Rev. Rul. 64-40

Consideration is given to the question of whether amounts distributed by a club, a nonprofit membership organization, to its employees out of a Christmas fund contributed by its members constitute compensation in the hands of the recipients for Federal income tax purposes and wages for Federal employment tax purposes and for purpose of the withholding of income tax.

The L Club, a nonprofit membership organization, each year collects a Christmas fund from its members and makes distributions therefrom to its employees, the funds being solicited by means of what may be designated a pledge card on which it is noted that contributions will be distributed as determined by the club's board of governors. They are made to all persons employed on a weekly basis as of the Christmas week, and to all persons employed on that basis prior to that week who completed six months or more of continuous employment.

Under the tax laws `all receipts in whatever form that come because of labor and service, whether payments could be compelled or not, shall be taxed as arising from labor. That only is a gift which is purely such, not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection, regard or pity or from general motives of philanthropy or charity.' James W. Bass v. A. L. Hawley , 62 Fed.(2d) 721 (1933), Ct. D. 693, C.B. XII-2, 169 (1933). Or, as was stated in Commissioner v. Mose Duberstein et al. , 363 U.S. 278 (1960), Ct. D. 1850, C.B. 1960-2, 428, at 431, `A gift in the statutory sense * * * proceeds from a detached and disinterested generosity, * * * out of affection, respect, admiration, charity or like impulses.' Thus, any payment for service, even though entirely voluntary, is compensation within the meaning of the statute. See Old Colony Trust Company et al. v. Commissioner , 279 U.S. 716 (1929), Ct. D. 80, C.B. VIII-2, 222 (1929). Where a transfer or payment proceeds primarily from `the constraining force of any moral or legal duty' such payment is not a gift. See Arthur G. Bogardus v. Commissioner , 302 U.S. 34, at 41 (1937), Ct. D. 1281, C.B. 1937-2, 258. Moreover, where the `payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it.' See Leroy J. Robertson v. United States , 343 U.S. 711, at 714 (1952), Ct. D. 1746, C.B. 1952-2, 66. Thus, tips are considered to be conpensation rather than gifts, and are includible in gross income. Harry A. Roberts et ux. v. Commissioner , 176 Fed.(2d) 221 (1949). Similarly, distributions by an employer to his employees of funds originally contributed by the employer's customers constitute compensation. Lawrence E. Bevers et ux. v. Commissioner , 26 T.C. 1218 (1956).

Thus, it is clear that the distributions made by the employer from the fund contributed by the club members constitute compensation for services performed by the club's employees. Only in those rare cases where the evidence clearly shows that a true gift was intended, i.e. , one motivated by a `detached and disinterested generosity, * * * affection, respect, admiration, charity or like impulses' ( Commissioner v. Duberstein, supra ) will the presumption that the payments are compensation for services rendered be overcome. See and compare I.T. 3726, C.B. 1945, 63, where voluntary contributions to a Christmas fund were not based upon services performed by the employees of the club.

Accordingly, it is held that the distributions made to the employees of the L Club from the Christmas fund made up of contributions by the members of the club constitute compensation which is includible in the gross income of the recipients. considered as tips rather than `wages' whether these distributions may be considered as tips rather than `wagesh for Federal employment tax purposes.

S.S.T. 261, C.B. 1938-1, 452, holds that amounts distributed to employees of the M athletic club from a Christmas fund supported entirely by members of the club do not constitute wages within the meaning of Titles VIII and IX of the Social Security Act (now Federal Insurance Contributions Act and Federal Unemployment Tax Act, chapters 21 and 23, respectively, subtitle C, Internal Revenue Code of 1954).

Subsequently, however, Revenue Ruling 59-252, C.B. 1959-2, 215, defined tips in the following terms:

To constitute a `tip' in the commonly accepted meaning of the term, it is inherent in the nature thereof that certain fundamental characteristics be present. It must be presented by the customer free from compulsion; he must have the unrestricted right to determine the amount thereof; and such amount should not be the subject of negotiation or dictated by employer policy . Generally, the customer has the right to determine precisely who shall be the recipient of his generosity. The absence of any of these factors creates a serious doubt as to whether the payment is really a tip and indicates that it is in fact a service charge for the use of certain facilities and the distributive shares of such contributions will * * * constitute wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act and the Collection of Income Tax at Source on Wages. (Emphasis added.)

In the instant case, the contributions are not made entirely `free from compulsion' and the annual organized fund raising drive is clearly `dictated by employer policy.' Moreover, the donor has no right to `determine precisely who shall be the recipient of his generosity.' In fact, some of the funds are distributed to employees of the club (such as cooks) with whom the donors never come in contact. In addition, the amount distributed to each employee is determined as a result of an employer-employee relationship between the club and its employees. It is probable that the employees perform their services with the expectation of sharing in the fund. Considering the compelling moral obligation of the club members to contribute to the fund, the great control over the fund exercised by the employer, the annual nature of the collections and distributions, and the expectations of the employees, it is clear that these distributions are not tips, but rather an integral part of the wage structure.

Therefore, it is also held that such amounts distributed by the club to its employees constitute wages for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C of the Code).

In view of the foregoing, S.S.T., 261, C.B. 1938-1, 452, is hereby revoked.

Pursuant to the authority contained in section 7805(b) of the Code, the provisions of this Revenue Ruling relating to employment taxes and withholding on wages will be applied only to distributions made on or after October 1, 1963.

¹ Also released as Technical Information Release 535, dated Jan. 17, 1964.