For those who watch the Academy Awards, there is more to it than who wins the Oscar. Celebrities are scrutinized for what they wear and who they bring with them. Recently, people are eyeing the swag gift bag, an assortment of products and services provided to the nominees of the Best Actor, Best Actress, and Best Director awards. With an estimated value of $205,000, the swag bag is also attracting the eyes of the taxmen, who want their pound of flesh.
The swag bag is provided by Distinctive Assets, a celebrity product-placement marketing company. In the past, the Academy provided the gift bags themselves. But they stopped in 2006 when the IRS began to investigate whether these gift bags could be taxable. Eventually, the agency announced that receipt of these gift bags could be taxable income to the recipients.
So what are in these swag bags? Mostly they are regular consumer products and some novelty items. But there are also some lavish and outlandish gifts that are attracting media attention. This includes workout sessions with a celebrity trainer, a liposuction procedure, home renovation management services, complimentary vacation packages worth several thousand dollars, and a 24-karat gold vape cartridge to name a few. And perhaps the most modern gift in this package is a nonfungible token containing a digital artwork of the late Oscar nominee Chadwick Boseman.
Since these bags contain such exquisite items, one can see why tax agencies would want to know whether receipt of these items are taxable. These raises some interesting tax questions.
The first question is why these swag gift bags are subject to income tax when they are gifts. First, calling something a gift doesn’t mean that it is. Just like putting a turbo badge on your Prius or pet turtle won’t increase its quarter-mile time.
Also, the tax law has its own definition of what qualifies as a gift. It comes from the Supreme Court case of Commissioner v. Duberstein where it ruled that a transfer is a gift when the transferor’s intent comes from a “detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses.”
So do the businesses that participate in the swag bags have this sense of detached and disinterested generosity toward the nominees? Are they providing these gifts with the same intent as they would for someone celebrating an anniversary or seeing a homeless child begging for food on a snowy street? It is theoretically possible but highly unlikely. They participate (and pay up to $25,000 for the privilege) hoping that the celebrities that use them will directly or indirectly promote them on mainstream media or to their millions of followers on social media.
The second question is when the taxable event is triggered. Generally, the taxable event occurs when you receive the product. But this can get confusing for some of the more expensive service gifts, such as the free liposuction services and the vacation packages. Does the gift recipient get taxed when they get the gift certificate? Or when they actually redeem it? Thankfully, the IRS has ruled that the recipient must include the fair market value of the services at the time it is redeemed.
Finally, there are some international tax issues as well. A few of the nominees are not U.S. residents, which means they could be subject to income taxes in both the U.S. and their home countries. This double tax threat is usually mitigated by tax credits for foreign income taxes paid. There are also income tax treaties between the U.S. and other countries which usually limit how much the U.S. can tax nonresidents with reciprocal rules for U.S. citizens earning income at a treaty country.
But generally, the IRS does not like to collect taxes owed by nonresidents. So instead, they impose a withholding requirement on the payor (or a withholding agent) if the income (or gifts in this case) is considered fixed, determinable, annual, or periodic income. Since these swag bags do not contain cash, how the withholding will be done will be problematic. For a dozen cookies, will the donor have to give four of them to the IRS? Or when it comes to a three-day vacation package, does one day have to be given to a government employee? The most likely case is that the payor will have to withhold a percentage of the cash value of the gift and pay it to the IRS and possibly the state.
There are more issues than the ones mentioned above. But the receipt of swag bags at awards shows raises a host of tax issues because it is not a case where the recipient is compensated in exchange for goods and services in the usual sense. While these bags are somehow valued at over $200,000, whether they will be taxed on the entire amount upon receipt is questionable. They can decline the bag, give some of the gifts to charity, or use some of the services at a later time, any of which can change how the recipients are taxed. But if they do accept these gifts, they are not really free. While the recipients may not have to compensate the donors, they will have to pay taxes to the government.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
Jordan Rothman is a partner of 
