Raffle winnings

How does one determine if the winnings are transferrable? If it is is transferrable then that could be a loophole in the tax code because it means I get get 100k salary or capital gains and then transfer this

100k to someone else or to charity and let them deal with the tax bill. However, there is a concept of nominee interest, which is transferrable; and also qualified intermediaries for like kind exchanges. If it is not transferrable then I imagine the $2,700 is line 21 Other Income, $20 is Schedule A line 28 Other Miscellaneous Deductions (not subject to 2% of AGI limit). The sale at $2000 is a loss of 2700-2000p0, and if the item is for personal use the loss is not deductible.

As the question is posed, I think it presents two issues: 1) the FMV of the gift certificate, and; 2) the assignment of income. It's a long-established tenet of tax law that income cannot be assigned. I think it was Lucas v. Earl in which the Supremes ruled something to the effect that income is the fruit of the tree that bore it. There is the fall back issue of disclaiming the gift certificate and trying the direct its maker to issue it to another person of your choosing but I doubt the maker will go for this.

That puts you back to the first issue. The income tax reg at 1.74-1 says recipients of prizes and awards are taxed on their FMV. If you were to redeem the gift certificate for its $2,700 face value, that should leave you with $2,700 of income to report on line 21. Assuming it's transferrable, if you offered it for sale on e-Bay and it fetched $2,000, I think you could make a reasonable case for reporting $2,000 of income. You would need to attach Form 8275 citing Reg. § 1.74.1-1 as your authority for doing so.

Condor

You have $2700 of income as that is the FMV of the gift certificate. Auctioning it on E-Bay has nothing to do with the value of the certificate. Your sale on E-Bay is a nondeductible loss on the sale of a personal asset. You would have $2000 cash to pay the tax due on the $2700 of income.

Sorry, but you're wrong. Just because something has a list price doesn't mean that's its "value." The value is what a willing buyer would pay a willing seller. And what someone could get on eBay is a much better determination of market value than the aggregate list price of goods (the price the seller hopes he can get) that are slapped on by a retailer.

Stu

There is no disagreement about the assignment of income being verboten. The maker would have no problem with issuing it to someone else. One of the people in charge had to have the issuance of a 1099 explained to him. One suggestion was to have it issued to one of your children who could then pay taxes on it. To wit, I mentioned the interests and penalties such a transparent transaction would create,

That's what I needed to read! Thank you.

There are a few issues unmentioned. One is that the gift certificate is worth up to $2,700 and must be used to purchase one of a selected set of equipment for homebrewing beer. So it's value is determined by which set you actually purchase.

I have no need for any of these sets of since I make primarily make Mead and not beer. There is a more significant personal issue that my childbride might go ballistic over a further attempt to commandeer more space in the basement.

Another issue is that it's a third party transaction. The store sold the gift certificate to the raffle. The store is an important continuing relationship for the raffle sponsor so it would essential to get the store's permission before going to eBay or Craigslist.

There is also the issue of what the raffle sponsor paid for the gift certificate as being it's FMV if the certificate is not put up for auction.

Dick

Normally I would agree with you, but in this case, the gift certificate is not the list price. The gift certificate is worth $2700 of goods in the store where various items may be on sale and represent what a willing buyer would pay for the goods. This is not the same as winning a car in a raffle.

If whoever ran the auction will allow Dick to specify who gets the certificate, then it's transferrable.

If Dick can give the certificate to someone else who can use it, it's transferrable.

If the certificate can only be used by Dick, it isn't transferrable.

The question is the value of the item won. There's no argument about your $100k being worth anything other than $100k.

Seth

There's a difference between transferrable legally and transferrable for tax purposes. For tax purposes transferrable means that you also transfer the recognition of income for tax purposes. For that purpose it's not transferrable.

Stu

But Dick doesn't want to transfer the taxability, he wants to sell it for FMV and pay tax only on that FMV that he receives.

