Merry Christmas everyone. So, now the topic that all the good boys and girls were waiting for: Santa Taxation.
* Is that thing that you found under the Christmas tree taxable income?
This reminds us of the court case of Cesarini v. United States: taxpayer found cash in a piano. Besides the timing issue addressed in Cesarini, the taxpayer raised the question whether the cash was in fact a gift. Gifts are not taxable to the recipient (with the exception of gifts received from covered expatriates) – they are taxed to the donor as a gift tax. The court found that the piano could not have made the gift, hence it was taxable income.
The IRS defines gifts as a “transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.”
So, for it to be a gift, it must be transferred/given by an individual, which we all know is what happened in our case: The donor is Santa Claus. We’ll also be making the simplifying assumption that he didn’t act as part of a promotional campaign for some company
So, the items found under the tree are gifts, not taxable income.
* Next question: is there a reporting requirement?
Well, if Santa Claus is a US person, no.
If he is not a US person, then possibly.
How could Santa Claus be a US person?
– He could be a US citizen
– He could meet the substantial presence test described under IRC 7701(b)(3)(A) but this makes reference to the United States, which as defined by IRC 7701(a)(9) includes “only the States and the District of Columbia.”. We’ll assume that even in the unlikely event (United States had not ratified the UN Convention on the Law of the Sea) in which the North Pole was to be determined to be part of the US and Alaska, such determination would not be retroactive.
– He could be a permanent resident IRC 7701(b)(1)(A)(i)
All available evidence lead us to believe that Santa Claus is a stateless person of European origin, living in the North Pole (which until decided by the UN is in international waters). He spends 1 day in the US per year (possibly in transit between 2 places outside the US), hence does not meet the substantial presence test.
It is understood that he worked at Macys in New York in 1947 (as seen in “Miracle on 34th Street”) but his immigration status was unclear. But we’ll assume that he never was a permanent resident (on a related topic, he has been a victim of a very large campaign of identity theft).
So, we have a non-US person making gifts to US persons:
Reporting on the part of the recipient (good boys and girls):
– If gift is in excess of $100,000: Need to file a form 3520 – no tax due but potential penalty of $10,000 if unfilled or filed late. This penalty may be increased by $10,000 per month per form for continued failure to file. Sorry, kids, yes that’s covered by IRC 6038D(d)
Reporting on the part of the donor (Santa Claus):
– The gift qualifies for the annual gift exclusion of $14,000 under IRC 2503(b) – hence no reporting if amount is less than $14,000
– If the gift is in excess of $14,000, the balance is subject to gift tax.
Wait, what? I thought that gifts from non-US persons were not subject to US gift tax. Well, well, well, that’s true if we’re talking about intangibles, or gifts which are not “U.S. situs assets” but if we’re talking about tangible properties gifted under a tree located in the US.
Just for argument sake, let’s assume that Santa Claus is a US citizen. He never surrender it (Santa Claus, the reindeer, the shrunk gifts and the unshrinking machine – yes that’s how he got them to all fit behind the reindeer, the secret’s out – all enter without inspection since well, they fly).
So, we have a US person making gifts to US persons:
Reporting on the part of the recipient (good boys and girls):
Nothing
Reporting on the part of the donor (Santa Claus):
– The gift qualifies for the annual gift exclusion of $14,000 under IRC 2503(b) – hence no reporting if amount is less than $14,000
– If the gift is in excess of $14,000, the balance is will be deduction from the lifetime $5,000,000 that Santa Claus can give (to be shared among all the good boys and girls). That’s probably why I got less than $14,000 this year now that I think about it.
All right, Merry Christmas and see you around.
