TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 10, 2012

Law Student Wins Krispy Kreme Doughnuts for a Year and Wonders: What Are the Tax Consequences?

Krispy-kreme-logoEast Valley Tribune:  The Early Bird Gets the Krispy Kreme Doughnut in Mesa:

A second-year law student at Arizona State University, Adam Brown arrived at the new Krispy Kreme Doughnuts shop in Mesa about 8 a.m. on Monday to be first in line for the grand opening of the shop, nearly 24 hours before its doors opened for business. ...

Most of them got there early enough to be among the first 100 people in line for the store or the first 24 at the drive-through window to receive a dozen free doughnuts for a year (every week for the first person in line inside and at the drive-through, and every month for everyone else). ...

Brown, an aspiring tax attorney, who said he doesn’t eat doughnuts on a regular basis, said he showed up just for the free doughnuts and will share them with his family and friends. He said he’ll take the first dozen home and share them with his wife, Melanie, and his daughters, Autumn, 2, and Maggie, 8 months.

"It was worth the wait," Brown said as workers were preparing to open the doors for business. "It’s been fun. I’ve been studying and slept a couple of hours. I’m a little cold, but no complaints on my part."

But is there any law that Brown knows of having to pay taxes on the doughnuts? "If it’s a prize, I’ll have to pay taxes, but if it’s a gift, I don’t," said Brown who was eating a plate full of Hawaiian haystacks (rice with cream of chicken salad) and studying for his final in criminal procedure.

(Hat Tip: Bob Kamman.)

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It's an interesting question. My own view is that generally, businesses don't give "gifts," which would subject recipients of all kinds of SWAG to taxation. Wasn't there an issue a few years back re the Service claiming that gift bags to celebrities were taxable?

Posted by: Rob | Dec 10, 2012 3:01:16 PM

Go ask Prof. Chodorow. And give him a doughnut. That's a gift. (You are welcome Adam)

Posted by: tax guy | Dec 10, 2012 3:23:02 PM

Just wait until he gets a "fat tax" bill for fried and sugary foods. Plus, he might receive a 1099-misc for his winnings, likely based upon constructive receipt of what is awarded rather than what he actually redeems. My advice, deliver a box to the local IRS office each month and claim it as withholding.

Posted by: Woody | Dec 10, 2012 3:37:44 PM

I presume that as a prize, he should be taxed based on the value to the winner concept. Given that he will likely emerge from the year as a grossly overweight individual or perhaps an obese person with a reduced longevity and a good chance for incurring diabetes, perhaps he should claim a very modest value for this disastrous outcome. Given is penchant for Hawaiian Haystacks, he may well be halfway down the slippery slope.

Posted by: Bill Turnier | Dec 11, 2012 8:33:50 PM

Section 61 of the Internal Revenue Code says that income from whatever source derived is taxable unless specifically excluded. Alimony (spousal support) is an example of specifically excluded income. So he will need to declare the value of the prize as income. What's more, he should be given a 1099 misc. form if the value exceeds $600.00. Also, the IRS does not look at the value to the prize recipient. Instead, they will look at the fair market value, which would be based on the retail price of the donuts.

Posted by: joel vorhes | Dec 12, 2012 1:48:49 PM

I just posted incorrect information about alimony not being taxable. It is taxable to the recipient, and deductible by the payer.

Posted by: joel vorhes | Dec 12, 2012 1:55:17 PM