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Won a Prize

2009-12-16 by Eva Rosenberg

Today TaxMama hears from Jed in Missouri, who says. “I won a trip. Due to health issues, I never booked or took the trip. The voucher has since expired. Now the IRS says I owe tax on the value of the trip. Is this correct?”

Dear Jed,

What? You don’t believe the IRS? This is actually a tough question. You won the prize. The company who gave you the prize issued a Form 1099-MISC with the manufacturer’s suggested retail price as the value of the prize.

Normally, you would do the smart thing and reduce the taxable value of the prize by proving the real retail price – the one people really pay. You would do that by getting ads, or printing out Web pages that
show the real price of a comparable trip. There are some tips in this TaxWatch article about the time Oprah gave a car to every member of her audience. (See link below)

But, not using it at all? I don’t think that’s IRS’s problem.

You won the prize. It had a value.

You chose not to use it, or cash it in, or to sell it, or to gift it to anyone.

I can’t really see a way around the tax – except to prove the reduced value. I may be wrong. So…keep an eye on the comments on TaxQuip #1431. Other tax professionals will be commenting, offering their guidance.

For now, I would just go back to the folks that issued the prize and find out if they can re-issue it since you never used it due to illness.

Incidentally, some of the travel prizes people ‘win’ are really trips with sales pitches for time shares or something else. Make sure your trip was not one of those. Those trips may have very little value, since you have to spend so much time at the sales pitch. Good luck!

And remember, you can find answers to all kinds of questions about winning prizes and other tax issues, free. Where? Where else? At TaxMama.com.

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# | Posted in Tax Quips | Comments » (10)

All Comments

Marc Says:
December 16th, 2009 at 10:23 am

The comment regarding prizes that are sales pitches begs the question about how exactly you account for the time involved.

Another question I have is what would happen, theoretically, if I refused a prize I legitimately won. Would I still owe tax on it? If not, wouldn't the case above be considered a refusal?

Linda Dorfmont Says:
December 16th, 2009 at 11:03 am

I have frequently reduced the "value" of prizes in kind to the documented value available to the general public. One client won a bed from Sears valued at $900 but he found an ad for the same bed at Sears for $600. We deducted the difference.

If I won a year’s supply of dog food which my birds could not eat, it would be worthless to me. If a renter won a home improvement item, it would be worthless to him.

There are ways around the taxability of useless prizes. If it was possible for the winner to eventually use the prize then he owes tax on it, but if he is permanently unable to travel due to a disability, a trip is worthless.

Linda Pang Says:
December 16th, 2009 at 12:03 pm

I like TaxMama, from your Taxquips, I
have been learning so much. I read your email every time, even you said I should go to health area, because I took some health trainning class too, thanks for your information you sent to me before. I want to get both
information about health coach and EA. Thanks a lot!

Thomas Simon, MBA Says:
December 16th, 2009 at 12:27 pm

I see two ways out: First, if the voucher was not tranferable, it was worthless to taxpayer because of the health issue. Second, did the taxpayer attempt to sell the voucher? If he did, and no one would buy it, it would seem to be worthless. Based on the facts, file Form 8275, Disclosure Statement, explaining basis for reduced or zero value.

Lucie Sample Says:
December 16th, 2009 at 12:37 pm

I agree with Thomas. He didn't use the prize or sell it or gift it or do anything else with it. So he got zero value for it. I'd show the income as other income (prize) then take a deduction for the same amount and explain it as a refused or unreceived prize. I'm not sure that you'd need Form 8275 to explain the deduction.

Gregory Noe Says:
December 16th, 2009 at 02:41 pm

I think it's simpler than that. It's the travel that has the value and not the voucher and you didn't receive the travel (for whatever reason) so you did not receive the "value" and therefore it is not taxable. A simple explanation with your tax return should suffice to explain why you did not include the value on your return.

Charlie Says:
December 19th, 2009 at 10:35 am

What about the constructive receipt concept? The prize was set aside for him and the company probably booked an expense for it and sent a 1099, considering the IRS contacted him. So who pays the tax? Of course he didn't actually receive the value because he did not go on the trip, but should he have contacted the company to issue a corrected 1099?

Eva Rosenberg, Your TaxMama® Says:
December 20th, 2009 at 02:14 pm

Hi Charlie,

I think you're right. Excellent point.

The key is the company. If you go back to the company,
you either get a correct 1099 with -0-.
Or you get the prize re-issued.

After all, if there are strings attached to the prize
(like strings attached to stock ownership), you don't
really earn it until you (vest, for stock) or cash it in or
use it for the prize.

Great idea!

Patrick Says:
January 29th, 2010 at 09:38 am

I had this very same problem. I contacted the company, they looked into it. Turns out they were charged a one night penalty for the hotel room, but it fell under the $600 requirement for issuing a 1099. They are sending an amended 1099 for $0.