SE income or Line 21 prize?

[Jesse]

Have a hunting/fishing guide who won a fishing tournament prize of $5,000.

Since his livelyhood is fishing and hunting would this be SE income or would it be other income line 21?

[erchess]

Interesting problem

but in the last analysis I would have to say that it is a prize on line 21 because similar situations abound and I know of no provision in the code to the effect that prizes won in contests which help the taxpayer make money are subject to SE Tax.

And yes similar situations do abound. Golf, tennis, chess, and martial arts instructors all stand to make more money if they have won some tournaments even if the tournaments are not at the highest levels. If the IRS or anyone in Congress wanted such instructors who win related prizes to pay SE Tax on the prizes, most of us on the board would already know that.

Here are two more little points. First, if your guide were an employee of an agency that supplies guides to fishermen, I suspect that it would not occur to you to put this prize on a Schedule C. Second, if your guide received royalties for writing a book on fishing, you would put them on Schedule E without much inner debate.

[veritas]

Royalties on books

I thought is self- employment?

Rev Ruling 55-258 said prize won by an individual was not subject to self-employment tax.

"In the instant case, it is held that the activity engaged in by the individual with respect to entering various and unrelated prize contests in his own behalf as a hobby does not constitute a "trade or business," as contemplated by section 481(c) of the Act. Accordingly, the value of prizes won by a contestant under the circumstances described above, although subject to normal income Tax and surtax, is not includible in computing net earnings from self-employment."

So I would conclude that if an individual won a prize in their business and if not a hobby it would be subject self-employment tax.

[erchess]

Let me come clean

Before I tell my client to pay SE Tax on money I want to know about a real case in which one of the recognized authorities (R R R Proc Court Decision or etc) says that as similarly situated taxpayer has to pay it.

[Jesse]

I'm still searching for more information. This not being a hobby I'm leaning towards SE tax. Another thought is that the contest is on his personal time, he's not getting paid unless he wins but the more contests he wins the more his name is heard throughout the area and the more valuable his guide service.

[winnie]

not hobby?

If you have been deducting expenses relating to this activity saying it is a business and not a hobby, then you had better claim this as income.

[Jesse]

If you have been deducting expenses relating to this activity saying it is a business and not a hobby, then you had better claim this as income.

I will claim it as income, it's just a matter of where to claim. He has ample income from his guide service above and beyond the $5,000 prize he won.

[travis bickle]

but, the $5,000

was not "earned" for "services rendered", correct?

and, since he had to comply with the requirements/restrictions/parameters set up by the contest officials (including where and when to fish, what type of equipment, tackle, bait is allowed, etc), it seems that he was not "working" as an "independent contractor" who sets his own parameters concerning fulfilling a job.

sounds like line 21 to me

[JohnH]

Hard to justify that approach

The last time I paid someone do work at my house, I specified the times he could work, type of materials he couid or could not use, and placed some limitations on the type of equipment he coud use (no backhoe in my yard) . But I still considered him an independent contractor.

[GIMoe]

Differences

The last time I paid someone do work at my house, I specified the times he could work, type of materials he couid or could not use, and placed some limitations on the type of equipment he coud use (no backhoe in my yard) . But I still considered him an independent contractor.

While you may hire a home contractor to to remodel your home and be able to spell out some specifics as you listed above. The difference is that contractor is acting in the capacity of a home contractor, even while working under the conditions you specify. When he finished the work he was hired for, he had a reasonable expectation of receiving payment. This "Hunting/Fishing Guide" that won the contest, on the other hand, was not acting in the capacity of a guide when he was participating in the contest. He was not hired to be in the contest, he was just one of several contestants. He had no reasonable expectation / assurance of winning the contest, he had to actually win in order to get the prize money.

IMHO this is definetly Line 21, Other Income NOT subject to SE Tax.

[Jesse]

...........This "Hunting/Fishing Guide" that won the contest, on the other hand, was not acting in the capacity of a guide when he was participating in the contest. He was not hired to be in the contest, he was just one of several contestants. He had no reasonable expectation / assurance of winning the contest, he had to actually win in order to get the prize money.

IMHO this is definetly Line 21, Other Income NOT subject to SE Tax.

Very good point.

[veritas]

Did you all

read the excerpt from the revenue ruling I posted?

[Kram BergGold]

Analogy

An artist who is an employee gets a grant. This is line 21 income. A artist who is self employed gets a grant this is self employment income. So if your client is a self employed nature guide and lets say takes people fishing then I say self employment. However, if fishing has nothing to do with his guide business then I would go line 21.

[Zee]

While you may hire a home contractor to to remodel your home and be able to spell out some specifics as you listed above. The difference is that contractor is acting in the capacity of a home contractor, even while working under the conditions you specify. When he finished the work he was hired for, he had a reasonable expectation of receiving payment. This "Hunting/Fishing Guide" that won the contest, on the other hand, was not acting in the capacity of a guide when he was participating in the contest. He was not hired to be in the contest, he was just one of several contestants. He had no reasonable expectation / assurance of winning the contest, he had to actually win in order to get the prize money.

IMHO this is definetly Line 21, Other Income NOT subject to SE Tax.

I would also agree. Guiding hunting and fishing trips is very different than simply entering a fishing contest as an individual. However, if he also is a professional fisherman entering in frequent contests, it'd most likely be SE income. It might be a separate segment of his business. I'm curious, does he expense the cost of the fishing contests as business expense? I would guess a fishing guide might enter fishing contests to gain esteem and use wins as an advertising aid. As such, it could be a business-related expense and the prize could be business income.

[Koss]

Not a grant

An artist who is an employee gets a grant. This is line 21 income. A artist who is self employed gets a grant this is self employment income. So if your client is a self employed nature guide and lets say takes people fishing then I say self employment. However, if fishing has nothing to do with his guide business then I would go line 21.

But the grant comes before the person performs the tasks or work associated with it. The prize comes only after, and only if they win.

Are the expenses that he incurred to participate in the contest deductible on Schedule C?

This is very subtle. If he has taken such deductions in the past, then he himself sees his participation in the contest as a work activity that is part of the business he owns. If he has not taken such deductions in the past, then perhaps he doesn't see it that way.

I'm not saying that the taxpayer's perception is dispositive. But over time, there may or may not be a pattern that helps determine whether participation in contests is actually part of a business activity...

If this thing was reported on Form 1099-MISC, I'll bet it's in Box 3, for "Other Income." Prizes are generally not reported in Box 7.

I have argued in many other posts that:

It is not the reporting documents that determine the tax treatment of an item; rather it is the nature and character of the income that determine the proper classification.

Putting a number in the wrong box on Form 1099-MISC doesn't convert it from self-employment income, to, say, rental income. Sometimes the form is just plain wrong. The IRS and the courts are going to look at the source and type of income if there is a substantive dispute.

With that being said, the reporting document does, in many cases, create a valid presumption about the nature and type of income.

So...

If it's reported in Box 3 of Form 1099-MISC, it will probably never be challenged by the IRS if it is reported as a prize on Line 21. The matching program certainly doesn't look at the identity of the payer. The IRS would have to become interested in the return for some other reason before this came up.

Burton M. Koss
koss@usakoss.net