Yep, that's majorly dysfunctional.
Any chance you can say "we'll be giving a donation to X" in lieu of Christmas gifts this year. If they're going to mock you, at least the little money you have could be doing some good!
I agree that is gift-receiving a time to model and practice manners. My family likes gift lists, so I put on things that I know my kids would like. Dh's family doesn't. Sometimes we get some really, um, interesting things. But it's given with love, and I'm not going to mock it or refuse it. And if your child ever has birthday parties with peers, who knows what you'll get!
And sometimes these gifts that are 'off' can be easily regifted. Ds got some legos for his birthday last year. The boy has never in his life built with legos. It sat around, unopened, for 6 months. Dd was invited to a birthday party on Saturday this last week. It had been a busy and hectic week, and we literally had 3 things to do on the morning before the party. Buying a present was going to be difficult. That little lego set came to the rescue. The birthday boy loved legos. I asked ds if it was OK if we gave the lego set away. He said "sure". Problem solved.