Cash Gifting – Why It Should Be Avoided

Posted on September 6, 2010
Filed Under Financial Education | Leave a Comment

Perhaps in your search for how to make money, you have come across a scheme known as cash gifting. There are thousands of websites all over the Internet just waiting to convince you that such a scheme is a great way to make tens of thousands of tax free dollars in very little time. These websites try convince you that they are legitimate by stating that United States IRS Tax Code, Title 26, Sections 2501-2504 and 2511 makes such schemes legal. The pertinent section of the Code states:

One is able to legally transfer up to $12,000 USD within a calendar year to as many individuals as they would like. This sum of money does not need to be reported to the Internal Revenue Service provided that it is within the $12,000 limit. Unfortunately, these cash gifting schemes tend to neglect the most important part of the Code. In order to qualify under this section as a tax-free gift, the money must be given with no intention of receiving anything in return. In other words, it must be an actual gift.

Here is where you have to avoid the putrid yellow Ferrari, the massive cartoon house, and the fake dollars and gold coins which these website attempt to distract you with, and maintain your rationality. I ask you this. Who in their right mind would send $250, $500, $1000, $2500, $5000, or $10,000 cash, overnighted mind you, to a complete stranger? The answer is, someone who is expecting something in return. Therefore, these transactions do not satisfy the requirements of United States IRS Tax Code, Title 26, Sections 2501-2504 and 2511. Anyone who avoids reporting such income is subjecting themselves to tax evasion charges. Furthermore, the Internal Revenue Service does not determine whether an activity, such as cash gifting, is legal or illegal. They just determine whether a transaction is taxable. Thus, this oft cited code does nothing to speak to the legality of cash gifting.

1) Looking At The Cash Gifting Structure

Essentially, the way in which cash gifting programs work is that one individual, who is already a member, recruits another individual, who is not yet a member, into the program. To gain membership, the recruited individual sends their “cash gift”, pays the administrator of the scheme a fee, and fills out some paper work stating that they do not expect anything in return, even though they do. I know of absolutely no cash gifting scheme which actually “sells” a legitimate product or service. Nonetheless, the way in which these schemes attempt to contrast themselves with the illegal pyramid scheme is by being somewhat deviceful.

2) The Illegal Pyramid

Most people are familiar with the illegal pyramid scheme. This is a type of cash gifting which has existed for probably a century. Due to the fact that they are doomed to collapse, and people have to fail in order for them to exist, they have been made illegal in nearly every developed country in the entire world. There simply are not enough people in the world for such a scheme to continue as they are an infinite chain. They are regarded as pyramid schemes due to their endless geometric progression. Just like the type of cash gifting which we have been discussing, these pyramid schemes involve recruiting people to hand over cash to gain membership in a cash gifting club. Similar to the above scheme, pyramid schemes offer nothing of value, no service, and no product.

3) Internet Age 1-UP Cash Gifting

This is most likely what you have seen polluting the Internet. To differentiate itself from illegal pyramids, which are illegal due to their infinite nature, and lack of sustainability, a 1-Up cash gifting was created. With such a structure, there is arguably not infinite chain. Instead, a beginning and end is unnaturally created. The line which this beginning and end form is referred to as a receiving line. Here is how it works. Subject A, who is already a member of the scheme, recruits Subject B, who is not yet a member. Subject A somehow convinces Subject B to overnight cash to them and become a member of the scheme. Thereafter, Subject B is able to convince Subject C to become a member of the scheme. Although Subject B recruited Subject C, Subject B is required to pass up their first “gift” to Subject A. This is where the name, 1-Up comes from. Once the 1-Up has taken place, the receiving line between Subject C and Subject A no longer exists. Thereafter, Subject B will receive “gifts” from future individuals who they recruit into this scheme. *For a more complete explanation, please go directly to the website listed at the bottom of this page.

Currently, there is nothing concrete stating that this new form of cash gifting is either legal, or illegal. I attribute this to its youth. With that being said, you cannot argue its resemblance to an illegal ponzi or pyramid scheme.

While the final decision is up to you, we recommend that you proceed with caution for a couple of reasons. The first reason is due to the fact that internet cash gifting is in such a gray area right now, you do not want to end up being the first defendant in State v. Your Name. Furthermore, if you decide to take your chances with cash gifting, other people will be very apprehensive not only to send untraceable cash to an absolute stranger (you), but will also have concerns of ending up being the named defendant in State v. Their Name. Hence, we conclude that if you are searching for how to make money, that you avoid cash gifting.

Do not fall for the Cash Gifting scam. To find out more regarding Cash Gifting and why you need to stay away, visit analogiclabs.com.

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