A Tennessee high school student got a lesson on tax law in the case of Conyers v. Commissioner, Designated Order, Case No. 13969-18.[1]  The former stand-out student discovered that the value of the Jeep Renegade she received as an award that given as a prize in a drawing was taxable income to her, despite being given to her in recognition of outstanding performance her senior year. 

To qualify to be part of that drawing, Alejandra had to have perfect attendance her senior year, good grades and be submitted for the drawing by her high school.  Alejandra was just such a model student.  The program was run by a local car dealership as a “Strive to Drive” competition.[2]

When Ms. Conyers filed her 2016 income tax return, she did not include the value of the prize in her income.  However, she was issued a Form 1099MISC that showed a value for the vehicle of $23,780.[3]

Ms. Conyers argued that she should be able to treat the receipt of the car as a gift.  Under IRC §102 a gift is excludable from a taxpayer’s income.  IRC §102(a) provides “[g]ross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”

The Tax Court opinion looks at the history of this section, noting that Ms. Conyer’s position on how to read IRC §102 did have some support in pre-1954 case law:

In Washburn v. Commissioner,[4] a taxpayer won a cash prize from a radio drawing.

The taxpayer received a phone call from a radio station informing her that she had won the “Pot O’ Gold” — a cash prize worth $900. The taxpayer did not enter into the drawing, but was selected randomly out of the phonebook. Once the taxpayer received the money, she had no promotional or service obligations to the donor. We held that, because the taxpayer had no obligations to the donor, the prize was a gift and excludable from her taxable income.

In the decade following Washburn, courts held that certain prizes were gifts. In those cases, a prize was treated as a gift for tax purposes when the taxpayer (1) did not enter into the drawing or contest from which the prize was won, and (2) did not promote or provide services for the donor of the prize. These cases varied on how much action was required for a taxpayer to have “entered” a drawing or contest.[5]

So far, so good.  Alejandra looked like the taxpayer in Washburn, having been submitted by her high school to be part of the contest.  But the Court noted that Congress was not happy with the Washburn ruling, and in 1954 Congress added an additional provision to the tax law—IRC §74.

That provision was added to the law specifically to overturn the result in Washburn, obviously not a good thing for Ms. Conyers.  IRC §74(a) specifically states “[e]xcept as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.”

The initial version of §74 did have an out that would have helped Alejandra—IRC §74(b) as originally enacted allowed an exclusion for awards in recognition of educational achievement if the recipient was selected without any action on his/her part to enter the contest and the recipients was not required to perform any substantial services in the future.[6]

However, in 1986 Congress again changed the rules—this time adding IRC §74(b)(3) that required the recipient to request that the prize be immediately transferred to a governmental agency or a §170(c) charitable organization to be excluded from the recipient’s income.[7]  This version of the law remained in place when Alejandra won her vehicle.

Thus, the Court concluded, Ms. Conyers must include the entire value of the value in her income for 2016.

The case illustrates some of the traps that taxpayers can fall into as they try and navigate the IRC, traps that advisers can fall into as well.  IRC §102 on its face presents a reasonable case for excluding the amount from income—so reasonable, in fact, that courts had done just that in cases like Ms. Conyers. 

However, the search for the answer has to consider the possibility that Congress might have enacted a provision that carves out some situations from coverage by the general rule of IRC §102—in this case, the addition of §74 to specifically reverse the results of the decisions that looked so favorable for Ms. Conyers.  The more specific rule overrides the general rule, thus making the amount taxable.

[1]https://www.ustaxcourt.gov/InternetOrders/DocumentViewer.aspx?IndexSearchableOrdersID=300396, September 11, 2019, retrieved September 12, 2019

[2] Ibid, p. 1

[3] Ibid, p. 2

[4] Washburn v. Commissioner, 5 T.C. 1333, 1334 (1945)

[5] https://www.ustaxcourt.gov/InternetOrders/DocumentViewer.aspx?IndexSearchableOrdersID=300396, September 11, 2019, retrieved September 12, 2019, pp. 3-4

[6] Ibid, p. 5

[7] Ibid