By: Annette Nellen, Co-Editor of the South-Western Federal Taxation series
Conyers, Order No. 13969-18 (9/11/19) – This designated order held that Ms. Conyers had to report the value of a Jeep and one year of car insurance she won. While a senior in high school in Tennessee in 2016, her high school entered her in the “Strive to Drive” competition that recognizes students with good grades and attendance. The only way to enter was for the high school to do so for the student. In the eventual drawing, C won a 2016 Jeep Renegade which she accepted and registered in her name. The Jeep dealer issued C a Form 1099-MISC for $23,780. C did not include this on her 2016 return as she viewed it as a non-taxable gift.
The Tax Court found that the Jeep was not a gift as the donor’s intent was to treat the transfer as a deductible business expense. The court reviewed the history of the rule on when a prize might be a gift, such as when the recipient had not requested the item or entered any contest.
In 1954, Congress modified §74. “In section 74(b), Congress exempted prizes and awards from income if the taxpayer received the prize made “primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement.” These prizes were exempt “only if―(l) the recipient was selected without any action on his part to enter the contest or proceeding; and (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award.””
A further requirement was added in 1986 that the recipient must immediately transfer the prize or award to a governmental unit or a charity.
C did not meet the prize exception because she did not transfer it to a government or charity but instead registered the vehicle in her name.
CLASS ASSIGNMENTS
- Ask students if they view the ruling as fair and why or why not?
- How will C find the money to pay the tax owed on the prize?
- Review the rules on scholarships that can be excluded from income. Assuming C is college-bound, why isn’t the Jeep a non-taxable scholarship?
- How could this recognition program be restructured to optimize the tax treatment for the recipient?
- Why might the students have been awarded a Jeep rather than a cash scholarship? (Likely the Jeep was donated to the school contest by a Jeep dealer for publicity.)
SWFT CHAPTERS:
- SWFT Individuals: Chapters 4 & 5
- SWFT Comprehensive: Chapters 4 & 5
- SWFT Essentials: Chapters 4 & 10
