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When to pay on contest winnings

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in Small Business Tax

Q. Our client had several contest winners who won trips at the end of 2005. The winners were given a year to select a date for travel. They signed release forms stating that taxes would be reported in the year the prizes were awarded. But when they received 1099s for 2005, some winners objected. Was our client right? S.S., via e-mail

A. In our opinion, yes. In general, the tax-law doctrine of “constructive receipt” says that a person is taxed on a prize when it’s made available to him or her. In other words, winners must pay tax on prizes in the year they could have received it, even if that actually didn’t occur. So, your client was on firm ground in submitting 1099s for 2005. Tip: If it wasn’t physically possible to claim the award (e.g., the recipient was notified on Dec. 31), then the constructive receipt doctrine does not apply.

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