Legal Question in Tax Law in Washington

Re: Gifting money

Generally, the party making the gift is responsible for paying the gift tax. The person making the gift would file a Form 709 to report any amount gifted over the annual exclusion, which is $11K (it goes up to $12K next year). However, no gift tax is owed if the person making the gift has yet to use up their lifetime gifting amount (which is $1MM) � even though they still have to file the Form 709. So one unmarried person can give up to $1,011,000 to another unmarried person in one year without incurring a federal gift tax if they have not previously used up their lifetime gift amount. Assuming that the person that gave you these funds has not used up this amount, then no federal gift taxes would be due (but they still may have to file the 709, depending). Also, the person making the gift could give you $22K if he/she was married at the time (the law allows married taxpayers to each give one person $11K, even if it is actually just from one spouse).

Moreover, based on the facts you presented, that person should be able to argue that at least a part of the funds were paid to you (to be cashed in your account) as a convenience for your girlfriend (as a loan repayment or gift) and/or your girlfriend�s brother, which could reduce the amount of the gift below $11K (meaning that there would be no tax and no requirement to file the 709). If that failed the person making the gift could even argue that you and your girlfriend are common law married under state law (if your state provides for that) and so they actually were able to make a $22K gift to each of you without incurring a federal gift tax (if the person making the gift was married and you were common law married then they could give you $44K). In that case part of the gift would be repayment of a loan and not a gift and the rest would be within the annual exclusion limit. All of this assumes that everyone involved are US citizens.

As a practical matter you should be sure to document any intra-family money flows, so that you will have some protection if other issues arise (such as someone bringing a suit for recoupment, child support, or any of the other types of problems that come with such transfers).

Hope that helps. Good luck.

Disclaimer: nothing in this post should be relied on in any way as it is not tax or legal advice. This post is not intended to help you avoid the imposition of penalties or other obligations. Nothing in this post creates an attorney-client relationship. You must speak to your tax advisors to discuss your individual situation.

Re: Gifting money

With due respect to my colleague who has already answered this question focusing on the gift tax aspects, I don't think this may not be about gift taxes at all. Instead, it appears to be about income taxes, tax evasion and money laundering.

More facts are needed to fully understand what's going on here. But if the ex-husband owed your friend money for services she rendered to his company, then it is her income, and she must report it as income. Paying it to you in an effort to hide it doesn't work. And if he owed her or her brother the money for personal reasons, he may be paying it to you in an effort to set it up so that he can falsely deduct it as some kind of business expense for his company rather than the nondeductible repayment of a personal debt. It is not income to you if you did not earn it, and you do not have to pay income tax on it.

Breaking up the money into three pieces, each under $10,000, and then having you cash the checks, smells like it is part of an effort to avoid the filing of a CTR or Currency Transaction Report with the IRS (something banks do on cash transactions of $10,000 or more). Breaking up transactions so as to avoid the filing of CTRs is called "currency structuring," and is a violation of the federal money laundering statutes. Someone who takes checks all under $10,000 around to different banks to cash them, or conversely goes to different banks to make multiple deposits all under $10,000, is known as a "smurf," and so the practice of currency structuring is also called "smurfing." This is the kind of thing engaged in by drug dealers in an effort to avoid the filing of CTRs, and it is bad stuff.

And finally, this may be part of a scheme to help your friend appear to qualify for a mortgage for which she doesn't really qualify, and thus may involve a false statement to a federally insured lender -- something that could get all of you in trouble.

You need to understand the facts better. And at the very first hint that any of this is being done to conceal any part of the transaction from the lender's underwriters or from the IRS, you need to get away from these people as fast as you can.