by Haley N. Baker*
Introduction
Laissez les bons temps rouler![1] Every year, people of all ages get to experience a riot of colors and an explosion of energy for a fun-filled weekend, or maybe even a whole week, of revelry to celebrate the tradition of Mardi Gras in New Orleans, Louisiana. People all over the South view this carnival tradition as a carefree time accompanied by a symphony of music, strings of beads, larger-than-life floats, beverages, food, friends, and family. The parade-goers experience community like no other in the United States. People of all backgrounds and ages share this experience every year and create lasting memories for all who partake in the festivities.
Much of this pageantry is attributed to the various Mardi Gras krewes that host numerous parades throughout the entire carnival holiday. Although many people receive first-hand experience as parade-goers, a smaller number of individuals experience the systematic organization that is a Mardi Gras krewe. The krewes are social organizations made up of krewe members who fund and organize the spectacular floats and throws of each parade. Many of these members are residents who strive to preserve the magical moments of Mardi Gras.
These goals are even more prevalent considering the aftermath of the COVID-19 pandemic. As many of the COVID-19 regulations fell, New Orleans was once again able to come to life for the Mardi Gras season. However, locals were worried that the tradition would no longer have the same spirit and force after the pandemic. New Orleans locals and krewe members personally assumed the role of preserving the tradition by donating various valuable throws to the krewes. As the people of Louisiana worked hard to protect the magic and mystery of Mardi Gras, it also revealed many of the real-world consequences that arise to make this fantasy into a reality.
For example, in 2022, a local New Orleans news outlet reported a story about a fourth-generation master jeweler (Master Jeweler) donating for a krewe King or Queen to hand out during the krewe’s parade.[2] The pearls were described as “double A quality, 10 to 12 millimeters round, perfectly matched with high luster, and knotted in-between. Some are opera length of 45 inches. The others are even longer, 72 inches. Retail [the pearls run] in the $1,500 range.”[3] The Master Jeweler intended this generous donation to illustrate New Orleans’ culture of resilience and that Mardi Gras was here to stay and to continue as it had before the pandemic.[4] Such generosity was the primary reason that allowed Mardi Gras to proceed as it had in the years before COVID-19. However, no good deed goes unnoticed. The reality of this generosity leads to significant tax implications for everyone involved in the Mardi Gras .
I. The Krewe of Tax Law
To illustrate the tax implications and planning strategies that may be available to krewe members, generous local donors, and parade-goers, consider the previously mentioned news story on the Master Jeweler’s donation of the pearl strands. Varying the facts of this story provides an illustration of how two types of individuals are able to traverse the tax implications of these precious pearl throws: (1) how the donor is able to place himself in a position where he can strategically ensure his donation is beneficial for all, including himself; and (2) how a parade-goer should proceed after receiving such a valuable throw. Assume that the wholesale price the Master Jeweler pays for the pearls is about 60% of the retail price,[5] which was about $1,500.[6] Is the Master Jeweler able to deduct the cost of the pearls as either a business expense or a charitable deduction? Additionally, what are the possible tax consequences to the parade-goers who receive these fine pearls?
Although genuine pearl throws are a rare situation, this hypothetical and the following tax implications can be applied to many donations received by the krewes and its members, as well as the parade-goers who receive these throws during a parade. Before analyzing the specific facts, this Part reviews the applicable federal Internal Revenue Code sections that may apply to this Mardi Gras quandary. First, Part I.A classifies what a Mardi Gras krewe is within the Internal Revenue Code, which will influence the tax implications for the Master Jeweler and the parade-goers. Part I.B then addresses the federal tax provisions that may be utilized by the Master Jeweler, who donated the pearl strands to the krewe. Finally, Part I.C will review the federal tax provisions available to a lucky parade-goer who receives these precious pearl strands at the parade.
A. Float No. 1: Classification of the Mardi Gras Krewe
For federal tax purposes, Mardi Gras krewes are classified as IRC § 501(c)(7) Organizations.[7] Internal Revenue Code § 501 allows a qualifying organization to be “exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.”[8] These types of organizations are non-profit social clubs or membership organizations that are supported by dues, fees, charges, or other funds paid by its members.[9]
The main purpose of a social club is to provide benefits to its members.[10] When these benefits are funded by the social club’s members, Congress has justified a federal income tax exemption based on the theory that the members will be in the same position as if they had paid for the benefits directly.[11] Although social clubs are generally exempt from federal income tax, they are subject to tax on their unrelated business income, which includes income from nonmembers.[12] “A social club may receive up to 35% of its gross receipts from nonmember sources.”[13] Therefore, if a donation to a social club exceeds 35% of its gross receipts, then the social club is likely not exempt and must pay taxes on that donation.
From the perspective of the donor or individual taxpayer, no deductions are available for donations made to an IRC § 501(c)(7) social club.[14] Although certain donations to these social clubs may seem charitable, the social club classification bars the donor’s ability to claim it as a charitable contribution.[15] However, a donor may avail himself or herself of other tax provisions.
