Taxation of Olympic Winnings

The summer Olympics are going on in Tokyo. I have watched little of the competitions. As I have gotten older, I watch less and less television, Olympics included. My heaviest TV consumption is just around the corner, when the NFL season begins. I am an unabashed NFL junkie.

Let’s discuss the taxation of Olympic awards, including medals.

In general, the law taxes all awards and prizes. There are exceptions, of course, but for years there was no exception for Olympic medals and prize money.

This means that if someone won a gold medal, for example, Uncle Sam was standing on the podium with the athlete waiting for his cut.

Can you imagine having to pay tax on a gold medal?

Although a gold medal is not pure gold. The last pure gold medal was awarded in 1912, and today’s gold medals are over 90% silver. Gold medals at the 2012 London Olympics were less than 2% gold, for example.

Then there is the issue that a medal – once awarded – can be worth more than the weight of the metals that went into its manufacture. Boxing fans may remember the boxer Wladimir Klitschko from the 1996 Atlanta games. He sold his gold medal in 2012 for $1 million, donating the proceeds to charity.  

There may also be cash winnings. The U.S. Olympic and Paralympic Committee (USOPC) will pay a winning athlete approximately $37,000 per gold medal. While not bad, it pales in comparison to some other countries. Singapore will pay over $730 thousand for a gold medal, by comparison.

The real money of course is in endorsements. Usain Bolt receives $4 million per year from Puma as a brand ambassador, even after retirement. Not bad work if you can get it.

Back to tax. The general rule is that all prizes and awards are taxable, unless the Code allows an exception.

In 2016 lawmakers decided that it was a bad look to assess tax on Olympic winners. Two senators – John Thune, a Republican from South Dakota and Chuck Schumer, a Democrat from New York – submitted a bill to change this situation. Here is a joint statement, something we are unlikely to see again in the near to intermediate political future:

It’s no secret that athletes don’t become Olympians overnight. For many of the competitors who’ve been fortunate enough to earn a spot on an Olympic or Paralympic podium, it’s a lifetime’s worth of work that has come with years of blood, sweat and tears.

It’s a patriotic endeavor that often has a large price tag affiliated with it, too.

Under the current tax code, medals and any associated prize stipend are considered taxable income.

Tax policy is too often complicated and partisan, which makes the bill we introduced this year unique. Our bill passed the Senate without a dissenting vote, and is about as simple as they come. The bill, which awaits action in the House, would bar the IRS from leveeing a victory tax on Olympic and Paralympic medalists.

Preventing the IRS from taxing medals and modest cash incentive prizes sends the right message to present and future members of Team USA: Rather than viewing Olympic success as another chance to pay Uncle Sam, it’s a special opportunity to celebrate American patriotism and the Olympic tradition.

The tax on Olympic winnings was called the “victory tax,” and President Obama signed the United States Appreciation for Olympians and Paralympians Act into effect on October 7, 2016. There was an important issue, however: how were professionals (think Kevin Durant, for example) to be taxed? These athletes were already making eye-watering sums of money, and to exclude their winnings seemed … an overreach … if one was truly trying to reward the amateur athlete.

Here is the Code section:

           Code § 74 - Prizes and awards

              (d) Exception for Olympic and Paralympic medals and prizes

(1) In general

Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.

(2) Limitation based on adjusted gross income

(A) In general

Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).

How therefore is an Olympic winner taxed?

·      There is no tax on the medal itself.

·      Prize money is not taxed unless the athlete has substantial other income, with substantial meaning over $1 million (half that if married filing separately).

·      Endorsement income is taxable as normal.

Racing As A Trade Or Business

 I am reading a case that made me grimace. The following is a total NO-NO if you are unfortunate enough to be selected for audit:

As part of the audit RA Chavez issued information document requests to petitioners requesting their accounting records for 2013, but petitioners did not respond. RA Chavez completed his audit without receiving any additional information from petitioners …”

The abbreviation “RA” means revenue agent; those are the IRS folks who do the examinations.

