9-1-06
The End of Swag
If you weren’t at least nominated for an Oscar, Emmy or Grammy this year, the experience will be a lot less enriching when you eventually are.
In August, the Internal Revenue Service and the Academy of Motion Picture Arts and Sciences announced an agreement settling both the rules for taxing the swag given presenters and nominees each year, and settling any back tax issues resulting from them. The short version: if you received one of those goodies bags, the value of its contents is income to you.
That’s Odd
As IRS settlements go, this one is a little peculiar. Technically, it is about the Academy’s failure to issue 1099s to recipients in past years. Normally in these situations, the IRS would then look to the various income recipients to pay the taxes. Neither party talks much about it, but, apparently, the Academy paid the back taxes on the recipients’ behalf. This, in turn, means that the IRS agreed both to using some arbitrary overall tax rate, and that they agreed not to treat the Academy’s payment of these taxes as additional income to the swag-getters. The IRS’s press release quotes its commissioner, Mark Everson, as saying, “There’s no special red-carpet tax loophole for the stars.” Maybe, but this sure looks like one to me.
On the other hand, this could reflect the IRS being practical: make the point very publicly, collect a reasonable amount of taxes, and stay out of the litigation swamp. Deep-pocketed stars can afford costly legal fights as to whether an actor or his corporation had the income, or indeed challenging the IRS to prove the swag was ever actually taken.
They also avoid a food fight over valuation issues. A lot of the content of these goodie bags is stuff none of the recipients actually used: spa treatments, cruises, hotel stays, plastic surgery. Maybe members of the stars’ entourages used some, but much was simply abandoned. The New York Times quoted experts as saying that fewer than 10 percent, sometimes fewer than 5 percent, of the coupons for high value swag are ever used. This would mean the worst of all possible worlds: a tax hit based on retail value of something whose utility value (an economist’s term) is nil in the hands of a particular recipient.
“We Don’t Pay Taxes. Only Little People Pay Taxes.”
All the major awards programs are now making changes. No information for a 1099 form, no goodie bag. Corporate sponsors have often set up “swag rooms” at places like the Sundance Film Festival, where invited guests could take whatever merchandise they wanted. Many have already said they will not do so again, according to the Los Angeles Times.
The settlement, and the changes it will spawn, are scarcely ground-breaking tax law. The only novelty is the explicit recognition that this is income, and not gifts, i.e., that these celebrities are being compensated for their presence and the aura of glamour (and the TV ratings) that their presence generates. Companies actually compete vigorously for the opportunity to have their goods or services given away. Clearly, they think that the remote chance that Paris Hilton or Brad Pitt or even Susan Lucci might be seen using the gifts or at the spa has tremendous marketing value. It’s really only a step removed from an endorsement ad.
The tax code has long recognized that a taxable transaction may occur even when money doesn’t change hands. It is just harder to measure in a barter transaction. Money, after all, is traditionally defined as a medium of exchange. You can think of it as a universal ruler for the relative value of other things. When money is not involved, the amount of the transaction has to be based on whichever component of the swap has the more readily determinable value.
In the End, You Need Cash
You can’t pay your taxes with objects, and that’s all you have at the end of a barter transaction. Few people – even the Amish – live solely in a barter world. As long as barter is a small part of your economic life, the cash for taxes can come from other activities.
With bigger transactions, though, you could have a problem. “Bigger” doesn’t mean the $42,000 of swag that the Los Angeles Times noted as what each losing actor at this year’s Emmys will receive. Unlike the recipients of Oprah’s infamous car giveaway, even supporting actors on a cable series should be able to manage the taxes on that.
No, here “bigger” means real estate swaps, where the potential tax amount could be many times more than the taxpayer’s other income. A special provision of Federal tax law exempts these from the normal barter rules. You can swap real estate for other real estate without recognizing income on the transaction except to the extent you receive cash. Some cash might leak out at the time of the exchange, but generally taxes are deferred until the last property is sold for cash.
“I Am Big. It’s the Pictures that Got Small.”
Barter transaction problems aren’t limited to the rich and famous. If a performer swaps, say, dog walking for voice lessons, that is a taxable barter transaction – though not one many people would report. For the performer, it’s a wash with no net tax effect: he would receive income for dog walking, and have an offsetting deductible expense for lessons. For the voice teacher, though, dog walking is not a deductible expense; she would be underreporting her income by the value of the lessons, and underpaying her taxes. Naughty, naughty, and if done enough, detectible.
Which brings us to the real point of the IRS crackdown on this stuff. They are realistic enough to know they can never catch all the small trade-outs of life, and won’t waste resources trying. But as Everson told the New York Times, “If you let things like this grow, they will just give actors houses and apartment buildings as compensation for films.”
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.