B. Float No. 2: The Master Jeweler’s Donation and Its Taxable Consequences
The Master Jeweler’s generous donation to strengthen the spirit of Mardi Gras also accompanies significant tax implications that must be addressed. To ensure that such generosity is encouraged, the Internal Revenue Code provides several avenues that a donor may take to ensure his or her good deed is beneficial for all. The two most likely deductions or exclusions available to the donor include IRC §§ 162 and 170.
- IRC § 162: Ordinary and Necessary Business Expenses
Internal Revenue Code § 162 allows taxpayers an above-the-line deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.[16] In order for an expense to be deductible, it must be an ordinary and necessary business expense.[17] A business expense is ordinary if it is “normal, usual, or customary” in the taxpayer’s business or arises from a transaction “of common or frequent occurrence in the type of business involved.”[18] A necessary business expense is an “appropriate and helpful” expense to the development and operation of the taxpayer’s business, although it need not be essential to the business.[19]
In addition to being ordinary and necessary, the amount of the expense must be reasonable for the expense to be deductible. To simplify, the expense is logically equivalent to the amount of the benefit received or expected by the business. Many courts agree that the reasonableness of the expense is inherent in the phrase “ordinary and necessary.”[20] Essentially, the reasonableness requirement illustrates the congressional intent to prevent automatic deductions for expenses paid or incurred by the taxpayer in unlimited amounts.[21]
Items of expense that may be considered ordinary and necessary are almost infinite. Examples of deductible expenses may include supplies, employee uniforms, utility bills, business lunches, consultants’ fees, and professional dues.[22] Possible business expenses applicable to the Master Jeweler’s situation are advertising and marketing expenses. Advertising and marketing costs are frequently classified as deductible ordinary and necessary business expenses under IRC § 162.[23]
The IRS provides a definition of what activities constitute as advertising in Treas. Reg. 1.513-4(c)(2)(v): “any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which promotes or markets any trade or business or any service, facility or product.”[24] The IRS further limits the scope of advertising by excluding from its definition (1) distributions of a sponsor’s product by the sponsor or exempt organization to the general public at the sponsored event, and (2) acknowledgements.[25] These exclusions are based on the theory that the activities do not induce consumers to buy, sell, or use the products and are merely identification of the sponsor rather than promotion of the sponsor’s products.[26]
In addition to the usual advertising that a business may engage in, the IRS generally allows a business to deduct the cost of institutional or goodwill advertising.[27] Goodwill advertising is meant to improve a business’s reputation and may include sponsoring small events, holding consumer contests, or calling for consumers to donate to charities.[28] Even though the primary purpose for these activities is to provide beneficial services to the public—rather than solely promote the business—these activities are deductible under IRC § 162 if it relates to business that you reasonably expect to gain in the future.[29]
The deduction under IRC § 162 is available for the ordinary and necessary business expenses that are “paid or incurred during the taxable year in carrying on any trade or business.”[30] This requirement is imposed to differentiate between expenses incurred during the operation of a business and those associated with the development or origination of a business. Therefore, the deduction that IRC § 162 provides is only available for expenses incurred in connection with an ongoing business.
The definition of a trade or business within the meaning of IRC § 162 is left to jurisprudence. Generally, a taxpayer is engaged in a trade and business when: (1) the taxpayer is involved in the activity with continuity and regularity; and (2) the taxpayer’s primary purpose for engaging the activity is for income or profit.[31] Generally, an activity will not qualify as a trade or business within the scope of IRC § 162 if it is “[a] sporadic activity, a hobby, or an amusement diversion.” [32]
- IRC § 170: The Charitable Contribution Deduction
Another possible deduction available to the Master Jeweler is for a charitable contribution under IRC § 170.[33] Internal Revenue Code § 170(a)(1) allows a deduction for charitable contributions to certain charities and organizations.[34] Charitable deductions are below-the-line deductions.[35] Charitable contributions are gifts of cash or other property to an organization described under IRC § 170(c).[36] However, if the deduction is applicable, it is limited to a certain percentage based on the taxpayer’s contribution base.
