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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121260  
Subject: Re: Prize Winner (loser?) Date: 2/17/1998 12:30 AM
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[[I won a watch, retail value $2000 (by guessing the S&P index). The contest organizers indicated
that I would be receiving a 1099 form listing the $2000 value (I haven't actually received the 1099).
The best price a jewelry dealer will give me is $750. Combining State and Federal taxes on the
$2000 comes to about $800.
Gee, I'm not so glad I won this watch. I guess if I wanted an $800 watch it wouldn't be so bad, but
I am more the $25 watch type. If I sell the watch it will end up costing me $50!

Is there some way I can contest the 1099 as not being the fair market value? If so, will I actually
have to sell the watch to make the claim.]]

You might even be able to do better than that. While the company may give you a Form 1099 indicating a $2k value, you are only required to report the TRUE fair market value of the prize on your tax return (as required by Regulation 1.74-1(a)(2).

For example, where the winner of a department store contest was allowed to buy a television set at a nominal price, the amount to be included in income was the difference between the fair market value of the set and the price paid. (Rev Rul 67-40, 1967-1 CB 19)

Even though fair market value of an item is usually considered the price that a willing seller and a willing buyer would agree to, the Tax Court has taken special factors into account in determining the fair market value of awards and prizes.

Resale value: It is obvious that a prize winner may not be able to resell the prize for as much as the contest sponsor paid for it. The Tax Court says in this situation, resale value, not cost, determines the amount of income. However, it is resale value at the time of receipt. Thus, a salesman won a car which cost his company $4,450. He drove it for 10 days, then sold it for a car costing $2,600 and $1,000 cash. The Tax Court said at receipt it was worth less than $4,450 but more than the $3,600 it brought after 10 days' use. The court put the value at $3,900.

Value to the winner: A taxpayer argued that his prize of two round-trip tickets to Buenos Aires wasn't worth the retail price of $2,200 to him. The Tax Court agreed that while some people would have paid $2,200 for the cruise, the taxpayer wasn't one of them. Winning the tickets didn't give his family something for which they would have spent money in any event, but merely offered them a luxury otherwise beyond their means. Even if he could have sold the tickets, he would have received substantially less than $2,200. The court used its discretion to fix $1,400 as the amount subject to tax.

Cost to the payor: A Subaru auto dealer received five trip awards over a 3-year period for himself and his wife. The Subaru company received the awards from TV stations in return for purchases of advertising time. The TV stations bought the trips at a cost significantly below their retail value. The Tax Court valued the trips by allocating the TV stations' total direct costs. The allocation was based on the total number of spaces reserved for each trip, even if some individuals were unable to go. Thus, the $250,000 cost was divided by 60, the number of spaces awarded for each trip or $4,167 per trip and not by 50, the number of people who actually took the trip or $5,000 as IRS had urged. The court also refused to value the trips at the $2,000 (as the taxpayers claimed) that taxpayer's friends paid to purchase trips from award recipients who chose not to go, since there was insufficient evidence of the circumstances of those resales.

So, if done correctly, it is very possible that you can KEEP the watch, but report less than the $2k amount on your tax return.

For additional instructions on this issue, read IRS Publication 525 at the IRS web site. It will tell you how to report and substantiate the true FMV of the watch.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)
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