Your client, John Butler, is an avid Houston Astros fan. Last March at the Astro's home opener, as a result of an random drawing of those in attendance at the game, John won 300 Shipley Do-Nut coupons. Each coupon entitled him to a cup of coffee and a free doughnut or dozen doughnut holes. John used some of the coupons (approximately 20), but he found that eating so many doughnuts directly conflicted with his goal of losing weight. The unused coupons expired on January 1, 2018. Thus, John was surprised when he received a Form 1099 in February 2018 that valued his prize at $900. John would like to know whether the value of the doughnut coupons should be included in income and asks you to research his question. If you conclude that their value should be included in income, John also would like to know if he can reduce his gross income by including in income only the value of the coupons that he used. He has the unused coupons as documentation that neither he nor anyone else used them.

Prepare a tax file memorandum and a letter to the client. Please, note the client is not a tax expert and adjust your writing appropriately.