Rev. Rul. 84-9

1984-1 C.B. 22.

                       Internal Revenue Service
                                 Revenue Ruling

                      EXCLUSION FROM GROSS INCOME;  AWARDS

                          Published: January 16, 1984

SECTION 74. - -PRIZES AND AWARDS, 26 CFR 1.74-1: Prizes and awards

  Exclusion from gross income;  awards.  An award in the form of annual payments measured by the age or retirement income of the recipient is excludable from gross income under section 74(b) of the Code as long as the award is made in recognition of achievement in one of the categories listed in section 74(b).

ISSUE

  Whether an award in the form of annual payments measured by the age or retirement income of the award recipient is excludable from gross income under section 74(b) of the Internal Revenue Code in the situations below?

FACTS

  The X foundation, an organization exempt from income tax under section 501(c)(3) of the Code and a private foundation within the meaning of section 509(a), established a program under which two types of awards are granted to individuals for religious, charitable, scientific, educational, artistic, literary, or civic achievements.  Under the program, potential recipients of an award are recommended to a selection committee by nominators, a diversified group of individuals in many fields of endeavor.  The identity of the nominators is unknown to the general public from which the potential award recipients are selected.  Nominators are responsible for providing the selection committee with detailed information concerning the achievement of a nominee.

  The selection committee, which includes members of X's board of directors, selects and recommends to the full board of directors the most outstanding candidates among the individuals nominated.  The selection is based on the individual's achievements in the religious, charitable, scientific, educational, artistic, literary, or civic fields.  An award will not be given to any individual because of the individual's employment relationship with any particular institution.

SITUATION (1)

  X grants an award in the form of annual payments for a period of 10 years.  The amount of the award per year depends on the age of the recipient.  The older the recipient is, the greater the annual payments.

SITUATION (2)

  X grants an award to an individual at or near retirement age. The award is in the form of annual payments for the lifetime of the recipients in the amount of 50x dollars per year less the recipient's annual retirement income.

  In both situations the awards are designed to give recipients freedom from financial responsibility so that they may direct their creativity and energy to whatever effort they freely choose.  The awards are irrevocable and the recipients are not required to perform any future services to receive them.

LAW AND ANALYSIS

  Section 74(b) of the Code and section 1.74-1(b) of the Income Tax Regulations provide that 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) the recipient was selected without any action on the recipient's part to enter the contest or proceeding;  and (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award.

  Section 74(b) of the Code does not limit the manner of payment of an award or the method of calculating the amount of the award amount, but requires that the award be made in recognition of an achievement set forth in that section.  Paying the award over a period of 10 years or for the recipient's life merely establishes the mode of payment and calculating the extent of the award on the age or retirement income of the recipient is considered as merely a measure of the amount of the award, as long as the award itself is in fact made primarily in recognition of achievement in one of the categories listed in section 74(b).

HOLDING

  The awards in the form of annual payments measured by the age or retirement income of the award recipient made by X in situations (1) and (2) are not includible in the gross incomes of the award recipients under section 74(b) of the Code.

Rev. Rul. 84-9, 1984-1 C.B. 22.