A note on the president’s tax return

President Obama received a monetary award of $1,400,000 along with his Nobel Peace Prize last year. He announced that he would be giving away the proceeds to charities. Many news outlets publicized the president’s list of designated beneficiaries. The president pledged the proceeds to ten charities ranging from The Fisher House to the Central Asia Institute.
At the time of the Nobel award, tax law expert Paul Caron of the TaxProf Blog published the thoughts and speculations of Professor Ellen Aprill related to the tax treatment of the monetary award. (Professor Aprill holds the John E. Anderson Chair in Tax Law at Loyola Law School in Los Angeles.) Under the Internal Revenue Code, Obama could take the award into income and donate it to charity. He could then take deductions on the amounts he donated to charity.
Professor Aprill contemplated that if President Obama donated the proceeds in this manner, his charitable donations might exceed the amount he could deduct under the Code. This is precisely the situation that President Bush (41) confronted when he donated the royalties on Millie’s Book to favorite charities including Ducks Unlimited and the Barbara Bush Foundation for Literacy in 1991. President Bush nevertheless gave away the royalties in full even though he could not deduct the entire amount on his 1991 tax return. He thus paid taxes on the additional amount he gave away but could not deduct.
This did not save President Bush from condemnation as a tax cheat by Pulitzer Prize-winning reporters Donald Barlett and James Steele in their book and syndicated newspaper series America: Who Really Pays the Taxes? Barlett and Steele expressed great indignation over the effective tax rate on President Bush’s total 1991 income. They simply omitted to apprise readers that the president’s effective rate was artificially lowered that year as a result of his taking Mrs. Bush’s royalties into income and giving them away as charitable gifts, of which the Code prevented him from taking full advantage.
As an alternative to taking the Nobel Prize money into income and donating the proceeds, Professor Aprill noted, Code § 74(b) allowed the president to transfer money directly from the Nobel Prize Committee to a charitable or governmental recipient without the amounts becoming part of his gross income. Professor Aprill doubted that Obama would avail himself of this option for reasons of public relations. She wrote:

[I]t seems to me, that even if the 50% AGI limit were a problem, the President would nonetheless decide not to use § 74(b) because he would as a political matter need to show both that he took the Nobel Prize money into income and that he made charitable contributions of it on his publicly disclosed tax return — the tax benefit of § 74(b) would be too great a public relations detriment to him. That is, using § 74(b) might look to the public…that he was somehow sheltering income.

This week the president posted his 2009 tax return online. The White House noted that the Code allows the recipient of Nobel Prize proceeds to donate the prize income directly to charity, and that this was what Obama did. In other words, President Obama relied on Code § 74(b) to exclude the Nobel proceeds from his gross income.
The White House explained that, under the circumstances, the president did “not have to recognize the prize as income on his federal income tax return.” The White House also explained that the president was not permitted to take a charitable deduction on the value of the prize since it was not included in his income. Professor Caron has updated his earlier post to discuss the tax issues raised by the president’s tax treatment of the Nobel award money here.
Professor Aprill to the contrary notwithstanding, the White House correctly calculated that it did not need to concern itself with the public relations fallout from the president’s treatment of his Nobel Prize proceeds.

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