This is not going to turn out well.

… respondent issued … revenue agent reports (RARs) to petitioners with proposed adjustments to tax and accuracy-related penalties. Petitioners did not respond to the … RARs.

Chances are very good that I would have resigned from this representation or refused to accept the client in the first place.

We have, for example, a client who has not filed returns for years. There are mitigating reasons, but not that many or reasons that persuasive for the number of years. My partner brought them in; I looked at their stuff and gave them a list and timetable of what we needed. I reached out to the IRS, explained that they had just hired tax representation and requested time.

I am not going to say that the IRS is always hospitable, but in general they tend to be reasonable if someone is truly trying to get back into the system (except during COVID; the COVID procedural issues have been extensive, unrelenting and extremely frustrating. The IRS really should have stopped issuing notices like government stim checks until it could at least open its mail on a timely basis).

What did my partner’s client do?

They gave us nothing. Two weeks became two months. Two months became three. I received exculpatory e-mails that read like a Grateful Dead tour.

My - and our - credibility with the IRS took a hit.

If they were my client, I would have dismissed them. They are not, however, so I did the next emphatic thing I could do: I will not work with them. We have a younger tax pro here at Galactic Command, and he will take this matter over. He has a nice background in preparation, and I would like to expose him to the representation side of practice. He is somewhat interested (at least, not uninterested), and if he remains in a CPA firm as a career it will be a nice addition to his skill set.

Back to our case.

There is a lot going on, but I want to focus on one issue.

Two families own a construction S corporation (Phoenix). The IRS disallowed $121,903 in 2013 related to car racing activities. More specifically, the racing was by a son of the owners, and his car of choice was a 1968 Camaro.

He started racing it in 2014.

One has to be very careful here. One is taking an activity with a high level of personal interest and gratification and jamming it into a profitable company. It would take minimal tax chops to argue that the racing activity is a hobby or is otherwise personal. The purported advertising cannot be “merely a thin cloak for the pursuit of a hobby.”   

The company fired back with three arguments:

(1)  The racing expenses were ordinary and necessary advertising expenses.

(2)  Phoenix purchased the car as an investment.

(3)  Racing was a separate trade or business from Phoenix and was engaged in for profit.

I do not know if these arguments existed when the return was prepared or dredged-up after the fact, but still … kudos.

Except …

The racing was not conducted under the Phoenix name. There was no company logo on the car, with the possible exception of something minimal on the rear window. There were no photographs or videos of the car on the company’s advertising.

One more thing.

Phoenix did not even separate the car racing expenses as Advertising on its tax return. Instead, it just buried them with “Construction Costs.”

Folks, the IRS does NOT like it when one appears to be hiding something iffy in a big, enveloping category of other expenses. It is, in fact, an indicium of fraud.

The first argument whiffed.

One BTW does not race a car that is held for investment. One stores a car that is held for investment, perhaps taking it to an occasional show.

The second argument collapsed.

That leaves a lot of pressure on the third argument: that the car was its own separate trade or business.

You know what the car did not do in 2013 (the year of examination)? It did not race, that is what it did not do. If one were to argue that the car was a separate trade or business, then one would have to concede that the activity started the following year – 2014 – and not in 2013. All those expenses are what the tax Code calls “startup expenses,” and – with a minimal exception - they have to be amortized over 15 years.

Let me check: yep, this is a pro se case, meaning that the taxpayers represented themselves.

We have said it before: hire a pro, spend a few dollars. You do not know what you do not know.

What would I have advised?

They should have posted photos and videos of that car everywhere they advertised, and I would have recommended adding new advertising venues. I am thinking a video diary: the purchase of the car, its modification, interviews with principal parties, technical issues encountered and resolved, anticipated future race sites and dates.

And yes, I would have put the company name on the car.

Our case this time is Berry v Commissioner, T.C. Memo 2021-42.