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Sarah Palin, meet Eleanor Roosevelt

October 22, 2009

Yesterday I disagreed with the conclusions of a reader-blog post on the Talking Points Memo website. The TPM post, written by "Ecclesiastes," said Sarah Palin should include in gross income the proceeds of a charity auction of a dinner date with her.

Somebody linked to my post in the TPM comment section, prompting an ungenerous comment by Mr. E:

So if one CPA mis-applies a Revenue Ruling, the problem goes away?

When an Old Testament prophet says you have misapplied a Revenue Ruling, you check your work. While Ecclesiastes may be correct that all is truly vanity, I still think I have the tax law right.

It turns out that the ruling that I applied to the Palin dinner-date has a history going back to Eleanor Roosevelt, strangely enough. According to a standard treatise, Bittker and Lokken's Federal Taxation of Income, Estates, and Gifts, Mrs. Roosevelt had her own radio show, but she refused to accept payment for it, and the sponsor instead made payments to a charity. The IRS ruled that she did not have to pick up the sponsorship in gross income.

Subsequent rulings have refined the IRS position; it is no longer clear that Mrs. Roosevelt's radio shows would be tax free today. The more recent rulings, including the one I cited in saying that Ms. Palin likely has no gross income, distinguish between revenues that arise only because of the fund-raising event and those that someone would earn anyway, but assigns to charity. Bittker and Lokken explain:

A 1971 ruling states that an individual is not taxed "in a case where the individual does not participate directly or indirectly in the contract pursuant to which his services are made available [by the exempt organization] to the third party and if he has no right to receive, or direct the use or disposition of the amounts so paid." Entertainers performing at a specially scheduled benefit night should ordinarily have little difficulty in satisfying the requirements of these rulings, but they may find it hard to extricate themselves from existing contractual arrangements and shift to an exempt organization income "which would normally be that of the individual artist."

As far as I can tell, nobody says Ms. Palin had already arranged to auction herself as a dinner date, and then assigned the proceeds to charity as a tax dodge. You could argue that a dinner date is not "entertainment" (just ask my old dates), but it seems awfully nit-picky to say that this is fundamentally different from singing at a charity benefit; it's merely a different sort of performance, with an audience of one.

I use lots of weasel-words like "likely" and "seem" here, as I did in yesterday's post. That's partly because I'm no Old Testament prophet (they get to flatly say that I misapplied a ruling, with no explanation or citations), but mostly because there's no IRS precedent dealing specifically with celebrity dinner auctions. You can only make an educated guess.

I have found nothing in repeated electronic searches of IRS rulings and court cases that directly addresses this situation. There appears to be no case where the IRS has ruled against, or taken to court, a taxpayer who was a dinner-date auction "prize." The IRS has in fact neglected the scourge of charity dinner-dates.

As a policy matter, why should the IRS ever go after a celebrity dinner-date? It's not as though the celebrity date is assigning income she would otherwise earn to a third party to save taxes. An IRS attack would be... vanity.