Internal Revenue Service
Rev. Rul. 68-20
1968-1 C.B. 55
Treatment for Federal income and withholding tax purposes of an amount
referred to as a scholarship, certain prizes and awards, and other amounts
received by the winner of a beauty contest.
Rev. Rul. 68-20
Advice has been requested as to the Federal tax treatment of various
amounts and items received by a taxpayer who participates in and wins a
contest under the circumstances described below.
A profit-making corporation is primarily engaged in the business of
conducting a national beauty contest and pageant. Each year local contests
are held in about one hundred major metropolitan areas in the United
States. A local winner is selected from each area on the basis of talent,
charm, and grooming.
Each local winner is required to sign a contract fixing her rights and
duties as a participant in the national contest, as a possible national
finalist, and as the possible national winner. The national contest takes
place in a particular city, lasts about one week, and ends with a
nationally-televised pageant attended by all participants, during which six
finalists demonstrate their talents, taste in dressing, capacity for
reacting in unrehearsed situations, and mental alertness. A single winner
is chosen from the six finalists as the climax of the show.
Under her contract with the corporation, the winner is entitled to receive
a four-year `scholarship' to the college of her choice (payable in
twice-a-year installments over the four-year college period), a fixed daily
sum for personal appearances, a fixed hourly amount for time spent in
modeling and posing for photographs at the direction of the corporation, a
monthly amount to defray the cost of her wardrobe and other miscellaneous
expenses, and a new automobile.
The taxpayer in the instant case became a local winner, signed the contract
referred to above, performed the requisite services as a national
participant, was selected as winner, performed the additional services
required of the winner, and received the items set forth above. She also
received numerous items (not related to her contract with the corporation)
from various manufacturers, such as wardrobe, shoes, perfume, and
Section 61(a)(1) of the Internal Revenue Code of 1954 defines gross income
as all income from whatever source derived, except as otherwise provided by
law, including but not limited to compensation for services, including fees
and similar items.
As a national participant, each local winner agrees to appear and to take
part in the week-long final judging and the televised pageant. The
corporation directs and controls the activities of the participants during
the entire week. The corporation pays the travel expenses and living
expenses of the participants while they are in that city. Each participant
agrees to permit the corporation to take and exploit commercially still,
motion, or television pictures, singly or with other contestants, for use
as endorsements or advertisements. In addition, each participant agrees to
provide a detailed biography for promotional use.
If selected as a finalist, but not as the winner, each contestant binds
herself upon request by the corporation to serve in the place of the
winner, if the winner is unable to serve or is replaced for any reason.
Pursuant to the terms of the contract, the contest winner agrees to accept
employment for one year with the corporation and to appear for the next
year's contest as directed. The corporation is entitled exclusively to her
services (such as personal appearances, modeling, and the like) and the
exclusive right to use her name and picture for its benefit in any way it
determines, specifically including use with respect to endorsements and
advertisements. The corporation enters into contracts with various national
sponsors for the services of the contest winner in connection with such
advertising and promotional activities, radio and television commercials,
and other product endorsements.
Section 1.61-1(a) of the Income Tax Regulations provides that gross income
includes income realized in any form, whether in money, property, or
Section 74(a) of the Code provides, in part, that gross income includes
amounts received as prizes and awards, except as provided in subsection (b)
(relating to certain prizes and awards made primarily in recognition of
religious, charitable, scientific, educational, artistic, literary, or
civic achievement, where the recipient took no action to enter the contest
and was not required to render substantial future services) and in section
117 of the Code (relating to scholarships and fellowship grants).
Section 117(a)(1)(A) of the Code states the general rule that in the case
of an individual, gross income does not include any amount received as a
scholarship at an educational institution. Before the exclusion provided by
section 117 of the Code becomes operative it must be initially determined
whether the payments under consideration have the normal characteristics
associated with the term `scholarship.' Ussery, et al. v. United States ,
296 F.2d 582 (1961), and Elmer L. Reese, Jr. v. Commissioner , 45 T.C. 407,
affirmed per curiam, 373 F.2d 742 (1967). The term `scholarship' is defined
in section 1.117-3(a) of the regulations generally as an amount paid or
allowed to, or for the benefit of a student to aid him in pursuing his
studies. In this regard, section 1.117-4(c) of the regulations provides, in
part, that any amount paid or allowed to, or on behalf of, an individual to
enable him to pursue studies shall not be considered to be an amount
received as a scholarship if the amount represents either compensation for
past, present, or future employment services or represents payment for
services which are subject to the direction or supervision of the grantor.
