Before Christmas, Hughes had received a season's greetings card from his long-lost brother. Attached was a check for $10,000.

When Glenn called to thank his brother, Ernest bragged about his real estate operations in Dallas and suggested Glenn move down there. After a visit, Glenn sold his Oregon home, gave up his job as high school guidance counselor and computer teacher and moved his wife and five children to Texas.

Ernest paid the moving expenses and insisted the family live in one of his houses, rent free. Ernest supported Glenn with company checks until he found a job. Glenn enthusiastically accepted his brother's offer to manage Celestial Connection, a computer store partially owned by Ernest.

Six months after Glenn arrived, Ernest began having financial difficulties. He asked his brother to start making house payments, but Glenn, unable to do so, moved. Then Ernest faced major problems. Celestial Connection failed, his condominium project failed, and he was convicted of fraud.

Unknown to Glenn, Ernest's company had deducted its payments to him and reported them to the IRS as Glenn's salary. So the IRS increased his income by $17,928.

Glenn insisted these were gifts. The IRS refused to budge, so Glenn went to court.

The judge said Ernest's company had no operations and so it had no basis for paying a salary. It merely served as Ernest's personal checking account. Furthermore, Glenn received a salary from Celestial for his services, which he reported. The judge concluded the money from Ernest's company was a gift or a loan, and in either case, not taxable to Glenn.

Gifts aren't taxable income to the recipient; compensation is. The reason for the transfer distinguishes the two. Generally, if the transfer satisfies an obligation, it's income; if made because of affection, respect, admiration or charity, it's a gift. The IRS told Jesse Miller and his wife, Signa, they owed income taxes on the money and home they received in Mamie McLeod's will.

McLeod, whom Jesse considered as his only real mother, befriended him while he lived in a boys' home. When she became disabled, the Millers moved to her house to care for her. Two years later they signed a contract to continue helping with personal and financial affairs. She paid them $100 a month and agreed to give them her Tacoma, Wash., home at her death.

When McLeod died 21 years later, the Millers learned she not only left them the house but $25,000 because of their kindness.

The Millers appealed the IRS decision to tax this as income. The judge issued a mixed decision. He said the house transfer fulfilled a contractual obligation, so it was taxable income. In contrast, McLeod had no obligation to give the $25,000. She made this bequest for their kindness, so they owed no taxes on it.

J. Marion Wright, a Los Angeles attorney, did volunteer legal work for Japanese aliens. In gratitude they honored him at a banquet and collected $10,000 for him. The IRS taxed this as income.

Wright appealed, and a judge ruled the money was tax-free. The court said, the donors had no legal or moral obligation. (more at Other Planning)

THE MORAL: Nice guys don't always finish last.

Released 8-19-96