IRS Letter Ruling 200437030 (2004)
Background. Many churches provide employees and volunteers with "gifts" at Christmas. Common examples include hams, turkeys, fruit baskets, small amounts of cash, or gift certificates. Church treasurers may assume that these gifts are so small that they need not be reported as taxable income. A recent IRS ruling suggests that this assumption is incorrect.
A charity provided employees with a ham, turkey, or gift basket as an annual holiday gift. Over the years, several employees complained about the gifts because of religious or dietary restrictions, and requested a gift coupon of comparable value. In response, the charity began providing employees with a gift coupon having a face value of $35 instead of a ham, turkey, or gift basket. The coupons listed food stores where they were redeemable. The charity did not withhold or pay any employment taxes for any portion of the $35 gift coupons provided to employees.