TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

Wednesday, March 16, 2011

Tax Appreciation Day

Doughnut Houston Chronicle, 'Lucky Winner' at Astros Game Learns Nothing Is Free:

Bob Choate has sold restaurant equipment for years, so he already knew there was no such thing as a free lunch.

Now, much to his chagrin, Choate has found there's no such thing as a free doughnut, either.

Choate, 56, of Houston last fall won a year's supply of coupons from Shipley's Do-Nuts as one of the lucky prize-winners during Astros Fan Appreciation Day at Minute Maid Park.

"I went up to the customer service window, fat, dumb and happy, and signed a form and picked up a fistful of certificates, each good for a free doughnut or a dozen doughnut holes and one free cup of coffee," he said.

But last month, much like the Grim Reaper, the punch line to his prize landed in Choate's mailbox: an Internal Revenue Service Form 1099, informing him that he owed taxes on $927.61 in "free" coffee and doughnuts.

"Right," Choate said. "Fan Appreciation Day. We appreciate you, oh, and by the way …"

Choate, mind you, is no rube. He knew about Form 1099s, and he presumed there would be some tax liability for his edible appreciation. Nearly a thousand bucks, however, exceeded his expectations considerably.

However, Roger Aksamit, an attorney with Thompson & Knight who is board certified in tax law, said Choate's plight demonstrates one of the iron-clad rules of the tax code.

"If you get paid in doughnuts," Aksamit said, "you've got to pay in dough."

(Hat Tip: Dan McCall.)

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Comments

Roger Aksamit needs to be thrown into the pun-itentiary for a long time.

Posted by: Guy in the Veal Calf Office | Mar 16, 2011 9:24:26 AM

"Also, audience members for Oprah Winfrey's show in 2004 were hit with tax bills of up to $7,000 each after Winfrey gave each of them new cars. Winfrey has continued giveaways, including 275 viewers who recently were told they will receive 2012 Volkswagen Beetles, but Volkswagen agreed to foot the tax bills."

To clear this up for a non-lawyer: say I receive a $1000 prize, and it is taxed at 10%. The prize giver decides, in order to make the contest more palatable, to then pay an additional $100.

Don't I have to pay taxes on the $100? If they're really going to cover my extra taxes, they'd have to pay 11.111...%, not 10%.

As numerical series go, it rapidly converges to a penny, but at 50% tax rates (not uncommon, when you add state, local and FICA) they're promising to pay the full value of the prize again in taxes.

Obviously, this could get messy if they bump you into another tax bracket.

Posted by: Ben | Mar 16, 2011 12:51:41 PM

Wow, and what if the winner hates donuts and doesn't drink coffee?

Posted by: peter | Mar 16, 2011 5:34:20 PM

peter: You can give it to a charity and wash your hands of it.

Ben: You hit the nail on the head; because the total prize amount goes up, so do taxes. You could possibly file to amend the 1099 valuation, but that only goes so far.

While there's a simple calculation to cover the total sum, I wouldn't expect any company to assume any tax obligation beyond a straight 15% (cash prizes are already automatically withheld at 25%); anyone in higher brackets can be expected to be able to pay off the rest of the taxes without filing bankruptcy. Plus if it's paid the next year, it wouldn't affect this year's taxes, so the cascade keeps getting pushed down the line. (If it's up-front, you have to worry about it all at once.)

If it's below $600, you might just get lucky and have it just not get reported.

Posted by: JB | Mar 16, 2011 7:48:21 PM

I'm the aforementioned 'Bob Choate.' What is particularly distressing about the situation is that there is a choice of TWO prizes on the certificate... DONUT + small coffee (Approx. Value: $565.75 OR
a dozen donut HOLES + small coffee (Approx. Value: $821.25)
And these figures are from the most expensive of the three stores that I visit. NO WAY is it over $900!
Further, is we used the prices from the store closest to Shipley's HQ, the values are ~$100 less! AND...I only received 315...NOT 365..certificates.

Why should Shipley's get a $927 write-off for promotional expense and I have to pay the tax on an assumption that I'll use the maximum value?

So far, the Astros nor Shipley's have responded to my written request to recind the 1099. And the 5-day time period I gave them just expired.

Posted by: Bob Choate | Mar 18, 2011 4:10:50 PM