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A tax problem for Palin?

October 21, 2009

Talking Points Memo says Sarah Palin may have to report taxable income from a charity auction of a dinner date with the former vice-presidential candidate (via the TaxProf). She would then be allowed to deduct the $63,000 proceeds, but would probably be out cash because of the phase-out of itemized deductions at higher income levels. TPM bases its conclusion on Treasury Reg. Sec. 1.61-2(c), which reads:

Payment to charitable, etc., organization on behalf of person rendering services. The value of services is not includible in gross income when such services are rendered directly and gratuitously to an organization described in section 170(c). Where, however, pursuant to an agreement or understanding, services are rendered to a person for the benefit of an organization described in section 170(c) and an amount for such services is paid to such organization by the person to whom the services are rendered, the amount so paid constitutes income to the person performing the services.

TPM is probably wrong. The dinner date is likely covered by Rev. Rul. 68-503, reprinted below, which interprets the regulation in the context of an entertainer who performs at a fund-raiser. The ruling holds that the entertainer is not taxable on the proceeds of a fund-raising performance where the entertainer isn't entitled to any of the proceeds. The IRS would likely apply this ruling to a charitable dinner date. You can draw distinctions between a dinner date auction and a fund-raising performance, but the main difference seems to be the size of the audience, which shouldn't affect the tax results.

Update, 10/22/2009: Sarah Palin, meet Eleanor Roosevelt

Text of Rev. Rul 68-503:

No amount is includible in a performer's gross income as a result of professional services rendered gratuitously in entertainment programs promoted by a political fund-raising organization.

Full Text:

At the request of a political fund-raising organization, an individual taxpayer gratuitously rendered professional services as a featured performer in entertainment programs planned, organized, promoted, and scheduled by the fund-raising organization. He was not entitled to, and received no payment for these services. Admissions were charged for the programs, and the net proceeds inured solely to the fund-raising organization.

Held, under these facts, no amount is includible in the individual's gross income as a result of the gratuitous services rendered. In the present case, the fund-raising organization is the promoter of the entertainment programs, and the fact that services are contributed in connection therewith does not, of itself, result in gross income to the contributor. See section 1.61-2(c) of the Income Tax Regulations; G.C.M. 27026, C.B. 1951-2, 7; and Rev. Rul. 66-167, C.B. 1966-1, 20.

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