Tax Issues – Valuation of Sweepstakes and Contest Prizes

The Internal Revenue Code mandates that the value of a sweepstakes or contest prize be included in the winner's gross income. If the value of the prize is $600 or more, the payor of the prize must file with the Internal Revenue Service a Form 1099 (with a copy to the winner) reporting the value of the prize.

Where the prize is cash or its equivalent, the value to be reported is, obviously, the face value. If the prize is not paid in money, then the "fair market value" of the prize must be reported. Unfortunately, there is no IRS regulation defining "fair market value" and revenue rulings and Tax Court decisions set no uniform method for determining fair market value. Objective factors are the primary ones looked at, but subjective factors also can play a part in determining the fair market value of a prize.

Two common sweepstakes prizes which often lead to disputes or dissatisfaction with the winner regarding reported fair market value are automobiles and trips. As to automobiles, the immediate tendency is to report the manufacturer's suggested retail price (MSRP) as the value, since that usually is the "approximate retail value" assigned to the prize in the sweepstakes' Official Rules. However, automobiles are rarely sold for the MSRP. Accordingly, the lower price at which the sweepstakes sponsor purchased the vehicle may be a more acceptable fair market value.

Regarding trips, there are many different ways to ascertain their value, such as the advertised cost of air fare or standard hotel rates or cruise rates. Often, these are the values used in the Official Rules and in advertising materials. As with automobiles, however, trips are often purchased at a discount, especially if they are being purchased in bulk. Thus, sponsors may also need to consider their direct costs for the different components of the trip in determining the fair market value of the trip for purposes of the Form 1099.

Finally, many sweepstakes sponsors wish to assist the winner in paying any taxes due on the receipt of the prize, by offering the winner additional cash. Please keep in mind that any monies used by a sponsor to defray a winner's taxes on his/her prize is in itself a taxable income to the winner.