moved to increase the amount of the deficiency. Respondent moves

to increase the deficiency because of the alleged error made by

Fox Paine when issuing the Form 1099-MISC to petitioner. 

Rule 41(b)(2) permits the Court to grant a party's motion to

conform the pleadings to the evidence "freely when justice so

requires" provided the objecting party is not prejudiced by its

admission. Church of Scientology v. Commissioner, 83 T.C. 381,

469 (1984), affd. 823 F.2d 1310 (9th Cir. 1987).

The Court does not find that granting respondent's motion 

would result in prejudice to petitioner. The parties agree that

petitioner received the full $7,500. Accordingly, respondent's

motion to conform the pleadings to the evidence so as to assert

an increased deficiency will be granted.
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2. Payment Petitioner Received

As a general rule, the value of property acquired by gift is

not includable in gross income. Sec. 102(a). Gifts are payments

made out of detached and disinterested generosity and not in

return for past services. Commissioner v. Duberstein, 363 U.S.

278, 285 (1960). Furthermore, a gift must be given out of

affection, respect, and admiration. Id.

In addition, section 102(c)(1) requires an employee to

include in his or her gross income "any amount transferred by or

for an employer to, or for the benefit of, an employee." Only in

"exceptional" circumstances should a transfer between an employer

and an employee be considered a gift in the statutory sense. 

Commissioner v. Duberstein, supra at 287. If the gift is made

solely for personal reasons (such as a birthday or wedding

present) and is in no way related to the employment relationship,

and no anticipation of business benefit exists, then the gift may

qualify for section 102 exclusion treatment. Williams v.

Commissioner, T.C. Memo. 2003-97.

Only in situations where the relationship between the

employer and the employee is personal and the payment is made for

reasons unrelated to the work relationship may it be treated as a

gift. See Caglia v. Commissioner, T.C. Memo. 1989-143 (finding

that payments received by the taxpayer from her employer with

whom she traveled for personal pleasure were not taxable);
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Harrington v. Commissioner, T.C. Memo. 1958-194 (finding on the

basis of social activities and vacations a personal relationship

existed between the taxpayers and the husband's employers). 

Petitioner is unable to establish that she had a

relationship with Mr. Kroner other than that of employeremployee. Indeed, she testified that she did not have a

relationship with Mr. Kroner outside of the work environment. 

Petitioner offered no evidence that would indicate that the

$7,500 was paid for any purpose other than to reward her for

excellent job performance. It appears to the Court that Mr.

Kroner was paying petitioner for the services she provided to him

as his executive assistant. The regulations expressly provide

that Christmas bonuses are included in the definition of

compensation. Sec. 1.61-2(a), Income Tax Regs.

The parties agree that petitioner received a check for

$7,500 from Mr. Kroner. Furthermore, the evidence indicates that

petitioner endorsed and deposited the check she received from Mr.

Kroner into her personal account. The Court holds that

petitioner is required to include the $7,500 in income.
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Reviewed and adopted as the report of the Small Tax Case

Division.

An order will be issued

granting respondent's motion

to conform the pleadings to

the evidence, and decision

will be entered under Rule

155.