Perhaps you should look at it a different way. The seat belongs to the airline. They are offering it to you as an elite and if you cannot use it, they would prefer to offer it to the next elite. You have possession of the seat and certainly can give it to whomever you choose, but this does violate the spirit of the gift.

I had an analogous situation earlier this year when a business associate offered me 2 lakers basketball tickets he couldn't use. I ended up not being able to go to the game and I called my friend so he could give them to someone else. I certainly could have given them to several of my friends or relatives or even sold them but I did not feel that was right.

So obviously people can give their upgrade to some stranger, but it is certainly not the right thing to do. If I saw this happening, and especially if I was #1 on the upgrade list, I would point this out to the staff and complain.