According to the tax law, prizes and awards are generally included in taxable income. There are specific prizes that can be excluded from income in areas such as religion, science, education, arts, literature or civic achievement. To be excludable, the prize must be given without any action on the recipient’s part, the recipient must not be required to provide services in the future, and the recipient must immediately transfer the prize to a governmental unit or tax-exempt organization.
In 2016, a case arose in which a high school senior was awarded a car by a local car dealership. The dealership was running an event called “Strive to Drive” and awarded the car based on good grades and attendance. Local high schools voluntarily submitted the names of students with perfect attendance and good grades into the contest, and the dealership randomly chose the winner at the end of the school year.
The lucky high school senior who received the car was later shocked to learn that the value of the car was taxable!
The high school senior’s representative argued that the car was a gift under IRS Code Section 102 and should not be included in income. However, the court ruled that the car was not a gift; rather, the car was a prize awarded by the dealership.
Even though the prize was given with no action by the recipient and she was not required to provide services in the future, she did not transfer the car to a governmental unit or tax-exempt agency, so she did not meet the third requirement for exclusion. She kept the vehicle in her name which is ultimately what sealed the case and made the car a taxable prize to be included in taxable income.
If you were lucky enough to receive a prize or award in 2019, contact your Henry+Horne tax professional to guarantee that you’re prepared for the income tax impact.
KC Kolb, CPA