Individual Income Tax Insights: ‘Gifts’ Prove Taxing for the Retiring Derek Jeter

As baseball season will soon reach its conclusion, gift-giving season awaits in the batter’s box. Before the next pitch is thrown it is worth considering what constitutes a tax-free gift versus taxable income. Derek Jeter, recently retired captain of the New York Yankees, offers an exampleof how to distinguish gifts from income.

For the past year Jeter has received various items from opposing Major League Baseball teams as a farewell when he played his final game in their stadiums. For example, the Houston Astros gifted pinstriped cowboy boots, the Los Angeles Angels gifted a massive paddleboard and the St. Louis Cardinals gifted custom-designed cufflinks.

Although described as gifts, Jeter has received income under tax laws. It is estimated that Jeter’s gifts approximately total $33,000, accompanied by $16,000 of state and federal taxes, according to Bloomberg.

What Constitutes As a Gift

The U.S. Supreme Court distinguished gifts from income in Commissioner v. Duberstein, a seminal tax case from the 1960s. Duberstein received a Cadillac from a corporate contact as a result of sharing helpful business information, and Duberstein did not include the car’s value as gross income on his annual tax return because he believed it was a gift.

The court disagreed with Duberstein and deemed the car as income because the gifter’s motive behind giving the car to Duberstein was to continue a professionally lucrative relationship. Since this case was decided, gifts are defined as “detached and disinterested generosity” given “out of affection, respect, admiration, charity or like impulses.”

Tax Treatment of Gifts Versus Income

Distinguishing gifts from income is important because gifts are typically tax-free and income is generally taxable. There is a federal gift tax. However, with the exception of Connecticut, states do not impose a gift tax.

Especially in the context of business relationships, gifts may be deemed taxable income under state law if there is an identifiable motive behind the transferor’s supposed gift. As mentioned in Duberstein, “the most critical consideration . . . is the transferor’s intention” when determining whether something given is a gift or income. Often professional contacts or employers will give gifts as an extra “thank you” for past service or cooperation, which sounds generous on the surface, but it is considered taxable income to the recipient because of the business nature prompting the giving.

In Jeter’s case, he received gifts from other baseball clubs as a marketing and publicity ploy. Although “The Captain” is admired by fans and fellow baseball players, the gifts were not necessarily detached or disinterested. There was typically a ceremony and fanfare surrounding Jeter receiving the gifts, allowing the gifters to capitalize off of his retirement, so the teams had a discernable interest in giving these gifts to Jeter.

Jeter, an athlete with one of the most highly valued sports clubs in the world, will have little problem footing the tax bill, but the simple decision of accepting a seemingly nice gesture may create a costly situation for others.

By: Sarah Mugmon

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