That amounts won in a contest may properly be classified as compensation
for services for Federal income tax purposes has been established by the
opinion in the case of Robertson v. United States , 343 U.S. 711 (1952),
Ct. D. 1746, C.B. 1952-2, 66.
The facts in the instant case demonstrate that the corporation derives its
profits primarily from marketing the services of the winner of the national
contest (or the services of one of the other finalists in the event the
winner drops out or is removed for breach of contract). The services of the
other participants in the national contest (that is, their appearing in the
city where the national contest is held and actively competing in the
preliminary talent and charm contests) are essential to the creation of the
corporation's final marketable product. Equally essential and more
extensive are the services of the finalists, who play starring roles in the
nationally televised pageant from which the ultimate winner is selected.
Under these circumstances, the so-called `scholarship' is compensation to
the contest winner for participation in the contest, for playing a leading
role in the televised pageant, and for performing subsequent services for,
or at the direction of, the corporation. Accordingly, the amount received
as a `scholarship' in this case is not excludable under the provisions of
section 117 of the Code, but is includible in gross income under the
provisions of section 61 of the Code as compensation for services.
Similarly, the fair market value of the automobile, the amount received for
personal appearances and for modeling and posing, and the monthly cash
allowance for wardrobe and miscellaneous expenses are includible in the
winner's gross income under the provisions of section 61 of the Code.
In the absence of evidence indicating that section 61 of the Code applies
because the contest winner performed services for the manufacturers who
provided her with wardrobe, shoes, perfume, and cosmetics, the fair market
value of such items is in any event includible in her gross income as a
prize or award under the provisions of section 74(a) of the Code.
The income tax withholding aspect of the case involves additional
considerations. The obligations of all participants in the national contest
(including the ultimate winner) are fixed by contract and their activities
during the entire period of the contest are directed and closely controlled
by the corporation. The services of the winner during her year-long reign
are equally closely controlled by the corporation. Pursuant to its
contracts with sponsors, the corporation is obligated to deliver the
services of the winner and it retains the requisite control to assure such
delivery. All arrangements for services must be made through the
corporation and it alone can require the winner to keep the scheduled
appointments. The corporation (and not the winner) has the right to approve
or disapprove of any or all advertising and promotion activities or
materials using the name, person, or likeness of the winner.
It follows from the foregoing that the corporation exercises, or has the
right to exercise, the necessary direction and control over the services of
the participant who becomes the national contest winner to establish the
relationship of employer and employee. Accordingly, liability for the
withholding of Federal income tax is incurred by the corporation with
respect to the `scholarship' amounts paid to, or on behalf of the winner,
the fair market value of the automobile, the amounts it pays to the winner
for personal appearances, modeling and posing, and the like, and the
monthly cash allowance for wardrobe and miscellaneous expenses.
Section 31.3401(a)-1(b)(2) of the Employment Tax Regulations provides that
amounts paid specifically, either as advances or reimbursements, for
traveling or other bona fide ordinary and necessary expenses incurred or
reasonably expected to be incurred in the business of the employer are not
wages and are not subject to withholding. Traveling and other reimbursed
expenses must be identified either by making a separate payment or by
specifically indicating the separate amounts where both wages and expense
allowances are combined in a single payment. To the extent that any portion
of the monthly cash allowance for wardrobe and miscellaneous expenses meets
the tests of the above regulations, such payment is not wages subject to
the withholding of income tax.
In the absence of any evidence indicating an employment relationship
between the contest winner and the manufacturers who provided her with
wardrobe, shoes, perfume, and cosmetics, the value of such items is not
wages subject to the withholding of income tax.