If I win a pool table on the Price is Right, and the manufacturer says that MSRP is $14000, can one pay taxes on a lower amount if the $14000 if over inflated?
What say the courts? I've read about people who have sued the IRS over a $720 tax bill. Surely, the value of a non-cash prize has been tested in the court.
Here's a woman who sold her $14000 pool tables for $4500. She never had the items out of storage and used them herself. The $4500 was an arms-length transaction that took several months.
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I assume the manufacturer doesn't get to deduct the MSRP from their income. All they deduct is their actual cost of manufacture. (they do this by not selling the item, so their gross income is lowered by the wholesale cost.)
She can claim a lower value for the prize only if she can document that she could have acquired the same item for less than the MSRP at the time the prize was won. Her sales price is irrelevant as it only establishes whether she has a gain or loss on the sale of the pool table. If she sold it for more than the FMV when she received the prize, she would have an additional amount to be taxed (but probably still much less than the tax on the full $14K). If she sells at a loss, she cannot claim the loss (losses on the sale of personal property are not deductible).
Why is this personal property if it is never used by the winner of the property? It seems like a case could be made that it wasn't personal property but rather an item acquired for re-sale.
FWIW, from my personal experience, the 1099-misc from the game show will show the full MSRP value of the prizes.
It's personal property because it isn't real property. (Personal property is a term of art.)
It isn't property held for resale because she isn't in the business of buying and selling goods. (An isolated sale isn't sufficient to establish a business.)
The 1099-MISC isn't the controlling amount for the tax return, only the starting point. In order to refute that amount, she has to document that she could have acquired the item for a different (lower) amount at the time of winning, not that she could sell it for a lower amount.
Let's get the "terms of art" straight before we go any further.
There are two TYPES of property, personal and real. Personal-type property is further divided into tangible and intangible.
There are four USES of property: business use, personal use, investment use, and stock-in-trade (inventory).
Clearly this is personal-type property (not real property), and it doesn't seem to be business use or stock in trade. Whether it is personal use or investment use, that's debatable. Doesn't seem like it was held as an investment, but maybe an argument could be made.
Seems to me this would be very similar to winning a new car, in that MSRP is not necessarily the true FMV, and also that the value decreases significantly upon the first change of ownership ("open box" discount). Was she able to transfer the warranty, etc with the item when she sold it?
If she didn't get the full service provided by a retail dealer when acquiring the item, then it doesn't seem MS*R*P would apply. Rather, it seems more like she got the item at wholesale, and should only have to take into account the wholesale value.
She can't claim wholesale value unless she can demonstrate that she could acquire the item at wholesale. There is extensive history on adjusting the value of prizes for tax purposes. My point was that the price she sold the pool table for is irrelevant in establishing the tax value of the prize.
Your winning a new car analogy is good, though you used the wrong reason supporting the reduced valuation. The reduced valuation is based on the actual selling price for that vehicle, not the immediate resale when a new car leaves the lot, nor whether she could transfer the warranty. On the other hand, if she received the prize without warranty when one would typically accompany a purchase, then I would argue for a further reduction in the prize value.
The question of personal use vs. investment use is an interesting one as a loss on the former is not deductible while an investment loss would be. I would expect that the only way to successfully claim that the pool table was an investment asset would be to demonstrate that there was a reasonable belief that the table "could" appreciate in value.
I've noticed errors in the replies to this post, particularly Ira's.
To begin with the correct valuation to be reported is the amount she could have sold the items for before taking possession, rather than the amount she could have purchased the items for. However, it would likely cost more than the tax benefit to obtain a forensic appraisal which would be accepted by the IRS.
Even if this cannot be successfully argued, she could claim an investment loss if she _didn't_ make personal use of the items, even if she could have. This doesn't make up for the overvaluation, as the capital loss would be $9,500, and net capital loss can only be claimed at $3,000 per year, but it's of some benefit.
A bank I have had an account with for 30 years gave me $300 for having the account open so long. However, they reported it on a 1099-INT (along with my reportable interest). Obviously, the $300 paid was not interest because it's not based on the "time value of money." I challenged the bank on this and they have NOT issued a revised form. I expect that I shall receive a CP-2000 notice someday from the IRS questioning this. What is really going on here? The bank is trying to get around the $25/recipient-year limitation on business gifts by sticking me with the entire $300 and writing it off.
Although a game show prize is different (it is a legitimate write-off by the show operator), the true value may be what the show operator paid for the item, which may be quite less than MSRP. In fact, if this were a gift instead of a prize, the donor's basis (plus gift tax, if any) is what would be used.
So far there have been several responses to my question, but none of them address my actual question: Has this ever been tested in the courts?
Here's one personal example: As a frequent flyer, I could upgrade a coast-to-coast coach ticket to first class for $150 (each way). Let's say the total cost of my coach ticket was $250 making my total cost $400 (each way). On the other hand I have no intention of paying the $1350 list price for a first-class ticket. So for me, if I won a first-class, round-trip ticket to San Fransisco, I would value it at $800, not the $2700 list price. While UAL does sell some tickets for $2700, they also sell some tickets for $800. Just because the 1099 from UAL says $2700, why can't I pay the taxes on an $800 prize.
