Sunday, October 18, 2009

Obama's Prize

I am not a great fan of President Obama, but he should not be the target of the latest criticism concerning the award of the Nobel prize for peace. Simply put, he has done nothing. He has done nothing to merit the award, but he has also done nothing to seek it out. That particular stupidity can be laid at the feet of the awarding committee and/or the Norwegian legislature. (The latter body is called the Storting. My favorite comment was, "So they picked his name out of the Storting hat?")

I also agree with the suggestion (first made by Mickey Kaus, I think) that the President should have declined the award. But he did not and will now receive almost $1.5 million in prize money. The White House announced he intended to donate money to charity, which sparked some discussion of the tax consequences of doing so. Not having looked at that section of the Internal Revenue Code in some time, I was under the impression that the receipt of the prize was tax free. And I was right.

Until 23 years ago.

Section 74(b) of the Code states that certain prizes and awards are excluded from income. Prior to 1986, there were two conditions that needed to be met. First, the recipient was selected without any action on his part to enter the contest or proceeding. And second, the recipient is not required to render substantial future services as a condition to receiving the prize or award.

Obviously, both of those conditions have been met in this case, and therefore under prior law, the President could have banked the entire prize and paid no federal income tax on it.

But in 1986, Congress added a third condition. Now the prize money must be given directly to a government or a charity pursuant to the instructions of the prize winner.

And, depending on the charity selected, that condition seems to have been satisfied as well. The limitations on charitable deductions (current and proposed) do not apply because the prize money is being excluded from income, rather than deducted.

And that, gentle reader(s), is why no tax professional should answer any tax question without actually reading the Code, no matter how straightforward the issue appears to be.

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