Internal Revenue Code § 170(c) provides a list of qualifying recipients of the contribution for the deduction to apply. The organizations include governmental entities[37] and non-profit organizations operating “exclusively for religious, charitable, scientific, literary, or educational purposes.”[38] Generally, the deduction provided in IRC § 170 is only available to IRC § 501(c)(3) charities.[39]
To receive the deduction as a charitable contribution under IRC § 170, the item donated must be a gift.[40] For a gift to exist, several requirements must be met. The general requirement is that “there must be a payment of money or transfer of property without adequate consideration.”[41] If the donor receives something of value in exchange for the item donated or contributed, then it is not a gift, and a deduction in whole or in part will not be allowed.[42] Additionally, if the donation is a gift but is not made for charitable purposes, a deduction will not be allowed.[43] When a donor receives something of value, there is a presumption that no gift has been made, and the donor has the burden to “establish that the amount paid is not the purchase price of the item, privilege, or benefit received and that part of the payment, in fact, does qualify as a gift.”[44] To meet this burden, an important element of proof is that a part of the payment claimed as a gift represents “the excess of the total amount paid over the value of the consideration received.”[45]
If the charitable contribution qualifies for the deduction, it is limited to a certain percentage based on the taxpayer’s contribution base. A contribution base is the taxpayer’s contribution base is the taxpayer’s adjusted gross income,[46] computed without regard to any net operating loss carryback to the taxable year under IRC § 172.[47] This percentage differs if the item contributed is cash or non-cash gifts. The charitable deduction for gifts of cash to a qualifying organization may not exceed 60% of the taxpayer’s contribution base for the year.[48] For non-cash gifts, the charitable deduction may not exceed 50% of the taxpayer’s contribution base for the year.[49] If the contribution base limit is exceeded, the excess deduction is carried over for deduction within the next five years.[50]
Applicable to the Master Jeweler’s case, when a donor contributes property, the donation may be deducted only by the fair market value of the property at the time of the gift, subject to certain reductions provided in IRC § 170(e).[51] The fair market value of the property is best approximated using the cost or sales price of the property. However, this estimation may have less weight if the date of sale is not reasonably close to the date of contribution. “Jewelry, gems, paintings, antiques, and other art objects of considerable value should be supported by a written appraisal from a qualified and reputable source.”[52] In the case of these aforementioned items, the influence of the appraisal made at or after valuation will depend on the knowledge of the appraiser with respect to the property and its market.[53]
C. Float No. 3: The Parade-Goer’s Responsibility
The tax implications do not stop the donor of the pearl beads. The parade-goers who receive these precious pearl strands are responsible to account for this increase in their patrimony. What is classified as income for federal tax purposes is notably broad. Generally, any increase to an individual’s patrimony must be included in the individual’s gross income unless the Internal Revenue Code provides for an exception.[54] In considering whether the receipt of these valuable pearl beads qualifies for an exception, it must be determined whether the pearl beads are a gift or a prize. This Part reviews the applicable Internal Revenue Code provisions on gifts and prizes.
- IRC § 102: The Gift of Mardi Gras Pearls
Internal Revenue Code § 102 provides that “[g]ross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”[55] In determining whether property acquired is a gift subject to the exclusion in IRC § 102, the test is a question of fact and focuses on whether the “gift is a bona fide gift or simply a method for paying compensation.”[56] More specifically, the issue is whether the transaction proceeds from a “detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses” implying a gift within the scope of the statute.[57] Several factors to consider include the intent of the parties, the reasons for the transfer, and the parties’ performance in accordance with their intentions.[58]
Once property is classified as a gift for purposes of IRC § 102, the donee-taxpayer should determine his or her basis in the property, which dictates the amount of deductions allowed with respect to the property received.[59] The taxpayer’s basis in the property acquired by gift is generally the same basis the donor had in the property.[60] The result of using a carryover basis means that any gain that accrued while the donor held the property will shift to the donee, and the donee will realize that gain on a later disposition of the property.[61] However, this is not true of any losses that accrued while the donor held the property. In the case of accrued loss, the donee’s basis will be the lower fair market value of the property rather than assuming the donor’s basis.[62]
- IRC § 74: The Prize of Mardi Gras Pearls
Alternatively, the pearl strands may be classified as a prize. Internal Revenue Code § 74 provides that “gross income includes amounts received as prizes and awards.”[63] Generally, both parties must take some action or consideration to receive the prize.[64] If the recipient receives the prize without taking any action, then it may qualify as an exclusion under IRC § 74(b).[65]
If the prize or award is not money, the fair market value is the amount included in income.[66] However, IRC § 74(b) provides an exclusion from gross income of the amount received as a prize or award if: (1) the prize or award was primarily made in “recognition of past achievements of the recipient in religious, charitable, scientific, educational, artistic, literary, or civic fields”; (2) the “recipient was selected without any action on his part to enter the contest or proceedings”; and (3) “the recipient is not required to render substantial future services as a condition to receiving the price or award.”[67] Scholarships and fellowship grants may also be excluded from income under IRC § 117.[68]
II. Throw Me a Tax Deduction, Mister!
Consider again the Master Jeweler’s generous donation of the precious pearl strands to a Mardi Gras krewe in 2022.[69] Applying the Internal Revenue Code sections to the story may yield several tax-planning avenues for both the donor and the donee. Once more, assume that the wholesale price the Master Jeweler pays for the pearls is about 60% of the retail price, which was about $1,500.[70] Part II implements the federal tax laws introduced in Part I to the Master Jeweler and to the individual parade-goers who receive these precious throws at a parade.
A. The Master Jeweler
The Master Jeweler desires his donation of the pearl strands to qualify for a deduction or exclusion when he files his federal tax return. The Master Jeweler may be able to deduct the cost of the pearls as either a business expense under IRC § 162 or as a charitable deduction under IRC § 170. However, when applying the facts to the federal tax provisions, it is more likely the Master Jeweler mayof the IRC § 162 deduction rather than the IRC § 170 deduction.
