Rev. Rul. 60-14

Advice has been requested whether the payment by a committee of the personal legal expenses of an organization official, under the circumstances described below, constitutes gross income or a nontaxable gift to the official.

During several taxable years, the taxpayer, an official of an organization, was involved in litigation which was of a personal nature but which focused national attention on the organization. For the professed purpose of counteracting unfavorable publicity, a committee was organized to raise funds to pay the legal expenses incident to the taxpayer's defense. Although this committee was not officially organized by the organization, it was composed of individuals who were also organization officials and it transacted committee activities on premises occupied by the organization. In addition, the committee made progress reports regularly to the organization's executive board.

During the years of litigation, a substantial sum of money was collected by the committee, mainly from members of the organization, and the committee expended substantially all of such funds in paying the taxpayer's legal expenses. A small amount which was not expended was turned over to the organization.

In Carro May Audigier v. Commissioner , 21 T.C. 665, the Tax Court of the United States, in determining that a particular transaction resulted in income to the petitioner rather than a nontaxable gift, stated, in part, as follows:

It is settled law that a gift is a voluntary transfer from one person to another without any consideration or compensation therefor. * * * Equally well settled, at least for income tax purposes, is the proposition that a transfer will not be deemed a gift unless it is accompanied by an intent on the part of the transferor to make a gift. * * * Thus petitioner has the burden of proving both essential elements, i.e., absence of consideration and presence of donative intent.

In many instances, the courts have held that the payment by one individual of the obligations of another results in income to the later. See Charles B. Levey v. Helvering , 68 Fed.(2d) 401; and Frank D. Yuengling v. Commissioner , 69 Fed.(2d) 971. In Old Colony Trust Company et al. v. Commissioner , 279 U.S. 716, Ct. D. 80, C.B. VIII-2, 222 (1929), the Supreme Court of the United States, in determining that the payment by one party of the taxes of another party constituted income to the latter even though the payment was voluntarily made, stated, in part, as follows:

* * * we think the question presented is whether a taxpayer having induced a third person to pay his income tax or having acquiesced in such payment as made in discharge of an obligation to him may avoid the making of a return thereof and the payment of a corresponding tax. We think he may not do so.

In determining whether the payment by a committee of the personal legal expenses of an organization official constitutes income or a nontaxable gift to the latter, all of the circumstances of the case indicative of a presence or absence of either consideration for the payment, or of donative intent, must be considered.

In the instant case, the taxpayer was an official of the organization and the funds raised by the committee to pay his legal expenses were solicited, in general, from the same sources as those from which his salary was derived, that is, from the organization members. The committee which solicited the funds was composed of organization officials, occupied the organization's premises, and made reports of fund raising activities to the executive board. In addition, the amount of committee funds remaining after payment of the taxpayer's legal expenses was turned over to the organization. The professed aim of the committee, that is, to aid the organization in general through defense of one of its officials, i.e. , the taxpayer, is not indicative of donative intent. On the contrary, such aim indicates that the committee considered it expedient to participate in the defense of the taxpayer and felt that the organization itself would benefit from his exoneration.

Based on the facts of this case, it is held that the amounts expended by the committee are not gifts to the taxpayer but constitute gross income to him for Federal income tax purposes. Consequently, the amounts actually expended by the committee in paying the taxpayer's legal expenses are includible in his gross income, under section 61 of the Internal Revenue Code of 1954, for the taxable year so expended.