Court Finds Car Awarded to Teenager for Good Grades and Attendance was Taxable
According to the Tax Court, a car awarded to a high school senior for good grades and attendance was a prize. Therefore, the value of the car was includible in her taxable income.
Background. Generally, prizes and awards are taxable to the recipient as gross income. (Code Sec. 74(a)) However, prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, that meet the following criteria, are excluded from gross income:
- The recipient was selected without any action on his part to enter the contest or proceeding;
- The recipient is not required to render substantial future services as a condition to receiving the prize or award;
- Upon the recipient’s request, the prize donor must immediately transfer the prize or award to a governmental unit or a qualified tax-exempt organization. (Code Sec. 74(b))
Facts. In 2016, Ms. Conyers was a high school senior. That year, Ms. Conyers was awarded a car by a local car dealership during its annual "Strive to Drive" competition. Ms. Conyers accepted the car and registered it in her name.
The "Strive to Drive" was an academic initiative that encouraged good grades and attendance for local high school seniors. Students did not enter their names in the competition; rather, local high schools automatically entered students who had perfect attendance or good grades into the drawing. At the end of the school year, the dealership randomly picked a name from among the qualifying high school seniors whose names had been entered.
Parties' arguments. Ms. Conyers asserted the car was a gift under Code Sec. 102 and, thus, should be excluded from taxable income. The IRS contended that Ms. Conyers received the car as a prize and, therefore, the value of the car was taxable income to Ms. Conyers.
Tax Court’s holding. In an unpublished designated order, the Tax Court has held that the car awarded to Ms. Conyers for good grades and attendance was a prize and, therefore, was includible in her 2016 taxable income.
Observation. The Tax Court did not discuss the taxpayer's argument that the car was a tax-free gift under Code Sec. 102.
According to the Tax Court, the dealership gave Ms. Conyers something of value to reward her for her goods grades and perfect attendance, a car, and Code Sec. 74(a) makes clear that gross income includes property received as a prize or award. Therefore, Ms. Conyers was precluded-by statute-from excluding the value of the car from her income as a gift.
The Tax Court also found that the value of Ms. Conyers' car did not qualify for income exclusion under the Code Sec. 74(b) exception because she accepted the car and transferred title to her name. Thus, while Ms. Conyers satisfied two of the conditions under Code Sec. 74(b) (the dealership awarded her the car in recognition of academic achievements; Ms. Conyers did not enter herself into the contest and she had no service obligations) Ms. Conyers failed to meet the third condition because Ms. Conyers did not ask the dealership to directly transfer the car to a governmental or charitable organization as required by Code Sec. 74(b)(3).