- The Pearl Strands as an Ordinary and Necessary Business Expense
To receive the business expense deduction under IRC § 162, the Master Jeweler should show that the pearl strands are an ordinary and necessary advertising expense for his jewelry business. Recall that an ordinary expense is one that is commonly accepted within the industry and is proximately related to the operation of the business;[71] and a necessary expense is one that is helpful and appropriate for promoting or maintaining the business.[72] Additionally, the business expense must be both for an existing business and reasonable—or logically equivalent to the amount of the benefit received or expected by the Master Jeweler and his business. Advertising is a common deductible business expense under IRC § 162 and is defined as any message that is broadcasted, published, or distributed to promote any trade, business, service, or product. [73]
In order to efficiently receive the business expense deduction, the Master Jeweler should classify his donation of the pearl strands as an advertising expense for his business. To successfully classify this as advertising within the IRS definition, the Master Jeweler must intend that the donation will promote his business with the primary purpose of receiving an income or profit from the donation.[74] The Master Jeweler should attach a designation to the pearl strands with the business’s logo and contact information. The fact that the business’s information is readily available to the parade-goer when he or she receives the pearl strands at a parade will alert the parade-goer to shop for all his or her fine jewelry needs at the Master Jeweler’s business rather than another competing business. However, if the Master Jeweler fails to attach a designation, logo, or any other business information to the pearl strands, then it is more difficult to classify the donation as advertising because it does not effectively alert the parade-goers to the master-jeweler’s business.
Even if the pearls are labeled with the Master Jeweler’s business information, is the Master Jeweler expecting an increase in income or business from his donation? Parades are free to all individuals, which includes individuals who are affluent and those who are in more necessitous circumstances. It is more likely than not that many of the parade-goers are not able to afford such fine jewelry and products that the Master Jeweler sells. The tangled atmosphere of the parades may diminish the argument that such advertising, handing out the pearl strands, will generate income to the Master Jeweler’s business.
Additionally, the news article reporting the Master Jeweler’s donation supports the notion that the Master Jeweler’s primary intention is to revitalize Mardi Gras after the COVID-19 pandemic, rather than generate income through new customers.[75] However, this intention likely does not diminish the claim that the donation was primarily intended to generate revenue. The IRS allows taxpayers to deduct goodwill advertising expenses if they improve a business’s reputation; these expenses are generally deductible if they relate to business that the taxpayer reasonably expects to gain in the future.[76] Mardi Gras is a significant event for New Orleans and provides the local economy with a surge of income.[77] To ensure Mardi Gras continues to support New Orleans businesses, big and small, the Master Jeweler is incentivizing parade-goers to return to the parades and invest in local businesses. This type of generosity will likely lead many individuals to choose the Master Jeweler’s business over other fine jewelry stores, especially when the donated pearl strands are labeled with the Master Jeweler’s business information. Therefore, the Master Jeweler’s donation is likely advertising, or goodwill advertising, that qualifies as an ordinary and necessary business expense under IRC § 162.
Finally, the Master Jeweler’s donation must be reasonable in cost for the IRC § 162 deduction to apply. Many people and businesses may balk at the idea of donating 100 strands of genuine pearls valued within the $1,500.00 range as a way advertise to the general public. Many businesses, specifically jewelry stores, advertise through billboards, magazines, newspapers, social media, commercials, etc. Rarely does an unsuspecting individual across free fine jewelry as an advertising tactic. Many individuals may find the Master Jeweler’s donation as unreasonable; however, many of those individuals have never experienced the magic and community that is Mardi Gras in New Orleans.
Nothing is per se reasonable when it comes to Mardi Gras in New Orleans. The spirit of Mardi Gras is about having fun, embracing the atmosphere, and supporting the community. The parades are outrageous, the beads iconic, and the costumes extravagant. The Master Jeweler himself described the experience and New Orleans as “a different culture than all the places . . . around the world.”[78] This donation is reasonable within the realm of the New Orleans Mardi Gras tradition, especially when the donation illustrates the goodwill of locals attempting to keep the tradition alive. The lengths New Orleans locals go to preserve their community and support their neighboring businesses has no bounds. Many businesses and leaders who have the means, like the Master Jeweler, will support their community because it supports them. Therefore, the Master Jeweler may support the reasonableness of this donation by showing the unique circumstances of New Orleans and the opportunities it creates for individuals who are willing to donate their time and products to the tradition.
It is uncertain whether the Master Jeweler’s donation will be guaranteed the IRC § 162 deduction because of the unique nature of Mardi Gras. The circumstances under which this donation occurred are not within the usual social and economic parameters of the donations and advertisements that generally qualify for the . However, the Master Jeweler should be able to persuasively argue that this donation is deductible under IRC § 162.[79] Such generosity to an individual’s community and its neighboring businesses should be rewarded and encouraged. Therefore, the IRS should consider the unique circumstances of Mardi Gras when determining whether the Master Jeweler, and similar individuals and situations, should receive available deductions.
