Actually not always true. Many years ago I owned a home and my boyfriend paid me what I considered rent each month. I called the IRS and asked how to report this. After a discussion, they said I could *not* consider it rent because there was not a well defined portion/room in the house that I was renting out. Since it was under $12,000/year, I decided if I was ever questioned, I would claim it was a gift, and under the reportable amount to trigger a gift tax for him.
Phone calls with the IRS are not legal authority. "[T]he authoritative sources of Federal tax law are in the statutes, regulations, and judicial decisions", not in oral statements made by IRS representatives during a phone call.
Zimmerman v. Commissioner,
71 TC 367, 371 (1978), aff'd without opinion 614 F 2d 1294 (2nd Cir 1979). According to regulations promulgated by the Commissioner of Internal Revenue under
5 USC § 301, "[a] taxpayer may, of course, seek oral technical assistance from [the IRS]" but "[
s]uch oral advice is advisory only and the [IRS] is not bound to recognize it".
26 CFR 601.201(k)(2). The bottom line is that you can't rely on IRS customer service agents to do your taxes for you.
That said, and with the caveat that we do not have all the facts so I cannot and will not comment on your specific situation, it appears that the IRS agent may have managed to state an accurate proposition of law here, although you may have misunderstood the significance (or lack thereof) of that accurately stated proposition of law.
The question of whether a receipt of money represents "rent" is really a question of property law, which is governed by state law. See
Burnet v. Harmel,
287 US 103, 110 (1932) ("The state law creates legal interests but the federal statute determines when and how they shall be taxed."). See also two posts I wrote on
December 11, 2015 and
December 17, 2015, where I also relied on this proposition.
The rules very by state, but generally speaking (and with various exceptions), the core essence of a tenancy is that the tenant is "grant[ed] exclusive possession of
designated space ..., subject to rights specifically reserved by the lessor".
Am Jewish Theatre v. Roundabout Theatre Co,
203 AD2d 155, 156 (NY App Div 1994) (emphasis added). An arrangement whereby a person pays money in exchange for the right to share in use and occupancy of the premises is not a tenancy, but rather a
licence (and the occupant is a "licensee").
Id. The money paid is not "rent" but rather "licence fees" (*) for the licence to use the property.
However, the more salient question is: Does the fact that the money is licence fees rather than rent change whether it is included in the taxpayer's income? And the answer to that question is generally "no". Gross income is defined to include "rents" (
26 USC § 61(a)(5)), but it also defined to include "all income from whatever source derived", which surely includes licence fees. Regardless of whether the money is rent or licence fees, it is still included in gross income, and it is still subject to federal income tax, unless specifically excluded from income by another provision.
As you correctly note, one such exclusion is that gross income generally does not include gifts.
26 USC § 102(a). However, if money is a gift, it is by definition neither rent nor licence fees, because a necessary condition for a payment to be a gift within the meaning of the statute is that the payment of the alleged gift "proceeds from a detached and disinterested generosity ... out of affection, respect, admiration, charity or like impulses".
Brown v. Commissioner,
47 TC 399, 408 (1967) (citations and internal quotation marks omitted), aff'd without opinion 398 F 2d 832 (6th Cir 1968), cert denied 393 US 1065 (1969). In other words, if the payment was either rent or licence fees, it could not have been a gift; and, by way of contrapositive, if the payment was indeed a gift, it was not necessary to analyse whether it was rent or licence fees because it could not have been either.
In conclusion, although the IRS agent probably stated an accurate proposition of law, that proposition was wholly irrelevant to the correctness of your position that the item was a gift. (Note that I express no view on whether your position is in fact correct.)
((*) An earlier version of this post used
the term "royalties" rather than "licence fees", but after further review, I determined that "licence fees" is the predominant term in this context, so I decided to use it instead.)