On Friday, the IRS announced an agreement with the Academy of Motion Picture Arts and Sciences on the tax consequences of “gift baskets” delivered to celebrities announcing the Academy Awards. This agreement will possibly change the way that stars view these baskets, especially if it means shelling out real money for them.
According to the Academy, the stars who give the awards are not compensated for their appearances. After all, it is an opportunity to showcase one’s persona on national television, even reaching into international markets. Consumer industry representatives are quick to enter this compensation vacuum, however, by donating to the stars packages of goods and services. They may include hotel stays, spa visits, jewelry, dinners at various restaurants, and other luxury items. (I found this list doing a google search – though I can’t vouch for its accuracy: http://www.girlhacker.com/2006_03_01_archive.html. Query whether the contents are advertised on the Academy's site - I did not check on this.)
It makes a lot of sense for these folks to give away products and services to celebrities. If they visit their hotel, use their products, or eat at their restaurant, that may attract others who like to be around the “beautiful people” and emulate their lifestyles. These high-margin activities can be made even moreso with savvy marketing.
However, there are risks. There is always the possibility that the gift will not be used, or that it will be given to an underling and the associational value depleted. If services are involved, nonuse costs them nothing, but transference to the unknown body guard or driver would mean costs without the cachet of the celebrity (other than that associated with being included in the “gift basket” list in the first place).
From the perspective of the providers, the costs actually incurred in connection with providing these goods and services are ordinary and necessary business expenses. That seems entirely appropriate from an income tax perspective. However, from the perspective of the recipient, the IRS wants this to be treated as taxable income. It is, after all, a form of personal consumption that is received as a result of their appearance at the academy award program.
In significant part, this tax treatment is based on the idea that the celebrities should be taxed on the same basis as other folks. Of course, that is not happening in most cases. Celebrities get to live and travel better than most of us, and often at the expense of other people. It is just part of their job. Most of the time, this goes below the radar screen. However, when it occurs before a live television audience, the IRS feels it must do something.
According to the IRS News Release (2006-128), celebrities this year will get “appropriate tax forms by the Academy and will be responsible for satisfying their tax obligations.” That will raise some interesting issues: will the celebrities give back the things they don’t want because the tax consequences are too high? In effect, if you are getting a $1000 spa treatment, and that treatment costs you a Medicare tax (2.9%), federal income tax (35%) and perhaps a state tax on top of that (maybe 9%?), it starts to cost you real money. Moreover, giving these items away to underlings should also generate a tax liability for the celebrity (and perhaps also for the underling) given that the celebrity controls the disposition of that wealth.
All of this means, despite the saying of not looking a gift horse in the mouth (which for the non-equine initiated, is a way of determining age and future utility), that consideration will be required for these celebrities. Perhaps while considering the significance of these tax burdens, some of them will be less likely to follow the PC version of high tax rates they so often champion. (But keep in mind, they also often champion "green" behavior such as riding the bus, while jetting off in their private fleets with large CO2 footprints. But that is another topic.)