- The Pearl Strands as Charitable Contributions
Another possible deduction for the Master Jeweler is under IRC § 170 as a charitable contribution. Recall that IRC § 170 allows a below-the-line deduction for charitable contributions to certain charities and organizations made within the taxable year.[80] For the Master Jeweler to qualify for the deduction under IRC § 170, the donation must be made to a qualifying organization and in the form of cash or property.[81]
The charitable contribution deduction only applies to qualifying organizations. Qualifying organizations under IRC § 170 include governmental entities[82] and non-profit organizations operating “exclusively for religious, charitable, scientific, literary, or educational purposes.”[83] Whether the Master Jeweler is donating the pearl strands to the parade-goers or to the krewe, it is likely that the charitable contribution deduction is not available in this instance. If the Master Jeweler donates the pearl strands to the parade-goers, then the donation will likely not qualify for the deduction because an individual parade-goer is not included in the list of qualified donees under IRC § 170(c)(2). Additionally, if the donation was made to the Mardi Gras krewe, the Master Jeweler would have the same conclusion. Mardi Gras krewes qualify as IRC § 501(c)(7) organizations, which are non-profit organizations commonly characterized as social clubs rather than charitable organizations.[84] These types of organizations are exempt from taxation in certain circumstances.[85] However, donations made to social clubs by taxpayers are not tax deductible under IRC § 170 because they are not classified as charitable organizations. Generally, the IRC § 170 deduction is only available to IRC § 501(c)(3) charities.[86] Therefore, the Master Jeweler’s most rational route to claim a taxable deduction for the donation of the pearl strands will likely be under IRC § 162 as an ordinary and necessary business expense.
B. The Parade-Goers
The tax implications attached to the pearl strands do not end with the Master Jeweler. Each of the lucky parade-goers who receive these pearl strands at the parade will have tax consequences of their own. Internal Revenue Code § 61(a) broadly defines gross income as “all income from whatever source derived.”[87] Courts have expanded the definition as an “undeniable accession to wealth, clearly realized” by the taxpayer.[88] For example, the individual parade-goer receiving the pearl strands at the parade would be classified as a realization event because the parade-goer now has an increase in his or her patrimony of about $1,500.00—the value of the pearl strands. The general principle is that any increase in a taxpayer’s patrimony should be included in gross income unless an exception applies.[89] Therefore, unless the parade-goer can find an exception, the pearl strands must be classified as income.
Availability of a possible exclusion depends on the classification of the pearl strands. If the pearl strands are classified as a gift, then an exclusion under IRC § 102 may be available. However, if the pearl strands are classified as a prize or an award, then the parade-goer must include the pearl strands in his or her gross income under IRC § 72. This Part analyzes the tax implications of the parade-goer if the pearl strands are classified as either a gift or a prize or award.
- The Pearl Strands as Gifts
Internal Revenue Code § 102 provides that “[g]ross income does not include the value of property acquired by gift, bequest, devise, or inheritance.”[90] In determining whether property acquired is a gift subject to the exclusion in IRC § 102, the test is a question of fact and focuses on whether the “gift is a bona fide gift or simply a method for paying compensation.”[91] Gifts are generally regarded as proceeds from a “detached and disinterested generosity, out of affection, respect, admiration, charity, or like impulses.”[92] Factors to consider include the intent of the parties, the reasons for the transfer, and the parties’ performance in accordance with their intentions.[93]
The news article states that the Master Jeweler’s intent when donating the pearl strands was to revitalize the parade-goers’ enthusiasm and attendance at Mardi Gras after the pandemic.[94] The Master Jeweler’s intent may not support a “detached and disinterested generosity”[95] because this donation is to encourage tourism in New Orleans, which likely leads to more opportunities to generate revenue for his business. However, as previously analyzed, the Master Jeweler is not donating to his usual clientele, which may suggest that this is the type of generosity that is required by the law—an act of admiration, respect, or affection for his community and the tradition of Mardi Gras.
However, this analysis may conflict with the tax-planning interests of the Master Jeweler. Recall from Part II.A that the Master Jeweler would have to mark all donated pearl strands with his business information or logo for advertising purposes to qualify for the IRC § 162 deduction. Generally, any expectation of future benefits is not considered a “detached or disinterested generosity.”[96] Therefore, if the Master Jeweler were to mark these donated pearl strands with his business information, it is more likely that the pearl strands are not a gift because the Master Jeweler is expecting future benefits to his business from this donation.
In the event the pearl strands are classified as a gift within the scope of IRC § 102, the parade-goer exclude the value of the pearls received from the parade. However, if the parade-goer subsequently sells the pearl strands, then he or she will need to report any gain or loss on that sale. In determining the value of the gain or loss, the parade-goer must take the Master Jeweler’s basis in the pearl strands.
- The Pearl Strands as Prizes
If the pearl strands are not classified as gifts, then they may be classified as prizes or awards, which must be included in the parade-goers’ gross income under IRC § 74. Internal Revenue Code § 74 provides that “gross income includes amounts received as prizes and awards.”[97] Generally, both parties must take some action or consideration to receive the prize.[98] The type of action or consideration may include purchasing a ticket, entering a contest, or entering a sweepstakes. Essentially, all that is required is that an individual’s action illustrates the intent to enter for a chance to win or receive something of value.
Parade-goers attend parades with the of catching something, whether it is plastic beads, stuffed animals, t-shirts, or pearl strands. The act of attending the parade and preparing for hours of entertainment may be sufficient to illustrate the parade-goer’s intention of receiving a prize. However, parades are free to all individuals, which may not support an argument that the parade-goer has taken some action or consideration to receive these items. Additionally, there may be a select few individuals who only attend parades for the atmosphere without any intention of receiving items from the krewe’s throws. If the parade-goer emphasizes that he or she displayed no consideration or action on their part when going to the parade, then he or she will likely be able to negate the argument that the pearl strands are prizes.
