1. (a) General rule Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.

2. (b) Exception for certain prizes and awards transferred to charities Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—

   1. (1) the recipient was selected without any action on his part to enter the contest or proceeding;
   2. (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and
   3. (3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.

3. (c) Exception for certain employee achievement awards

   1. (1) In general Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.

   2. (2) Excess deduction award If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of—

      1. (A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or
      2. (B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.

      The remaining portion of the value of such award shall not be included in the gross income of the recipient.

   3. (3) Treatment of tax-exempt employers In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle.
   4. (4) Cross reference For provisions excluding certain de minimis fringes from gross income, see section 132(e).

(Aug. 16, 1954, ch. 736, 68A Stat. 24; Pub. L. 99–514, title I, §§ 122(a)(1), 123(b)(1), Oct. 22, 1986, 100 Stat. 2109, 2113.)

Amendments

1986—Subsec. (a). Pub. L. 99–514, § 123(b)(1), which directed that subsec. (a) be amended by substituting “(relating to qualified scholarships)” for “(relating to scholarship and fellowship grants)”, was executed by making the substitution for “(relating to scholarships and fellowship grants)” to reflect the probable intent of Congress.

Pub. L. 99–514, § 122(a)(1)(A), substituted “Except as otherwise provided in this section or” for “Except as provided in subsection (b) and”.

Subsec. (b). Pub. L. 99–514, § 122(a)(1)(B), (C), inserted “for certain prizes and awards transferred to charities” in heading and added par. (3).

Subsec. (c). Pub. L. 99–514, § 122(a)(1)(D), added subsec. (c).

Effective Date of 1986 Amendment

Amendment by section 122(a)(1) of Pub. L. 99–514 applicable to prizes and awards granted after Dec. 31, 1986, see section 151(c) of Pub. L. 99–514, set out as a note under section 1 of this title.

Amendment by section 123(b)(1) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, but only in the case of scholarships and fellowships granted after Aug. 16, 1986, see section 151(d) of Pub. L. 99–514, set out as a note under section 1 of this title.

Applicability of Certain Amendments by Public Law 99–514 in Relation to Treaty Obligations of United States

For nonapplication of amendment by section 123(b)(1) of Pub. L. 99–514 to the extent application of such amendment would be contrary to any treaty obligation of the United States in effect on Oct. 22, 1986, see section 1012(aa)(3) of Pub. L. 100–647, set out as a note under section 861 of this title.