11.1 Prizes and Awards

Prizes and awards are taxable income except for an award or prize that meets all these four tests:

1. It is primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement.
2. You were selected without any action on your part.
3. You do not have to perform services.
4. You assign the prize or award to a government unit or tax-exempt charitable organization. You must make the assignment before you use or benefit from the award. You may not claim a charitable deduction for the assignment.

Prize taxed at fair market value.

A prize of merchandise is taxable at fair market value. For example, where a prize of first-class steamship tickets was exchanged for tourist-class tickets for a winner’s family, the taxable value of the prize was the price of the tourist tickets. What is the taxable fair market value of an automobile won as a prize? In one case, the Tax Court held that the taxable value was what the recipient could realize on an immediate resale of the car.

Employee achievement awards.

Awards from an employer are generally taxable (as part of regular pay on form W-2) but there is an exception for certain awards of tangible personal property given for length of service or safety achievement. An award in the form of cash, a gift certificate or equivalent item does not qualify for the exclusion, but other types of tangible personal property, such as a watch, or golf clubs are generally not taxable up to a limit of $1,600 for a qualified plan award or $400 for a non-qualified plan award (3.12, 20.25).

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