Internal Revenue Code § 74 provides an exception to the general rule that prizes and awards must be included in income. However, if the pearl strands are classified as prizes, the parade-goer will likely not qualify for the exception within IRC § 74.[99] Although the parade-goer likely satisfies two of the three elements, the exception does not apply because the receipt of the pearl strands is not in recognition of any of the parade-goer’s past achievements.[100] Therefore, if the pearl strands are classified as prizes within IRC § 74, they must be included in the parade-goer’s gross income.
- Throw Me a Gift, Mister!
It is more likely that the pearl strands will be considered gifts to the parade-goers, which would exclude the pearl strands from the parade-goer’s gross income until a realization event occurs, such as selling the pearl strands. Generally, when attending parades, parade-goers only hope to catch stuffed animals, t-shirts, plastic beads, and similar cheap and cheerful items. Although the low-value items that many parade-goers receive from parades may qualify as income under federal tax law, the values are so insignificant that if the IRS taxed every parade-goer, it would chill the tradition of Mardi Gras itself. Mardi Gras is meant to be free and enjoyed by all individuals, often without the intention or hope of catching anything within and beyond $20 to $40. To preserve this tradition and encourage significant economic growth with each Mardi Gras season, it is best to classify the pearl strands as gifts within IRC § 102 and exclude the value from the parade-goer’s gross income.
Conclusion
People from all walks of life come together to celebrate the music, food, community, and tradition Mardi Gras. New Orleans and its residents put on the party of the year with their extravagant parades, costumes, and throws. The people who donate their time, skills, goods, and services to transform the Mardi Gras dream into reality should be wary about the federal income tax implications that may be lurking beneath the outer glam and pageantry of the parades and balls.
To efficiently prepare oneself for the tax implications that may arise from the celebration of Mardi Gras, it is prudent to strike a balance between responsibility and indulgence. The specific IRC provisions and regulations must be examined to determine whether any deductions or exclusions are available. Additionally, the unique tradition and culture of Mardi Gras in New Orleans should be considered by the IRS when determining whether and how much donors and donees must be taxed. The tradition is one of a lifetime for many and a livelihood for all New Orleans locals. So, whether individuals are crunching numbers or catching the parade beads—Laissez les bon temps!
* J.D./D.C.L. 2024, Paul M. Hebert Law Center, Louisiana State University. Thank you to Professor Elizabeth R. Carter for creating this lively topic and hypothetical addressed in this Article. Your insights have brought a refreshing perspective to the discussion of tax and its implications for a unique Louisiana tradition. I dedicate this Article to Abigail Mock: your interest and excitement on this topic helped me channel the Mardi Gras spirit while writing. You have been an unwavering source of support, inspiration, and friendship throughout our time in law school, and I will always be grateful.
[1] Laissez les bons temps rouler is a Cajun French phrase that means “let the good times roll” in English. For more information on the history of Mardi Gras in Louisiana see Mardi Gras History, Mardi Gras New Orleans, https://www.mardigrasneworleans.com/history/ [https://perma.cc/7G7J-6DXG] (last visited Jan. 24, 2024).
[2] Meg Farris, King of Hermes to hand out real strands of pearls thanks to local jeweler, WWL-TV, https://www.wwltv.com/article/entertainment/events/mardi-gras/king-of-hermes-to-hand-out-real-strands-of-pearls-thanks-to-local-jeweler/ [https://perma.cc/9F9V-FXCG] (Feb. 21, 2022, 6:42 PM).
[3] Id.
[4] Id.
[5] Jewelry Market Statistics (2023), Classy Women Collection, Jan. 14, 2024, https://classywomencollection.com/blogs/fashion-guide/jewelry-market#:~:text=Markup%3A%202020%20%26%202021%20data%20from,possible%20marketing%20cost%20of%20jewelry (reporting that jewelry businesses generally sell their jewelry with a 60-170% markup on the original acquisition price).
[6] Professor Carter created this hypothetical from the news report and graciously allowed me to write an analysis on this hypothetical. See also id.
[7] I.R.C. § 501(c)(7) (2024) (“Clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder.”).
[8] See generally I.R.C. § 501(b).
[9] Jim Langley & Conrad Rosenberg, Social Clubs–IRC 507(c)(7) (1996).
[10] Id.
[11] Id.
[12] Social Clubs, IRS.gov, https://www.irs.gov/charities-non-profits/other-non-profits/social-clubs [https://perma.cc/8Y8U-9C73] (last visited Jan. 6, 2024).
[13] Id.
[14] Id. See also I.R.C. § 507(c)(7).
[15] A charitable contribution may qualify for a deduction under IRC § 170(a)(1). See discussion infra Part I.B.2.
[16] See generally I.R.C. § 162. An above-the-line deduction is “[a] nonitemized tax deduction that reduces gross income because it is subtracted from total income.” Above-the-line tax deduction, Black’s Law Dictionary (11th ed. 2019).
