Friday, April 16, 2010
Following up on yesterday's post, Obama and Biden Release Tax Returns:
As part of his 2009 Nobel Peace Prize, President Obama won $1 million. Because, as expected, he gave the money to charity, it was excluded from his taxable income. Yesterday's release of President Obama's tax returns provides more information about the charitable transfer of the $1 million, and also raises some interesting questions about the timing of the transfer.
Documents posted with President Obama's tax return include a letter dated March 10, 2010, from the President to the Nobel Committee directing which charities were to receive the prize money, and a letter dated April 12, 2010, from the Nobel Foundation confirming that the prize money had been sent directly to the charities. Under Section 74, gross income does not include amounts received for the Nobel Prize if, among other requirements, "the prize or award is transferred by the payor" to a qualified charity or governmental unit "pursuant to a designation made by the recipient." The evocative April 12 date made us wonder: Would it have mattered for purposes of Section 74 if the Nobel Foundation had not sent the money to the designated charities prior to the filing of President Obama's tax returns? Is there any time by which a recipient must make the designation? Is there any limit on how long the payor can take to transfer the prize money?
Section 74 doesn't give any guidance about these timing questions, and the legislative history says only that the grant must be made before the recipient or an associate of the recipient has received any benefit from the award. S. Rep't No. 99-313. The IRS has issued guidance on the question, Revenue Procedure 87-54, which says only that in order to fall within the Revenue Procedure's safe harbor, the designation should be made before the potential recipient actually receives the money (so that there's no way he can receive any benefit from the award). It appears that President Obama never actually received the money--that the money was available to him, but the Nobel Foundation held onto it until he told them where it should be transferred. This doesn't explain the date of either of the letters included with the tax return.More guidance is available in a proposed regulation from 1989, Prop. Treas. Reg. 1.74-1. Taxpayers are not required to follow proposed regulations. But for political reasons, the President's tax advisors probably want to prepare the most conservative return possible, and that might include following a proposed regulation. Under the proposed regulation, to qualify for exclusion under Section 74, (1) a "qualifying designation" that the prize is going to be donated must made within 45 days of the prize's being granted, and (2) the prize must be transfered to the charity no later than the due date of the return for the tax year in which the prize would otherwise be includible in the recipient's gross income.
According to that April 12 letter, the Nobel Foundation did transfer the money prior to April 15, 2010, the due date of President Obama's 2009 return, so that meets the second requirement of the proposed regulation. But what about the first requirement? Under the proposed regulation, the award was "granted" when the money was under President Obama's dominion and control. The Nobel Foundation presented the prize to President Obama on December 10, 2009, the date of Nobel's birthday, when the ceremony is always held. Even if, as appears to be the case, he didn't actually receive the money, and thus couldn't obtain any benefit from it, he still would have been in constructive receipt of the money if the Foundation had made that money available to him (as it appears that they did). At any rate, because these documents were included with the President's 2009 tax return, it seems that his advisors think that but for his giving the money to a charity, the amounts would have been included on his 2009 return, which suggests that he would have been in constructive receipt of the money sometime in 2009. March 10 is, of course, more than 45 days after the end of 2009.
But even if the Nobel Foundation didn't receive the letter naming the specific recipients until more than 45 days after the award was granted, the President still might meet the requirements of the proposed regulation (though of course, because this is a proposed regulation, it doesn't matter whether he meets the requirements). The regulation says that a qualifying designation does not need to state a specific recipient, just a class of recipients, so if he advised the Nobel Foundation earlier that he was going to donate the money to a charity, it would be fine under the proposed regulation not to name the specific charities until later. He may well have done so.
- More on the Tax Consequences of President Obama's Nobel Prize (Oct. 11, 2009)
- Tax Consequences of President Obama's Nobel Prize (Oct. 9, 2009)
- Al Gore and the Nobel Peace Prize: Avoiding an Inconvenient Tax (Oct. 14, 2007)