"Chewbacca mom" gets free gifts, may need tax advice
When Candace Payne, a Texas mom, posted a video she took of herself laughing hysterically while wearing a newly purchased Chewbacca mask, her motive was simple: Share proof with her Facebook friends that she bought the mask for herself, not her kids. What happened next was surreal.
Since the video was posted on May 19, it quickly became the most-viewed Facebook Live video ever, with over 150 million views and counting. And since content is often driven by what's trending, the affable Ms. Payne has become one of the most famous folks of the moment.
She's been on a whirlwind tour, including appearances on The Late Late Show with James Corden, Good Morning America, and even visits to Lucasfilm Studios and Facebook's headquarters.
Ms. Payne is also a bit wealthier. To show their appreciation for her simple video -- which was her celebration of the simple joys of life -- a number of businesses reached out to give her free swag, in the form of travel, merchandise, gift cards and even college scholarships.
Time listed the gifts, which total in value in excess of $420,000:
Gifts from Kohl's (where Ms. Payne bought the mask): $3,000
Travel, talk show visits: $7,500
Walt Disney World vacation: $7,500
Star Wars Fan Expo Dallas VIP treatment: $2,000
College scholarships (for all members of the Payne family): $400,000
But there's a dark side to the generosity Ms. Payne has received: It's the IRS. The basic question she will need to answer is, "Am I required to report any or all of the items received as taxable income, or are these tax-free gifts?"
One of the most famous examples of the backlash caused by "free gifts" arose in 2004, when Oprah gave Pontiacs to her audience members. The audience members receiving these vehicles quickly learned that "free" wasn't really free. Because they were all part of a pre-arranged promotion, each recipient was required to report the fair market value of the car as taxable income and they were required, under IRS regulations, to pay income tax on the value of the car they were given. This was because the gift was determined to be a payment, or a prize, for participating in a promotion.
Pontiac and Oprah received significant promotional benefits and in exchange, they agreed to give the cars to the audience, who agreed to receive them. Shortly after this, Oprah offered to pay the additional taxes each person owed on their "gift." Although it was a generous thing for her to do, the IRS still required the audience members' share of it.
But when you receive a gift which is given by a donor who has no expectation to receive anything in return -- no prearranged agreement for you to perform a service in the future or no strings of any sort attached -- then gifts received are not taxable as income to the recipient.
The most common example of a nontaxable gift is when parents (or grandparents) give money to their children. Most people have heard of the annual gift exclusion amount that's income tax free and also excluded from the gift tax - it's $14,000 per person per year in 2016.
But when a corporation makes a "gift," it's more suspect. That's because there's almost always a profit motive behind a company's generosity. The IRS shares the belief that corporations don't make gifts for the same reasons people do, and as a result, they'll carefully examine such a transaction to ensure it's not really a taxable promotional consideration cleverly disguised as a tax-free gift.
If the givers send a Form 1099 MISC to Ms. Payne, reporting as income any or all of the value of the items given to her, she'll have a more difficult time trying to come up with the answer that these are tax-free gifts.
Rather than trying to answer this question on her own, "Chewbacca mom" should seek the advice of a professional tax adviser. May the Force be with her!