[17] I.R.C. § 162.
[18] Deputy v. du Pont, 308 U.S. 488, 495 (1940). See also Welch v. Helvering, 290 U.S. 111, 114 (1933).
[19] Comm’r v. Tellier, 383 U.S. 687, 689 (1966) (quoting Welch, 290 U.S. at 113 (1933)).
[20] Comm’r v. Lincoln Elec. Co., 176 F.2d 815, 817 (6th Cir. 1949).
[21] Id.
[22] Treas. Reg. § 1.162-1(a).
[23] Small business advertising and marketing costs may be tax deductible, IRS.gov, https://www.irs.gov/newsroom/small-business-advertising-and-marketing-costs-may-be-tax-deductible [https://perma.cc/QT8L-K5ZH] (last updated Oct. 27, 2021) (listing advertising expenses that are usually deductible as: “Reasonable advertising expenses that are directly related to the business activities. An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible. The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.”).
[24] Treas. Reg. § 1.513-4(c)(2)(v).
[25] Id. (Acknowledgments “are the mere recognition of sponsorship payments and may include sponsor logos and slogans (that do not contain comparative or qualitative descriptions), sponsor locations and telephone numbers, value-neutral descriptions (including displays or visual depictions) of a sponsor’s product-line or services and sponsor brand or trade names, and product service listing. The effect of an acknowledgement is identification of the sponsor rather than the promotion of the sponsor’s products, services or facilities. Logos or slogans alone are considered acknowledgements as they do not contain comparative or qualitative descriptions.”).
[26] See generally Id.
[27] Publication 535 (2022), Business Expenses, IRS.gov, https://www.irs.gov/publications/p535#idm140076114173408 [https://perma.cc/G8W3-EFQQ] (last visited Jan. 6, 2024).
[28] Id. (listing examples as “the cost of advertising that encourages people to contribute to the Red Cross, to buy U.S. savings bonds, or to participate in similar causes is usually deductible.”).
[29] Id.
[30] I.R.C. § 162(a) (emphasis added).
[31] Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987).
[32] Id.
[33] I.R.C. § 170.
[34] I.R.C. § 170(a)(1).
[35] See generally I.R.C. § 170. Below-the-line deductions are “expense[s] that can be subtracted from adjusted gross income before the tax liability is determined. Examples of below-the-line deductions are charitable donations and certain medical and interest expenses.” Below-the-line tax deduction, Black’s Law Dictionary (11th ed. 2019).
[36] I.R.C. § 170(a)(1).
[37] I.R.C. § 170(c)(1).
[38] See generally I.R.C. § 170(c)(2).
[39] See I.R.C. § 501(c)(3) (“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”).
[40] E. Deductions of Contributions to IRC 501(c)(3) Organizations and Other Exempt Organizations, IRS. gov, https://www.irs.gov/pub/irs-tege/eotopice85.pdf [https://perma.cc/L4QK-KKX7] (last visited Jan 6, 2024).
[41] Id.
[42] Id.
[43] Id.
[44] Id.
[45] Id. (stating that this element may be established by evidence that the payment exceeds fair market value of the privilege or benefit received by the amount claimed to have been paid as a gift). See also Rev. Rul. 67–246, 1967–2 C.B. 104.
[46] Adjusted gross income is “[g]ross income minus allowable deductions specified in the tax code.” Adjusted gross income, Black’s Law Dictionary (11th ed. 2019). Definition of adjusted gross income, IRS. Gov, https://www.irs.gov/e-file-providers/definition-of-adjusted-gross-income#:~:text=Examples%20of%20adjustments%20include%20half,paid%3B%20educator%20expenses%2C%20etc. (providing examples of allowed adjustments to adjusted gross income, including: “half of the self-employment taxes you pay; self-employed health insurance premiums; contributions to certain retirement accounts (such as a traditional IRA); student loan interest paid; educator expenses, etc.”).
[47] I.R.C. § 170(b)(1)(H).
[48] I.R.C. § 170(b)(1)(A).
[49] I.R.C. § 170(b)(1)(G)(i).
[50] I.R.C. § 170(b)(1)(G)(ii), (d)(1)(A).
[51] E. Deductions of Contributions to IRC 501(c)(3), supra note 39 (defining fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”).
[52] Id.
[53] Id. Rev. Proc. 66-49, 1966-2 C.B. 1257.
[54] See generally Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969); I.R.C. § 61(a) (“[G]ross income means all income from whatever source derived”).
[55] I.R.C. § 102(a).
[56] Wolder v. Comm’r of Internal Rev., 493 F.2d 608 (2d Cir. 1974).
[57] Comm’r v. Duberstein, 363 U.S. 278, 285 (1960).
[58] Wolder, 493 F.2d at 608
[59] Basis is “[t]he value assigned to a taxpayer’s investment in property and used primarily for computing gain or loss from a transfer of the property. Basis is usually the total cost of acquiring the asset, including the purchase price plus commissions and other related expenses, less depreciation and other adjustments.” Basis, Black’s Law Dictionary (11th ed. 2019).
