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Thursday, October 25, 2007

Tax Consequences of a Red Sox World Series Victory

Red_sox_2I previously blogged the tax consequences of furniture store giveaways in connection with victories by local sports teams -- Chicago Bears v. Green Bay Packers and UCLA v. USC.  The latest variation is Jordan's Furniture in Boston, which ran a "Monster" promotion (named after the left field Green Monster in Fenway Park) this Spring that promised that customers who purchased furniture between March 7 and April 16 would have their entire purchase price refunded if the Red Sox went on to win the 2007 World Series.  See the full terms and conditions here.

From the Freakonomics Blog:

The chain, which is owned by Berkshire Hathaway Inc., sensibly bought an insurance policy to cover the possibility of a Sox victory. While Jordan’s declined recently to comment to Freakonomics.com on any details, the chain’s CEO earlier told TheRedSoxTimes.com that he had “bought insurance that is going to cover the whole thing. I would never have done it if I was going to be rooting against the Red Sox, let’s put it that way.”

The full cost of the promotion reportedly amounted to the “license fee paid to the Red Sox to use their name, advertising spots, and a little bit of insurance.” Meanwhile Jordan’s executives reportedly estimated that the promotion’s total sales might top $20 million. ...

The Boston promotion caused a stir with Massachusetts authorities after locals raised charges of illegal gambling, according to the Boston Globe. Because of the high ticket items available for rebate, along with the substantial risk involved, debate arose over whether the sales were lotteries, classified as illegal gambling in both states. Ultimately, the Massachusetts Attorney General ruled that the sale showed “no evidence of consumer harm,” and let Jordan’s alone. Still, there’s at least one party outside of New York and Cleveland rooting firmly against the Sox this year: whoever holds the Jordan’s insurance policy.

From ABC News:

[Eliot Tatelman, president and CEO of Jordan's] refused to say exactly how much furniture Jordan's sold during the "Monster Deal" promotion, but did say it was just short of 30,000 orders. He would not give a dollar figure.

"They're large orders. There were a lot of dollars involved in this," Tatelman said. "We're not selling $100 items. We're selling $1,000 sofas and $600 pieces, and so forth." If each order was just $500 — a pretty conservative estimate — then Jordan's might end up giving away more than $15 million. ...

So, how much did Jordan's Furniture spend on the prize insurance? Tatelman wouldn't say, but the cost was in the millions. Mark Gilmartin is president of Odds On Promotions, a Reno, Nev., company that underwrites such insurance policies. While he didn't do a policy for Jordan's, the furniture store did seek a quote from him. Gilmartin would have insured the contest for 30% of the value of all the furniture given away. Using the conservative $15 million prize tally, that means the insurance would have cost Jordan's $4.5 million.

Tax issues raised in the promotion include:

  • Is the store owner required to give each of the customers a Form 1099-Misc?  Jordan's says yes.
  • Can the customers avoid reporting income on the transaction by treating it as a rebate of the purchase price?
  • What is the customers' basis in the furniture?
  • Can the transaction instead be treated as a wager (a purchase of both the furniture and a lottery ticket to win back the purchase price)?

Other press and blogosphere coverage:

(Hat Tip: Eric Lustig.)

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Congratulations to the Red Sox. And congrats, too, to folks who bought furniture this spring at Jordan's Furniture. According to the Boston Globe, the local chain promised free furniture to customers who bought items between March 7 and April 16 if the... [Read More]

Tracked on Oct 28, 2007 11:27:24 PM

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