Generally, contest prizes and awards must be included with gross income for income tax purposes. An exception is provided for prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if the recipient meets all of the following requirements:

• The recipient was selected without action on his or her part to enter the contest or proceeding, and
• The recipient is not required to render substantial future services as a condition to receiving the prize or award, and
• The recipient designates a governmental unit or charitable organization to which the payer transfers the prize or award directly.