Tax Implications of California's Vax for the Win Program

On May 27, 2021, California Governor Newsom’s “Vax for the Win” program with awards to vaccinated and to be vaccinated Californians provides:

• $1.5 million to each of 10 individuals
• $50,000 cash prize for 30 individuals
• $50 gift cards to the first 2 million individuals vaccinated on or after May 27; prize not awarded until vaccination series is completed.

The total cost is $116.5 million.

So, what are the tax consequences?

Accession to wealth, clearly realized so taxable (§61, §74, and Glenshaw Glass, 345 US 426 (1955)) unless an exclusion applies.

Since there are no income limitations for winning, the general welfare exclusion does not apply [see Info Letter 2019-0024]. This doctrine applies to exclude certain government payments when:

1. Paid per a government program
2. For promotion of the general welfare (based on need)
3. Are not payments for services

The prizes are not tied to the California tax system so they are not a tax credit (as the Golden State Stimulus Payments of $600/person are labeled in SB 88. Also, we are unlikely to see any federal legislation creating a special exclusion.

Query: Are the prizes a “qualified disaster relief payment” under §139(b)(4) – “if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare”? This term is not defined in §139 and there are no regs. Per JCX-93-01 on P.L. 107-134 (1/23/02): “Qualified disaster relief payments also include amounts paid by a Federal, State or local government in connection with a qualified disaster in order to promote the general welfare. As under the present law general welfare exception, the exclusion does not apply to payments in the nature of income replacement, such as payments to individuals of lost wages, unemployment compensation, or payments in the nature of business income replacement.”

In Notice 2002-76 with Q&As on the application of then new §139 regarding some 9/11 governmental payments, the IRS provided: “Section 139(b)(4) codifies (but does not supplant) the administrative general welfare exclusion for certain disaster relief payments to individuals.” Similarly, see Rev Rul. 2003-12. This exclusion is based on need.

Assuming the prizes are not excludable under §139, will withholding be required for any of these prizes? Per IRC §3402(o) and (q) and regs, probably not. The $50 gift cards to newly-vaccinated individuals might be viewed as issued for wagering but the amount paid is too low to require withholding. Since the first 2 million vaccinated in the stated time period get a gift card, the only gamble seems to be whether you’ll be in that group of two million. The prizes available to those already vaccinated should not require any withholding. Example 9 at Reg. 1.3402(q)-1(f) involves a magazine subscriber automatically entered into a sweepstakes who paid just the normal subscription price and has not placed a wager or entered a wagering transaction. So, there was no withholding  required for the $50K prize the subscriber won.

Observation: The recipients of the $1.5 million prizes (and even the $50K ones) should be offered and encouraged to have federal and California withholding taken from the prize. The terms and conditions do make a reference to tax withholding (perhaps that is just for California?).

Observation: If the winner is under age 18, they apparently can still get the $50 card with the parent’s assistance. But for the larger prizes, the terms and conditions state: “If a winner is a minor, the prize funds will be invested in a savings instrument and the minor will be able to access the funds upon achieving the age of majority. Additional conditions and details about administration of prizes paid to minors will be available before the first drawing.”  The fact sheet says the cash will be put in a savings account until they turn 18.

This raises some interesting accounting method rules (particularly the economic benefit doctrine and constructive receipt rule)! In Pulsifer, 64 TC 245 (1975), winnings from the Irish Sweepstakes were irrevocably deposited to a bank account for a minor for his benefit until reaching age 21. The funds were taxable when won. If instead, the state or other agency is the holder of the winnings until the minor reaches age 18, they likely are not taxable until received later. PLR 9624009 and PLR 200031031 have detailed discussion of this regarding lottery winnings.

The kiddie tax is also relevant if the child is under age 18 or is a full-time student age 19 to 23.

What if the winner declines the prize? The terms and conditions for these vaccine prizes allow this. Will the winner be treated as having income and then a donation to the state of California when they give the prize back?  This is not exactly a wash for taxable income (income less charitable donation) because the high AGI will exclude the individual from many tax rules that phase out at certain high AGI levels. Since the winner is selected without any action on their part to enter the contest, §74(b) should treat the amount as not taxable if transferred to a government or charity immediately. But refusing the prize should make it non-taxable per Rev Rul 57-374. The full text of this old ruling: “Where an individual refuses to accept an all-expense paid vacation trip he won as a prize in a contest, the fair market value of the trip is not includible in his gross income for Federal income tax purposes.”

California: Tax treatment will be the same as federal unless the state enacts an exclusion, which I think is unlikely.

Tax Policy: These prizes are unexpected accessions to wealth and should be taxed. That is, no exclusion should be enacted in California and certainly not at the federal level (no need for non-Californians to subsidize these prizes). While excluding a $50 gift card might seem administratively convenient per person, the aggregate award is $100 million and perhaps 5% average tax – so a lot of revenue. And many recipients may be below the filing threshold and some may be in the highest tax bracket. And, of course, since taxable at the federal level, the federal government will get a portion of these awards.

What do you think? (of these awards and taxation)