So far, all the responses have been conjecture. What do the courts say? Any legislative regulations on the subject?
If bonuses for opening a new account are taxable, I would imagine so are bonuses to existing customers, as an incentive to keep their accounts open.
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Citi sends out 1099s Citi drew attention to the issue last week because it is sending out
1099-MISC notices to customers who took advantage of a 2011 Citi promotion that offered 25,000 American Airlines frequent flier miles to anyone who opened a new bank account.
One of the customers who signed up reportedly got a 1099 notice showing $645 in "income" from the frequent flier miles. The customer claimed it was a surprise, but Citi's standard disclosure found in the terms and conditions of its promotions and on its ThankYou rewards program website has this nugget:
"In accordance with U.S. tax law, Citibank may be required to send to you and file with the IRS a Form 1099-MISC (Miscellaneous Income) for the year in which a reward is issued to you. The valuation of ThankYou Point redemptions for Form 1099-MISC tax reporting purposes will be at Citibank's sole discretion. You are solely responsible for any personal tax liability arising out of the redemption of ThankYou Points."
The IRS confirmed that Citi was correct in sending out the 1099 for giving away miles as a sign-up bonus.
"When frequent flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law," IRS spokeswoman Michelle Eldridge said in a statement e-mailed to CreditCards.com. "If taxpayers have questions about the information they receive on a Form 1099, they should follow up with the issuer or their tax professional to resolve any questions about valuation, timing or other issues regarding the income reported."
I'm sure there are court cases on the subject, but you'll have to do your own research. ;-) Reference IRC 74.
I believe the courts have held that inkind items are taxable at their "fair market value." But FMV is a question of "facts and circumstances" and there is no single, cookie-cutter definition or formula that I am aware of. So you build your case as best you can, noting that independent third-party opinion/analysis (say, from an appraiser) undoubtedly carries more weight than your own (or the payer's).
Like with many issues under our wonderful tax code, there is no simple answer.
Yes and no. Fair market value is defined as "...the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." United States v. Cartwright, 411 U. S. 546, 93 S. Ct. 1713, 1716-17, 36 L. Ed. 2d 528, 73-1 U.S. Tax Cas. (CCH) ¶ 12,926 (1973) (quoting from U.S. Treasury regulations relating to Federal estate taxes, at 26 C.F.R. sec. 20.2031-1(b)).
In an "ideal" world, the price she would be willing to pay to acquire would be same as the price she would be willing to accept to sell. Perhaps some of the difficulty we're (all of us, not just you and I) having is our reference to the prize recipient as a party to the valuation transaction. In other words, the FMV value isn't what *she* could buy/sell the table for, because she isn't "...[not] being under any compulsion to buy or sell..." On the other hand, if we directed our attention to the price at which someone else could buy/sell the pool table, we probably would arrive at the same valuation regardless of whether one of us considered buying or selling the pool table.
I don't think she would prevail if she tried to claim the loss. The pool table isn't investment property since it isn't expected to generate investment income. It doesn't matter if she made personal use of the property or not, the burden of proof is on her to show why the pool table should be considered investment property. That "proof" would have to include that she had at least a reasonable expectation that the pool table could appreciate in value.
Taking the investment argument to its absurd limit, one could propose the following: I purchase some new clothes for $100, bring them home and put them in the closet with the tags still attached. A year goes by and I haven't worn the clothes. I realize that they no longer fit (I've gained or lost weight) and the store won't take them back. I give the clothes (still tagged) to a consignment shop to sell. The consignment shop sells the clothes and my share is $25. Are you saying that I can claim a loss of $75 as an investment loss?
There are many court cases on the subject, but you'll have to do your own reasearch. You might want to start with cases that cite United States v. Cartwright, 411 U.S. 546, 93 S. Ct. 1713, 36 L. Ed. 2d 528 (1973).
I'm not sure of the authority citation, but Pub 550 states:
"Gift for opening account. If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution."
My guess is that if a non-cash gift is considered interest, a cash gift is as well.
While not disagreeing with your conclusion, I think the process is a bit different. I don't believe game show operators pay for their prizes. They act as a middle man between the manufacturer/service provider who takes the legitimate write-off and the prize recipient. In fact, I suspect many game show operators are actually paid to feature the prizes they give away. That's why you see in the credits at the end ; "Promotional consideration given by ...."
The textbook definition of fair market value is what a willing buyer would pay a willing seller, neither being under a compulsion to either buy or sell. If a person wins a new car, the market value is, of course, what someone would pay to buy that new car.
However if the recipient then wants to sell the car immediately, the issue will be whether or not the car is still new at that point. So it really is an issue of fact rather than an issue of law.
That's not obvious at all. You have money on deposit with them; they pay you interest. When and how they pay the interest doesn't "obviously" change its character.
Correct. The law is clear that FMV is the right basis and therefore the right amount to pay tax on, but the law is silent on how best to determine FMV for a specific situation.
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