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High School Student Owes Tax on Prize for Good Grades

Normally, if you win a prize or award, you’re taxed on the value of the benefit received. However, there are certain exceptions, based on prior case law.

Nov 5th 2019
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Normally, if you win a prize or award, you’re taxed on the value of the benefit received. However, there are certain exceptions, based on prior case law. In a new case, Conyers, Case No. 13969-18, 9/11/19, the Tax Court said that a high school senior owed tax on the value a car awarded to her by a local dealership, even though she technically didn’t enter the contest.

Under the current tax law, the IRS taxes most prizes, awards, raffle and lottery winnings and other similar types of income as ordinary income, regardless of the amount. This is true even if you didn’t make any effort to enter into the running for the prize. Furthermore, you may also owe state income tax on the prize, depending on the state where you reside.

Congress tightened up the federal tax rules after several cases exempted prizes from tax prior to the mid-fifties.

In 2016, the taxpayer in the new case was a high school senior in Tennessee, when a local car dealership held its annual "Strive to Drive" competition. "Strive to Drive" is an academic initiative encouraging good grades and attendance for local high school seniors.

Students don’t enter their names into this competition. Instead, the local high schools automatically enter students who have perfect attendance or good grades into the drawing. At the end of the school year, the dealership randomly chooses a name from the qualifying high school seniors whose names have been entered. The winner receives a free car and insurance for one year.

The dealership drew the taxpayer’s name for the grand prize in 2016. She won a 2016 Jeep Renegade. The taxpayer accepted the car and registered it in her name.

When she filed her 2016 tax return, the taxpayer didn’t include the fair market value (FMV) of the 2016 Jeep Renegade in her gross income for 2016. The IRS then sent her a notice of deficiency, showing additional income of $23,780 and a tax liability of $3,267. The IRS arrived at this amount from a Form 1099-MISC issued by the dealership that included the Jeep Renegade’s FMV.

However, the taxpayer asserted that the vehicle was actually a gift from the dealership. Therefore, she argued that it should be excluded from her taxable income for 2016.

The Tax Court looked at the facts of this case, as well as prior cases and legislative intent, to determine the nature of the award. Significantly, it said that the dealership gave the taxpayers something of value to reward her for her goods grades and perfect attendance. Because she accepted the car as a prize, the taxpayer can’t exclude its value from income as a gift. Bottom line: Although the taxpayer was a grand prize winner, she ended up a loser in Tax Court.

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