Rev. Rul. 58-101

The Internal Revenue Service has been requested to advise whether the fair market value of a house received by a taxpayer as a prize for taking part in a contest, but subject to the conditions and restrictions described below, should be included in gross income for the year in which title to the property was transferred, or the benefits and burdens of ownership received; or, whether the prize should be considered as having been earned over a longer period. Advice is also requested as to the applicability to the transaction of section 1301 or 1302 of the Internal Revenue Code of 1954 relating to income attributable to serveral taxable years.

In the instant case, a taxpayer submitted an entry in a twenty-five word essay contest conducted by a sponsor in 1954. In 1955 it was publicly announced that the taxpayer had won a house which would be built for him, subject to certain conditions and restrictions contained in an agreement entered into between him and the sponsor. The agreement provided that the taxpayer would do all the work and pay all expenses incurred in connection with the selection of a lot upon which the house would be built and would permit the sponsor and its advertising agency to publicize the house in any manner they considered desirable. The agreement also provided that the taxpayer would live in the house for a period of six months and that he would not disclose the winning entry, nor publicize it, without prior approval of the sponsor. In addition the agreement contained a clause which provided that the taxpayer would return the house and deliver the title thereto to the sponsor should he fail to comply with any of the conditions set forth in the agreement. The house was completed in 1956 and the six months' occupancy period provided for in the agreement extended into 1957. Title to the property was received some time in 1956. In order to protect himself against any future suit by the sponsor, or anyone who might purchase the home, the taxpayer had the agreement with the sponsor recorded as a public document and made a part of the abstract of the property. Certain title insurance companies refused to insure title to the property unless the taxpayer would agree to post bond for the value of the property.

On the basis of these facts, it is held that the fair market value of the house constitutes gross income to the taxpayer, under the provisions of section 74 of the Code. Such income is includible in the taxpayer's gross income for the year in which title to the property was transferred to him or the year in which the taxpayer took possession of the completed home, whichever occurred first (in this case, both occurred in 1956), regardless of the fact that subsequent events may require him to reconvey title to the sponsor. Loss of title because of failure to comply with conditions subsequent would constitute a separate transaction for Federal income tax purposes.

The efforts expended by the taxpayer which resulted in his winning the prize do not constitute `an employment,' the compensation from which would, under section 1301 of the Code, be attributable to several years. There was no `arrangement' within the meaning of section 1301(b) between the taxpayer and the sponsor at the time he submitted his essay in the contest. See Revenue Ruling 55-642, C.B. 1955-2, 302. Such an `arrangement' did not come into existence until the time of the announcement of the taxpayer as the winner, when the conditions to the awarding of the prize were agreed to. Therefore, the subsequent activities of the taxpayer in finding a lot suitable to the sponsor and in holding himself subject to publicity claims of the sponsor would constitute `personal services * * * to effect a particular result,' i.e. , the furtherance of a particular advertising scheme of the sponsor. However, since the elapsed time between the date of announcement of the winner of the contest and the expiration of the six-month occupancy requirement amounted to less than 36 months, section 1301 is not applicable in the instant case.

Since the taxpayer's efforts did not culminate in an `invention' or `artistic work,' section 1302 of the 1954 Code is not applicable.