Will U.S. be first to tax Nobel Prize?

Will U.S. be first to tax Nobel Prize?

To journalists it's known as the "Pulitzer Prize rule,' to scientists it's the "Nobel Prize rule.' It's a provision in the U.S. tax code that excludes from taxable income certain cash awards recognizing achievement in fields such as charity, the arts and science. But a little-noted provision of the proposed tax reform legislation now wending its way through Congress would drop that exclusion and tax as income all money from prizes and awards other than scholarships or academic fellowship grants.

U.S. tax law already treats most monetary prizes and awards as income. However, winnings are not taxed when the award is for special achievements, was not applied for by the recipient and will not require that the winner "render substantial services as a condition of receiving it.' Among awards that fall into this special exemption category are the Nobel Prize, the Pulitzer Prize, the MacArthur Foundation Fellowship Award, the Lasker Award and the General Motors' Kettering, Mott and Sloan cancer-research prizes.

The proposed elimination of exemptions for certain awards has already brought sharp criticism from the Stockholm-based Nobel Foundation. "The tax reform bill would make the United States the first and only country in the world to tax Nobel Prizes,' notes Nancy Abramowitz of Arnold & Porter in Washington, D.C., a firm representing the Nobel Foundation in the United States. A statement by her firm, outlining the Nobel Foundation's position, charges that the proposed tax change could set a disturbing precedent: "U.S. taxation of Nobel Prizes could be used as an excuse by certain foreign governments to tax away the prizes, or otherwise punish dissident laureates.'

Says John Corbally, president of the John D. and Catherine T. MacArthur Foundation in Chicago, "Everybody is going to have to do something if we're going to get hold of the deficit. But in general, this would seem to me to be such a small source of funds . . . that I'm not sure it's among the important things that need to be done.'

In fact, the intent of the tax reform package is for it to be "revenue neutral'-- that is, to bring in only as much money as before, according to Betty Scott Boom, a staff member of the Senate Finance Committee. If individuals pay less tax per dollar earned--one goal of the reform--the "lost' revenues will have to be made up elsewhere. As a result, the Senate committee has recommended doing away with many existing deductions, including the one for these prizes. But removing exemptions on awards like the Nobel will not make much of a dent, Boom concedes. Over five years it is expected to bring in less than $50 million.

The MacArthur award, potentially the largest of those that would lose their exempted status, seeks to stimulate further innovative activity in persons who have already demonstrated exceptional creativity by freeing them from some fiscal constraints that their income, or their need to earn an income, might place on them. MacArthur Fellowships vary from $128,000 to $300,000, paid out over five years, depending on the age of the recipient; recipients over age 65 at the time of the award receive the most money. But if these prizes were taxed, Corbally told SCIENCE NEWS, the MacArthur Foundation would have to evaluate whether the tax burden on the winner countered the intent of the award. And if it did, he says, the foundation "certainly would consider' increasing its awards to offset the effect of the tax.

The Nobel Foundation is considering a similar move. Compensating U.S. winners for their tax burden could, according to the foundation's position statement, "significantly increase the cost to the Nobel Foundation,' since 102 of its awards over the past 25 years--some 40 percent--have gone to U.S. citizens.

The Reagan administration's reasoning in initially proposing to tax these prizes was not only to simplify tax law but also to take advantage of the fact that receipt of a monetary award would increase a citizen's ability to pay taxes in much the same way that winning a lottery would. According to an analysis by the Joint Committee on Taxation, however, one could tighten existing laws and still maintain an exclusion for certain expressly earmarked awards, like the Nobel. However, the tax reform package has already passed through the House without any changes to this provision. An alternative tax reform proposal drafted and passed by the Senate Finance Committee last week would also tax these prizes.