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And The Winner Is... Going To Owe Tax On Booty

by Harry Rabb, C.P.A.

Special to Tropical Breeze

 MarketWatch is reporting that Oscar presenters this year each walked off with more than $35,000 worth of gifts in their goody bags, including four nights at Honolulu’s Halekulani Resort, with a 24-hour butler, valued at $25,000. Not bad for a few minutes of banter and tearing open an envelope or two. Other celebrities were provided shopping gifts that approached six figures in value.

As of last Thursday, though, those who enjoy such handouts — not just at the Oscars but at events around the country — are going to find one extra item in each bag: an envelope from the IRS.

“The gift basket industry has exploded, and it’s important that the groups running these events keep in mind the tax consequences,” said IRS Commissioner Mark W. Everson in announcing the tax agency and the film industry had reached an agreement on the Oscar booty. 

In fact, the value of this year’s goodies was so high that the Academy of Motion Picture Arts and Sciences voluntarily approached the IRS shortly after this year’s awards presentations in March seeking to clarify the tax issues surrounding the gift baskets, as well as to ensure that any obligations for the prior years were met.

The Academy and the IRS have settled the tax obligations with respect to gifts given through 2005, though the tax agency gave no specifics. Recipients of this year’s gift basket will be issued appropriate informational tax forms by the Academy and will be responsible for satisfying their income tax obligations.

You might think that a “gift” bag is just that, a gift, and that taxes wouldn’t apply. The major hotels, designers and manufacturers give the celebrities these presents to pay homage to their greatness and popularity. Don’t they? Not at these prices, the IRS reasons. Those donors hand out the freebies for the public relations value. They want the public to see their names associated with top celebrities so they can position their products at top prices — and to generate visibility and sales. This is strictly business.

Do the stars have any alternative to paying the tax? Well, the celebrities may donate the gifts they received to a qualified charitable organization. If they do, they may be able to take a tax deduction, subject to the usual applicable limitations and requirements.

Does this arrangement only to apply to celebrities? Hardly. After all, sensible charity fundraiser organizers will do their best to attract wealthy donors by finding the best, most appealing and most expensive gifts available.

While some donors really enjoy exploring the treasures they receive, others often leave them behind, indifferently. Or they just hand the bag to a friend or assistant. The same rules apply to volunteers who help themselves to the bounty.

Be aware. The IRS is now notifying entertainment and charitable organizations that they must issue appropriate 1099-MISC forms at the end of each year to each celebrity or recipient of these expensive sets of gifts.

So, if you’re one of those people who generally disregard the gifts, be sure to return the package to the organizer and get some written proof that you did. In fact, under the circumstances, it may be wise for the charity to include a slip of paper for the recipient to sign if they wish to return the gifts to the charity.

Pretty much anything you get at such fundraisers is taxable — except the meal, of course — including things in your goody bags; items you pick up at a free shopping table or room offered to guests; gift certificates or vouchers.

Oh, and don’t forget those gowns — celebrities get to keep the gowns they wear. Just think of the various actors in their designer-provided gowns. Many outfits have high-five-figure values. Those are taxable too — as is the money the designer labels pay the celebrities to wear their gowns.

What’s the taxable value of these “gifts?” In general, you have received taxable income equal to the fair market value of the bag and its contents. So, you’re expected to report that amount on your federal income tax return.

There’s no mention of the reporting the fair market rental value of things loaned to celebrities for major events. Millions of dollars worth. When asked about reporting this, the IRS had no comment.

This information is provided as a public service and should not be construed as individual accounting or tax planning advice. For information on how these general principles apply to your situation, please consult an accounting or tax professional.