Celebrity Gift Bags and the IRS

Apparently, being talented, beautiful (or handsome, as the case may be), photogenic, admired and catered to is just not enough if you’re a celebrity.  These days, the surest way to get your product’s name linked to a celebrity is to be featured in a celebrity gift bag.

For those of you who may not know what celebrity gift bags are, they’re a series of products, services, hotel stays, and other amenities that are given to people who either perform or present at various entertainment awards shows, like the Oscars.

In past years, these goodie bags have included things ranging from enormous flat screen televisions to the new Samsung Galaxy Note tablet, Uggs to Oakley snow gear, eye and hair treatments, Tiffany and Pandora bracelets, luxury handbags, and trips to Maui. Because, goodness knows, talented and highly paid performers need even more free stuff.

And what do the companies donating these products and services get out of this? Very simply stated, it’s very low cost publicity and advertising. By donating maybe $100,000 worth of merchandise, they can reap the benefits of millions of dollars of free advertising. Because all they need is for a celebrity to get his or her picture taken by People magazine wearing their earrings or watch, or have a celebrity go on a talk show and mention the perfume they were gifted at one of these events, and suddenly their product or service has become a white hot commodity. It’s a win-win for the celebrities and the companies.

The only one who wasn’t winning though was the IRS. You see, if you’re given a gift bag that could be valued at $10,000, $20,000, even $30,000, you owe taxes on the value of that stuff. And apparently no one was paying those taxes.

So, in 2006, the IRS began an outreach campaign aimed directly at the entertainment industry and its practice of giving out celebrity gift bags and other types of promotional items. The IRS wanted to ensure that the planners of these events, like the Academy of Motion Picture Arts and Sciences (AMPAS) and the Hollywood Foreign Press Association (HFPA) among others made their presenters and performers aware that they need to pay taxes on these items.

Both AMPAS and HFPA reached agreements with the IRS in 2006 where they “resolved” outstanding tax responsibilities on gift baskets given out through 2005. And the IRS contacted all other industry groups to have them ensure that recipients of gift baskets were aware of the fact that they had to report the value as income, and that the approximate 1099 tax form was sent by the providers of the gifts to the stars receiving them. As the IRS Commissioner Mark Emerson noted in its agreement with the Academy, “There’s no special red-carpet tax loophole for the stars”. I know we’ll all sleep easier knowing that celebrities have to pay taxes just like the rest of us do.