A high school senior with a perfect attendance record and good grades was entered by the school into a “Strive to Drive” drawing held by a local car dealership. She won a Jeep Renegade valued at over $23,000, which she kept. The dealership sent her Form 1099-MISC reporting this prize, but she didn’t report the value of the car as income. The IRS moved for summary judgment that the prize was taxable, and the Tax Court agreed (Alejandra Conyers, Order and Decision, No. 13969-18, 9/11/19).
She argued that the prize was merely a gift to her. However, the Tax Code specifically treats prizes and awards as other than gifts. They are usually taxable, but can be tax free under very limited circumstances. One condition for tax-free treatment is that the recipient can’t accept the prize or award. Instead, it must be directly transferred to a governmental or charitable organization (Code Sec. 74(b)(3)); this wasn’t done here. Bottom line: the prize for being a good student cost her $3,267 in taxes (although she still has the car).