Paul Caron, who runs TaxProfBlog, one of my favorite sites, recently posted an interesting, albeit well researched area of U.S. tax law concerning the treatment of prizes and awards. Under U.S. law, prize money is considered income, and is thus included in the recipient’s annual income tax return. Under §74(b) of the Internal Revenue Code (“IRC”) however, a recipient could have the Nobel Prize Committee transfer the prize money (approximately $1.4 million) directly to a charitable or governmental entity without it being included in the recipient’s income. The key factor in “avoiding” the tax is not deriving any use or enjoyment from the prize. A direct transfer by the awarding committee to a qualifying charity or governmental entity would sufficiently satisfy this requirement.
Back in law school, Professor Bridget Crawford taught us that the general exception for prizes and awards, to be excluded from income, was that the award be made for Scientific, Educational, Artistic, Literary, Civic, Charitable or Religious reasons (SEAL CCR), with no action on behalf of the recipient, no benefit from the award or substantial services performed, and that the award be transferred directly from the awarding committee to a charity or governmental entity.
Interestingly enough, Professor Caron and Professor Ellen Aprill expand on this, discussing some of the political issues involved in such an award.