Golden Ticket = Greater tax

The NHL season is here and the Pittsburgh Penguins (back-to-back Stanley Cup Champions!) have established themselves as one of the most successful hockey organizations in the modern NHL. Success often translates to higher demand for tickets and higher ticket prices. Last season, the Penguins announced they would provide 20 years of season tickets to one lucky fan in their aptly named “Golden Ticket” prize drawing. A very exciting contest indeed and we know what you are thinking – what are the tax implications of winning?

Everyone likes to win a prize – especially 20 years of free season tickets. The IRS, however, considers these awards, whether in the form or cash or prizes as taxable income to the recipient. Depending on the magnitude, an award can quickly become a burden, especially in the case of non-cash prizes. To what extent these awards are taxable is wholly dependent on the form of the award and its respective fair market value.

Typically, income attributable to an individual is taxed at both federal and state levels based on the respective fair market value of what is received. In the case of an award, this holds true. Awards and prizes, such as the “Golden Ticket,” are considered as income based on the fair market value of the prize. The resulting tax can be substantial, and when the award is non-cash, the illiquidity of the prize can create a significant out-of-pocket tax obligation to an individual who may not have means of payment.

To demonstrate this point using the “Golden Ticket” prize, consider the following: the recipient of the “Golden Ticket” drawing is deemed to have received an award with an approximate retail value (ARV) of $250,000 over a 20-year period (based on the Official Rules). The Official Rules state, “The ARV of the Prize Tickets is based on available information and assumptions as to the increase in ARV over the course of twenty years, and the value thereof will be reported for tax purposes as required by law on an annual basis.” While fair market value may be different from retail value, for purposes of this example, the ARV will be used as a reasonable approximation of the award’s fair market value. Utilizing the ARV noted, one could reasonably assume that annual income approximating $12,500 is earned and reportable as taxable income by the recipient. Consider an individual with a marginal federal tax rate of 25% and a 3.07% Pennsylvania state tax rate, the “free” tickets could cost the recipient $3,125 in federal taxes and $384 in state taxes, annually.

The tax obligation could create financial strain on the recipient, leaving the question: is there a way to minimize tax? Without insight into the recipient’s financial position, it is a difficult question to answer. The winner could sell a portion of the tickets to cover the tax obligation, but to the extent the tickets are sold for a profit, additional tax obligation can be created. If proper tax planning is important for the Golden Ticket winner – imagine how much more important it is in an M&A transaction? Call us today with your Golden Ticket – or M&A – planning situations!

Sources: www.nhl.com/penguins/fans/golden-ticket; www.forbes.com; www.abc.go.com; www.revenue.pa.gov

STEELGATE ADVISORS, INC.

SteelGate Advisors is a multidiscipline investment bank specializing in buy- and sell-side representation, corporate finance, business valuation and tax planning/structuring for middle market companies. Our expertise, objectivity and individualized approach have helped stakeholders develop the important – and often challenging – business strategies that help them achieve their professional and personal financial goals.

Thomas Krahe, CPA/ABV/CFF; Managing Director; 724.719.3220; Tom.Krahe@SteelGateAdvisors.com

Bill Collier, CPA/MST; Managing Director; Bill.Collier@SteelGateAdvisors.com

Christopher Miller, CPA/ABV/CFF; Director of Valuation Services; Chris.Miller@SteelGateAdvisors.com

Some associates of SteelGate Advisors are registered representatives of, and securities transactions are conducted through, Stillpoint Capital LLC, Member FINRA and SIPC, Tampa, FL. Stillpoint Capital is not affiliated with SteelGate Advisors.

 

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