Seth

If the certificate entitled the bearer to one specific system, then it would be treated the same as winning a car in a raffle, i.e., FMV at an auction would determine its tax value.

In this case, it is similar to winning a discount coupon toward the purchase of a car. The certificate entitles the bearer to a credit of up to $2,700 toward the purchase of a complete in-home brewery which can cost anywhere from $1,350 to $6,065 plus sales/use tax and freight. So the maximum taxable amount is determined by what is purchased, not by the face value of the certificate.

After thinking about this from my perspective of an auditor, I would concede that the winner would have taxable income equal to the actual eBay sale price or to the actual sales price if less than the $2,700.

I would also concede that the taxable income was equal to what the sponsor paid for the certificate if and only if the taxpayer raised that argument.

And then there is the possibility of a related-party transaction which would cause even a unaggressive auditor to look at the taxpayer as lion looks at a lame wildebeest.

Dick

I see a reasonable argument that the actual market value is what a willing buyer and willing seller agree.

And that's the prize value to be reported.

And eBay is a reasonable maketplace, sold immediately after it is awarded, for establishing that value.

An examiner can raise issues such as did eBay do an adequate job of letting propective buyers know? Is there a beer brewers area?

Did Dick leave enough time for enough willing buyers to learn and bid?

Did Dick adequately describe the certificate?

But the buirden should shift to the IRS to show eBay is not a good marketplace for establishing FMV of the certificate.

As for the results of the eBay sale, this is not a sale in connection with his trade or business, so no reportable sale since no profit on personal item.

Yes, to the extent that the keyword "beer" has/had an equipment subcategory.

That is a very good point, Art.

My profit is the difference between the $20 ticket price and the eBay sale price.

The days when Ed Zollars and I would argue about constructive receipt are long gone. But it is good that this raffle is in June and not December.

Dick

So if you purchase a $2,700 or more expensive machine (paying the difference between the price and $2,700 in the latter case), then the value to report on line 21 is $2,700 even if you're only able to fetch $2,000 on EBay.

But it's possible they require you to buy the product at their overpriced store, so reporting $2,700 seems a bit unfair, but then again it is what you paid for it.

If on the other hand, they give you a beer maker that they claim is valued at $2,700, but you only fetch $2,000 for it on EBay, then I guess from the other posts it may be OK to report the income as $2,000. However, the company that gave you the gift, would on their books report a deduction of $2,700, so I'm not sure what is the correct answer.

Was this mentioned in the original post, that it is for personal use? If the beer maker was won by a corporation (example, the corporation bought the raffle tickets and put the corporation's name in the name field), then would the loss be deductible? And would the loss be deductible if the corporation had nothing to do with beer making? And what if a person wins the beer maker, but the person has a sole proprietorship; then could they claim that the beer maker is won by their sole proprietorship and therefore the loss is deductible?

Loss? What loss? The 20? Was that an ordinary and necesary business expense?

No, the company would not report it on their books as anything other than the sale of the gift cerificate and let the equipment wash out in their 'Cost of Goods Sold'. But that's an accounting issue, not a tax issue.

The tax issue is how one determines fair market value.

Dick

And for that there could be a battle of the experts.

Stu

With restrictions, the value goes down because fewer people would be willing to pay less money for it.

You'd think. But I suspect the value would have to be determined at the time you receive the certificate, not later after it is used.

If there are enough restrictions, I think the value could be less.

Yes, there is always that.

Stu

No, my thinking is that if the goods were purchased for $2,700 with a $2,700 gift certificate, the income to report is $2,700. If you later sell the item for $2,000 you have a loss of $700. Only if the equipment was used won and used by a business (either through a corporation or sole proprietorship) that is into beer making is the loss deductible. In my thinking, the $20 is a gambling expense reportable on Schedule A not subject to 2% limit if a person bought tickets; but if a corporation bought tickets in the corporation's name then the $20 expense goes somewhere else.