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Subject Author Date
Tax implications from an unusual insurance policy. NadCixelsyd 10-25-2007
Posted by Dick Adams on October 29, 2007, 11:26 pm
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> Last spring, a Massachusetts furniture store offered to
> refund your money on select furniture (bedroom sets?) if the
> Red Sox won the World Series. Sales surged. The furniture
> store covered themselves with an insurance policy, "That
> way, we're rooting for the Red Sox, too".
>
> Way back in March, the Red Sox probably had an 10% chance of
> winning. At this point, I think the Red Sox have about a 70%
> chance of winning. What are the income tax implications for
> the furniture buyers if the Red Sox do win?

Since the Jedi Knights of Boston won the World Series on
Sunday night, this issue is now a tax reality. I've thought
this out as best I could and have come up with what I believe
are reasonable positions for both the taxpayer and the IRS.

The taxpayer takes the position that the furniture was
purchased at full price plus the insurance premium without
the possibility of negotiating discount in return for a
contingent rebate, i.e., return of capital, and rebates are
not taxable income.

The IRS takes the position that the purchase was analogous
to buying a lottery ticket. Therefore, the rebate is Other
Income and the cost of the ticket is deductible as a
gambling loss on Schedule A.

IMRHO, the two positions are a wash unless the taxpayer does
not have enough expenses to make a difference on Schedule A,
e.g., the poor and the retired.

Considering it is near impossible to get elected to public
office in Massachusetts without swearing allegiance to the
Red Sox, the taxpayers' position should prevail.

Dick

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Posted by Bob Sandler on October 30, 2007, 11:48 pm
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> The IRS takes the position that the purchase was analogous
> to buying a lottery ticket. Therefore, the rebate is Other
> Income and the cost of the ticket is deductible as a
> gambling loss on Schedule A.

I don't think so. The IRS will take the position that $1 was
the price of the lottery ticket, and whatever the buyer paid
in addition to that $1 was the price of the furniture. The
rebate is gambling income, and the $1 cost of the ticket is
deductible on Schedule A.

Bob Sandler

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
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<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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Posted by Seth on November 1, 2007, 12:30 am
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>> The IRS takes the position that the purchase was analogous
>> to buying a lottery ticket. Therefore, the rebate is Other
>> Income and the cost of the ticket is deductible as a
>> gambling loss on Schedule A.

> I don't think so. The IRS will take the position that $1 was
> the price of the lottery ticket, and whatever the buyer paid
> in addition to that $1 was the price of the furniture. The
> rebate is gambling income, and the $1 cost of the ticket is
> deductible on Schedule A.

More than $1; rather, whatever the store paid for its
insurance would be the fair price. But if several things
are purchased together (and cannot be unbundled), the
pricing for each is an interesting issue.

Seth

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Bob Sandler on October 30, 2007, 11:48 pm
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No one has yet addressed the question (mentioned briefly by
kastnna in an earlier post) of whether the store or the
insurance company will report the refunds on either a W-2G
or a 1099-MISC. Whether and how it gets reported is going
to affect how the buyers report it on their tax returns. The
OP mentioned bedroom sets and a full refund of the purchase
price, so the refunds are likely to be large enough that
they have to be reported, unless the company making the
payments considers it a rebate. If it's not a rebate, the
proper reporting, of course, depends on whether you consider
it gambling income or a prize.

I'm sure neither company considers itself to be in the
gambling business, so they are unlikely to even think of
issuing a W-2G. Having seen a lot of reports of incorrect
1099s in the past, in this group and elsewhere, I expect
that the rebates will be reported in 1099-MISC box 7
(nonemployee compensation), because that seems to be the
knee-jerk reaction of any company reporting any payment
other than salary, even though it's obviously wrong. This
will put every one of the buyers in the position of having
to do battle with the payer, the IRS, or both.

Bob Sandler

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Alan on November 1, 2007, 12:30 am
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Bob Sandler wrote:

> No one has yet addressed the question (mentioned briefly by
> kastnna in an earlier post) of whether the store or the
> insurance company will report the refunds on either a W-2G
> or a 1099-MISC. Whether and how it gets reported is going
> to affect how the buyers report it on their tax returns. The
> OP mentioned bedroom sets and a full refund of the purchase
> price, so the refunds are likely to be large enough that
> they have to be reported, unless the company making the
> payments considers it a rebate. If it's not a rebate, the
> proper reporting, of course, depends on whether you consider
> it gambling income or a prize.
>
> I'm sure neither company considers itself to be in the
> gambling business, so they are unlikely to even think of
> issuing a W-2G. Having seen a lot of reports of incorrect
> 1099s in the past, in this group and elsewhere, I expect
> that the rebates will be reported in 1099-MISC box 7
> (nonemployee compensation), because that seems to be the
> knee-jerk reaction of any company reporting any payment
> other than salary, even though it's obviously wrong. This
> will put every one of the buyers in the position of having
> to do battle with the payer, the IRS, or both.

Jordan's Furniture offered to rebate the purchase price if
the Sox won the World Series. An earlier reply of mine
seems to have been lost in the ether.

I find this to be a conditional sale. I.e., a sale that
would not be completed until certain conditions were met.
Sox win, your price is zero. Sox lose, your price is equal
to today's price. The money turned over to Jordan's at the
time of sale would be nothing more than a deposit.

<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

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