Rev. Rul. 62-74

Advice has been requested with respect to the treatment for Federal income tax purposes of a cash prize won and to be paid under the circumstances described below.

The taxpayer was awarded a prize in the amount of 12 x dollars. Pursuant to the terms of the contest, which were issued before the winner was chosen, the contest sponsor placed the 12 x dollars in a noninterest-bearing escrow account to be paid to the winner as follows: 2.5 x dollars immediately, 5 x dollars four months later, and 4.5 x dollars one year after payment of the second installment. The taxpayer uses the cash receipts and disbursements method of accounting.

Section 74 of the Internal Revenue Code of 1954 provides, in part, that gross income includes amounts received as prizes and awards, with certain exceptions not pertinent here.

Section 451 of the Code provides, in part, that the amount of any item of gross income shall be included in gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

In E. T. Sproull v. Commissioner , 16 T.C. 244, affirmed, 194 Fed.(2d) 541, the court held, in determining the taxable year of inclusion of an amount placed in a trust established in 1945 but to be paid to the taxpayer in later years, that though the doctrine of constructive receipt was not applicable, still the entire amount was the measure of the economic benefit conferred on the taxpayer in 1945. The court stated, in part, as follows:

The question then becomes * * * was `any economic or financial benefit conferred on the employee as compensation' in the taxable year. If so, it was taxable to him in that year. This question we must answer in the affirmative. The employer's part of the transaction terminated in 1945. It was then that the amount of the compensation was fixed * * * and irrevocably paid out for the petitioner's sole benefit * * *.

The only substantial difference between the Sproull case and the instant situation is that in the former interest was to be paid to the taxpayer with the last installment of trust principal. In this case, no interest is to accrue to the benefit of the taxpayer. Therefore, unlike the Sproull case, the present value of the fund to the taxpayer is not equivalent to the amount paid over for his benefit, but, rather, is equivalent to the 2.5 x dollars paid to him immediately plus the discounted value of the future payments to be received.

The interest factor to be used in arriving at the present discounted value of the right to receive payments in the future may be determined by reference to section 20.2031-7 of the Estate Tax Regulations. The difference between this discounted value and the full amount of future payments is includible in the taxpayer's gross income for the taxable years the payments are received in the proportion dictated by the projected interest. Thus, the aggregate of the amounts attributable to the prize which are presently and ultimately includible in the taxpayer's gross income should be exactly 12 x dollars.

Based upon the specific facts of this case, it is held that the discounted value of the right to receive future payments from the escrow account is includible in the taxpayer's gross income for the taxable year in which the prize was awarded. The excess of future payments received over the discounted value is includible in the taxpayer's gross income for the taxable years in which received.