As in previous years, the host of the Academy Awards and the nominees for Best Actor, Best Actress, Best Supporting Actor, Best Supporting Actress, and Best Director will receive a package containing a range of gifts from household items to luxury vacations.
The full list of items includes dog food, tequila, popcorn, sneakers, a travel bag, a portable infrared grill, and a special 50th anniversary edition Rubik’s Cube, to name a few. But the more unique and extravagant items include home renovation services, a private sound bath, three nights at a chalet in Switzerland for a party of 10, a seven-day wellness retreat in Southern California, and a three-night stay in a luxury villa for a party of two in Saint Barthélemy, a country in the Caribbean. This year’s gift bag is valued at over $170,000.
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.
The tax law excludes from income tax money, goods, and services received as gifts. But even though these are popularly known as gift bags, they are not considered gifts by the IRS. To be a gift, the transferor’s intent must come from a “detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses.”
Of course, the vendors who participated in the gift bags do not see Academy Award nominees in the same as they would see a couple celebrating an anniversary or a homeless child begging for food in the snow. The vendors pay Distinctive Assets to put their products in the gift bag in the hopes that the celebrities that receive them will promote them on mainstream media or to their millions of followers on social media.
Despite the high value of the gift bag, not everything is immediately taxable. The more tangible items such as the dog food and the portable grill are taxable upon receipt. But according to IRS guidance, the more expensive items such as the vacation packages and renovation services are not taxable until they are redeemed. According to Distinctive Assets founder Lash Fary, only a few people accepted all of the items.
According to the IRS, the items can be donated to charity and the recipient could take a tax deduction. But there are two problems. First, it is highly likely that the vacation packages can only be redeemed by the recipient and cannot be transferred to anyone else. But assuming they can be transferred, the vacation packages will benefit private individuals and not serve a charitable purpose so the recipient cannot take the deduction anyway.
Lastly, if the vacation and services offers are redeemed, they are still considered taxable income and the tax must be paid with money even though no money was exchanged. While the recipients are highly paid celebrities, they should plan to save some of their salaries to cover the tax.
Thankfully, the more expensive packages in the Academy Award gift bags are not taxable until they are received. But even though they are gifts, they are not really free. If the recipients want to enjoy their vacations, they will have to pay 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 stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.