Wednesday, April 21, 2010

A Note on Obama's Tax Return Regarding The Nobel Peace Prize Money

Obama announced that he was going to donate the $1.4 million Nobel Peace Prize money to select charities. Obama has done so. What is of interest is the way in which he did it. Instead of accepting the winnings and taking it as income before donating it, he opted to have it transferred strait to the charities. This is not bad, indeed it was probobly the more economically rational of the choices, but some argued that it had the potential to be more politically detrimental. The downside of doing it this way is that Obama can not show on his public tax return that he took the prize money and donated it to charity. The Obama administration concluded rightly in my opinion, that it would easy enough to explain why it would not appear on his tax forms and ultimately not be a serious problem.

"As an alternative to taking the Nobel Prize money into income and donating the proceeds, Professor Aprill noted, Code § 74(b) allowed the president to transfer money directly from the Nobel Prize Committee to a charitable or governmental recipient without the amounts becoming part of his gross income. Professor Aprill doubted that Obama would avail himself of this option for reasons of public relations. She wrote:

[I]t seems to me, that even if the 50% AGI limit were a problem, the President would nonetheless decide not to use § 74(b) because he would as a political matter need to show both that he took the Nobel Prize money into income and that he made charitable contributions of it on his publicly disclosed tax return -- the tax benefit of § 74(b) would be too great a public relations detriment to him. That is, using § 74(b) might look to the public...that he was somehow sheltering income.

This week the president posted his 2009 tax return online. The White House noted that the Code allows the recipient of Nobel Prize proceeds to donate the prize income directly to charity, and that this was what Obama did. In other words, President Obama relied on Code § 74(b) to exclude the Nobel proceeds from his gross income.

The White House explained that, under the circumstances, the president did "not have to recognize the prize as income on his federal income tax return." The White House also explained that the president was not permitted to take a charitable deduction on the value of the prize since it was not included in his income.

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