Winnings and Taxes

[tvrandywest]

Because taxes on winnings has been a recurring topic of discussion, I thought you might enjoy this tidbit from my accountant:

Newsweek, May 17, 2004, had an interesting article on page 12 of that issue titled: Tax Trouble for ABC’s ‘Extreme’ Winners? The article spoke about the TV show Extreme Makeover: Home Edition and addressed a tax question—is the contestant taxable on the fair market value of the renovations? Here is what they state:

“The production company gave the Woslums (the contestants) a letter saying its accountant believed the family didn’t have to pay taxes on their windfall, but when the family’s own accountant read it, he grew wary. “I’m living in fear and trepidation”, says accountant Brett Porter. If the IRS looks closely, he worries, the family could owe thousands in taxes.”

How could it not be taxable?

Remember that everything is taxable unless there is a code section that otherwise exempts it. The article said that the producers argue that it is tax-free since “the show leases participants’ homes, paying $50,000 for 10 days’ rental.” Now, there is a statute, Internal Revenue Code Section 280A, which provides, as explained in the accompanying regulations:

Short rental period

If a dwelling unit used by the taxpayer as a residence during the taxable year is actually rented for less than 15 days during the taxable year, no deduction otherwise allowable because of the rental use shall be allowed, and the rental income shall not be included in gross income.

It seems a very strained interpretation to state that the TV company is renting the property.

Code Section 74 clearly states, “Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.”

What about the value of the improvements?

If the prize is taxable and if the program is not renting the taxpayer’s residence for less than 15 days, how do they claim that the improvements made are not taxable?

They would invoke Code Section 109 which provides: “Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.”

So, says the TV Production Company, you can rent your house to us for less than 15 days, and the rent you receive is tax-free. During those 15 days, any improvements we make and leave will not be taxable to you. It stretches the imagination to think that this would be considered a short term rental and that any short-term rental, of less than 15 days, would have the lessee incur such substantial improvements.

Disagreement

The Newsweek article quotes a tax publisher who finds the TV company’s position lacking merit.

This office agrees. If you go on a game show, have your moment of fun. If you win, fabulous. But be prepared to pay the tax on the fair market value of the winnings. Now, what exactly the fair market value of the winnings is monetarily is a REAL issue. The Newsweek article has a picture of the winner in his nonworking shower. If you do a quick Internet search, you can read some interesting discussion threads about the “quality” of some of the work won on TV. The office can help you with determining your proper portion of tax, but it can’t entertain curious tax positions.


See you at the audit   ;-)

Randy
tvrandywest.com

[goongas]

Also, the family has to pay the increased utility bills that go along with better appliances, more living space, etc.  Also, the local property taxes would go up as the assessed value of the home would increase if a new assessment is made.  Some of the families were struggling financially, so how can they afford more?

I believe I read or heard somewhere that Extreme Makeover warns the family in advance of these increased costs.

I wonder if the family is allowed to sell the house, or does the show stipulate they can't for awhile?

[Steve Gavazzi]

And another thing:  I saw an episode recently where instead of renovating the family's house, the crew tore it down and built a new one.  How do they handle that?

[Jumpondees]

Okay...let me see if this sounds right...hypothetically speaking...Or maybe I'm reading too much into it.

Say I own a home, and submit it to be on Extreme Makeover: Home Edition, and are selected...The producers are going to give me $50K, which to them is a "rent" payment for using my home for 10 days while doing the "makeover".  Meanwhile, the $50K is really to pay for all the sales taxes on the "prizes" I get in the "makeover" (i.e. Plasma TV's, Swimming Pool, Kitchen Equipment, Furniture, trip, etc).

Now the producers say the money is tax free because they are leasing the home for less than 15 days as the statute that Randy has in his post says.

On a side note...It appears to me that on the show, the "contestant" who gets the makeover doesn't find out they have been selected until the bus with Ty and the Design Team pulls up in front of the house.  Now, with a "construction" project as big as these makeovers are, I'm sure that the producers would have to acquire building permits in many of the locales they visit...and 9 out of 10 times, records of building permits are public record, so if my next door neighbor was nosey enough, they could conceivably find out that I've been selected for the show, and then tell me before the show gets here...Surprise!!

So, somewhere, I would think the producers would notify the "winner" ahead of time of the makeover, and the money, and their "tax-free' reasoning....and in the days leading up to the renovation, I would go to a lawyer to have a "rental contract" drafted...This way, there is a legal document that says that "I" am renting "My Home" to the "Production Company" for a rental term of "10 days" at a rate of "$5,000/day -- $50,000/rental period" and that any modifications to the property during that time would be permitted by the landlord providing that they are permanant modifications and that said mods would be left intact upon renter's departure from the property ... and that contract would be my proof that I rented the house...

Now if the family in the artilce only got a letter to thier accountant...then I think they would be screwed for the taxes on the money and the prizes since there is no document saying that the house was rented to the show by the homeowners...

Okay...Does any of that makes sense to anyone but myself, or should I just go watch a taped episode of "Inquizition" to mellow out.

[JayDLewis]

The only problem is that EM:HE isn't a gameshow. No prizes...no game.

That aside, the production company probably pays some sort of "gift tax" on the stuff provided by Sears, etc (which Sears, in turn, probably writes off as a charitable contribution).

AFAICS, the only liability to the homeowner would be increased property taxes/utilities.

Most of this pretty much applies to shows like Pimp My Ride/Overhaulin'. Imagine the expense of insuring your ride that was worth $1,000 and had $25,000 dumped into it.

Anyway, it would be nice to think that the feds would realize that the people being helped are deserving folks who need a break...not someone dressed up in a banana suit picking whatever is in the box.