Facts
- A corporation sponsored an “Annual Youth Scholarship Contest” requiring entrants to complete a sentence in 50 words or less.
- Prizes were described as annuity policies in stated face amounts, including a $1,500 prize level.
- Contest rules allowed anyone to enter, but entrants above the age limit had to designate an eligible minor under the stated age to receive the policy.
- Paul A. Teschner, an adult, entered the contest and designated his seven-year-old daughter to receive any prize.
- Teschner’s entry was selected as a winner.
- The sponsor applied for and paid $1,287.12 to an insurer, and in 1957 the daughter received a fully paid-up annuity policy with a $1,500 face value.
- The annuity policy imposed no limitation requiring the proceeds or benefits to be used for education or any other purpose.
- The Teschners did not report any amount from the annuity on their 1957 joint return.
- The Commissioner determined a deficiency, including $1,287.12 in gross income as the value of a prize or award to Teschner.
Issues
- Whether the cost/value of an annuity policy awarded through a contest is includible in the gross income of the contest entrant when the policy is issued directly to the entrant’s minor child.
- Whether labeling the contest as a youth scholarship contest supports exclusion from income when the policy benefits are not restricted to educational use.
- How the prize should be valued and when income is realized.
Decision
- The Tax Court sustained the Commissioner’s determination.
- The court held that the contest prize was taxable gross income to Teschner, the entrant whose efforts produced the award.
- The includible amount was $1,287.12, the amount paid for the annuity policy.
- The income was realized in 1957, when the fully paid-up policy was acquired and delivered to the daughter.
Legal Principles
- Gross income under I.R.C. § 61 includes prizes and awards; a contest prize is taxable to the person who earns or wins it.
- A taxpayer cannot avoid taxation on earned income by directing the payment or property to a third party; directing issuance to a family member is treated as an anticipatory assignment.
- A claimed “scholarship” characterization is not controlling where the award is, in substance, a prize and the recipient has unrestricted control over the benefits.
- The value of a newly issued, fully paid-up annuity prize may be measured by the premium cost paid to obtain the policy.
Conclusion
The Tax Court treated the annuity awarded through the contest as taxable prize income to the parent who won the contest, measured by the sponsor’s cost of the policy, notwithstanding that the insurer issued the policy directly to the parent’s minor child and the contest was marketed as educational.