[60] I.R.C. §§ 1015(a), 7701(a)(43). This is commonly referred to as a carryover basis. A carryover basis is “[t]he recipient’s basis in property transferred by gift or in trust, equaling the transferor’s basis.” Carryover basis, Black’s Law Dictionary (11th ed. 2019).
[61] I.R.C. § 1015(a).
[62] I.R.C. § 1015(a).
[63] I.R.C. § 74. A prize is “[s]omething of value awarded in recognition of a person’s achievement.” Prize, Black’s Law Dictionary (11th ed. 2019).
[64] See generally Isenbergh v. Comm’r, No. 68525, 1959 WL 1146 (T.C. Feb. 26, 1959).
[65] See generally id. (holding that a fellowship grant was not a prize or award excludible as a whole from gross income under I.R.C. § 74(b) because the taxpayer initiated the action to enter the contest and under the language of the statute the taxpayer must have been selected without any action on his part in a contest for such an award to qualify for the exclusion).
[66] Treas. Reg. § 1.74-1(a)(2).
[67] See generally Treas. Reg. § 1.74-1(b).
[68] Treas. Reg. § 1.74-1(c). See also I.R.C. § 117.
[69] Farris, supra note 2.
[70] Id.
[71] Deputy v. du Pont, 308 U.S. 488, 495 (1940). See also Welch v. Helvering, 290 U.S. 111, 114 (1933).
[72] Comm’r v. Tellier, 383 U.S. 687, 689 (1966) (quoting Welch, 290 U.S. at 113 (1933)).
[73] Treas. Reg. § 1.513-4(c)(2)(v).
[74] Comm’r v. Groetzinger, 480 U.S. 23, 35 (1987) (“the taxpayer’s primary purpose for engaging in the activity must be for income or profit.”).
[75] See generally Farris, supra note 2 (“These are going to be hand[ed] out to the people along the route to let them know this Mardi Gras is here to stay, no matter what. No hurricanes, no pandemic, no crisis will stop Mardi Gras.”).
[76] See generally Publication 535 (2022), supra note 26.
[77] See John S. Kiernan, 2020 Mardi Gras Facts—Booze, Floats, Money & More, WalletHub, https://wallethub.com/blog/mardi-gras-facts/31999 [https://perma.cc/Q6AT-X76X] (reporting that the 2020 Mardi Gras season generated more than $1 billion for the New Orleans area).
[78] Farris, supra note 2 (stating that New Orleanians “have an attitude of gratitude, we’re much more festive, and we’re much more likely to strike up a conversation and be very talkative with strangers.”).
[79] If the donated pearl strands qualify for the deduction, then the Master Jeweler may only deduct the amount that he paid for them. See I.R.C. § 162.
[80] I.R.C. § 170(a)(1).
[81] See generally I.R.C. § 170.
[82] I.R.C. § 170(c)(1).
[83] See generally I.R.C. § 170(c)(2).
[84] Social Clubs, supra note 11.
[85] See supra Part A.1.
[86] See I.R.C. § 501(c)(3) (“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”).
[87] I.R.C. § 61(a).
[88] See generally Comm’r v. Glenshaw Glass Co., 348 U.S. 426 (1955). Realization “determines the proper timing of taxation by instructing when income or gain should be recorded,” which is generally when a “provider of services or a seller of property has fulfilled all the material steps on [his or] her side of the bargain.” John A. Miller & Jeffrey A. Maine, The Fundamentals of Federal Taxation 21 (5th ed. 2018).
[89] See generally Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969).
[90] I.R.C. § 102(a).
[91] See generally Wolder v. Comm’r of Internal Rev., 493 F.2d 608 (2d Cir. 1974).
[92] Comm’r v. Duberstein, 363 U.S. 278, 285 (1960).
[93] Wolder, 493 F.2d at 612.
[94] Farris, supra note 2.
[95] Duberstein, 363 U.S. at 285.
[96] Id.
[97] I.R.C. § 74. A prize is “[s]omething of value awarded in recognition of a person’s achievement.” Prize, Black’s Law Dictionary (11th ed. 2019).
[98] See generally Isenbergh v. Comm’r, No. 68525, 1959 WL 1146 (T.C. Feb. 26, 1959).
[99] I.R.C. § 74(b) provides an exclusion from gross income of the amount received as a prize or award if: (1) the prize or award was primarily made in “recognition of past achievements of the recipient in religious, charitable, scientific, educational, artistic, literary, or civic fields”; (2) the “recipient was selected without any action on his part to enter the contest or proceedings”; and (3) “the recipient is not required to render substantial future services as a condition to receiving the price or award.” See generally Treas. Reg. § 1.74-1(b).
[100] See Treas. Reg. § 1.74-1(b) (providing elements two and three of the exception: (2) the “recipient was selected without any action on his part to enter the contest or proceedings”; and (3) “the recipient is not required to render substantial future services as a condition to receiving the price or award.”). Regarding the second element, it is possible that the parade-goer received the pearl strands without any action on his or her part. Additionally, the third element is likely satisfied because the receipt of the pearl strands is not conditioned on the parade-goer’s obligation to render any substantial future services.