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Thought this was amusing :-).

In March I entered a contest sponsored by American Airlines entitled “Why You Fly” in which entrants were required to create videos, photos, or writing telling a story as to why they fly. My entry won the grand prize in the video category. The prize consisted of twelve flights for two people from any American to city to any worldwide destination that American Airlines services. The flight vouchers would have to be used within one year or forfeited. Upon my notification of the prize, I was very excited, as my wife and I love to travel, and have done so frequently on American Airlines. I had worked hard creating my video entry, and I felt that my work had been justly rewarded.

However, when I received the winner's package, I noticed some fine print that indicated that I would be issued a 1099 form for the “full retail value” of the prize, and that I would be required to pay all federal, state, and local taxes on that value. This concerned me greatly as American Airlines had indicated that the retail value of this prize was $52,800. I spoke to my tax accountant and a representative of the company, Shamrock Industries, that organized the contest, and confirmed that I would have to pay tax on $52,800 as if it were income that I had received.


http://www.travelblog.org/North-America/United-States/New-York/New-York/Manhattan/blog-10073.html

T
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No. of Recommendations: 4
I read about this one yesterday.

I'll go out on a limb here and say that noncash prizes are always overvalued on the 1099. It would take some work, but if you documented the true fair market value of the trips you actually took, you'd wind up with significantly less tax due.

Phil
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Likewise, I'd be real scared to "win" one of those travel packages as a prize on a game show. "Wheel of Fortune", especially, comes to mind, as quoting real high values for those things. If those values are what they put on a 1099, I know you can do the same vacation for less by shopping - just a little.

Bill
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I would appear that AA's intention was to make acceptance of the prize so costly that it wouldn't be accepted by the winner, and AA is out nothing for some free publicity and apparant generousity. ed
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and AA is out nothing for some free publicity and apparant generousity

I don't think the publicity is particularly good, and I don't think it's generous to give something to someone that they can't afford to accept :-).

If anything, AA got some free content for their advertising. Imagine all of the people that took video clips and otherwise provided content for their advertising. AA came out ahead...

Randy
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I would appear that AA's intention was to make acceptance of the prize so costly that it wouldn't be accepted by the winner, and AA is out nothing for some free publicity and apparant generousity. ed

How about a more generous position?

AA is simply following the letter of the law. It is the IRS (enforcing laws passed by Congress and signed by the President) that is requiring the full FMV of the prize to be shown on a 1099. Why would AA do any less than follow the law? There is simply no benefit to them to do any less.

For the person who wins a travel prize, this is a common problem. (And it's not uncommon for other prize winners as well.) The contest promoter wants the prize to look as big as possible. And, given the right set of circumstances, that IS was someone could pay for the travel. No one in their right mind would do so, but you could.

I have in the back of my mind that someone successfully challenged the valuation of a prize as reported on a 1099. I can't find a reference to the case at the moment, so maybe my recollection is failing me. But if I remember right, the issue is that a 1099 is not definitive. The issuer's opinion of FMV can be challenged.

--Peter
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If you can document the cost that your trip would cost if you purchased it yourself, I think you can use that instead of the 1099 value.

The question would be "What constitutes sufficient documentation for IRS purposes?" I would think the best would be an advertisement in a newspaper, but I suspect a written statement from a travel agent stating that if purchased 3 weeks in advance a pair of round-trip tickets from x to y leaving on date z and returning on a would cost $b would be sufficient to justify the prize having a fair market value of b. That is, provided that the trip you take matches that profile (same departure and arrival airports, same dates, same fare class). Probably a fax from the travel agent would do.

I don't know if a computer printout from a rate finder web site would do. Maybe one of the tax professionals could respond about that.

The problem with airline fares is that they change so much and the same flight can have passengers who paid a low fare because they bought early and may have also had some special discount to people who may have gotten on at the last minute and don't have a Saturday night stay and ended up paying top dollar. And it is likely the 1099 prices the most expensive fare for the most expensive trip that meets the fine print, which, if it is domestic, could be from a non-major airport to another non-major airport with several plane changes, not on a major hub to hub route with several competing airlines.

The trick is to have appropriate documentation on what the FMV of the prize really is when it is lower than the 1099 declaration. And keep that documentation with your copy of your tax return because you may receive a call or a letter requesting justification for your numbers.

Please, though, wait for someone more competent with tax laws to respond or run the above across your tax preparer before acting on it.
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Faced with the income tax on the inflated value of any trip I took, and the income tax on the value of trips I didn't take, I would reject the entire prize, and would not enter any more non-cash-prize contests knowing that the sponsor will hide behind the "letter of the law" to effectively discourage the winner from taking his prize. How cheap can you get when all you're giving away is an unused seat on your airline.

AA may have done this for good publicity but hopefully they'll get more bad publicity from its reality. ed
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TMFPMarti writes (in part):

I'll go out on a limb here and say that noncash prizes are always overvalued on the 1099.

I reply:

That's been my experience as well. In 2002, I won a four-day, three-night trip for two to Disney World. Fortunately, I already knew enough to know that I did not need to blindly accept the price set forth on the 1099. I asked my wife to go onto Priceline to determine how much the airfare and hotel room would have cost had we made the purchase ourselves. We documented her findings, and those are the figures we used on our taxes. So far, we haven't heard a peep from either the IRS or the Franchise Tax Board. --Bob
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I would appear that AA's intention was to make acceptance of the prize so costly that it wouldn't be accepted by the winner, and AA is out nothing for some free publicity and apparant generousity. ed



You could not be more correct. In another case, a few years ago AA and Kellogg's teamed up to offer free air miles to people who bought a significant number of boxes of a certain cereal. I was living in Argentina at the time and we could get that cereal particular there, so I thought hey, cool.

It was after we'd bought a few boxes that I read the fine print. There it was revealed that only people residing in the USA were eligible for the mileage. I have no idea how much of that cereal was shipped outside the US, well away from anyone who could benefit from that great "offer." But it was a whoooole lot.
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Jack got the publicity he desired, and egg on American's face.

http://www.thestreet.com/_yahoo/comment/dumbest/10231325_3.html

Dumb-o-Meter score: 72. Plane folk just can't catch a break

Bill
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