Question

Discuss any tax aspects or problems with this statement. The TV show TMZ spoke with Larry Edema from Michigan, who was selected to be in the audience for Oprah’s big giveaway: a free trip to Australia. Supposedly, Winfrey had a certified public accountant on hand to address the tax issue right after the taping. Edema said that the CPA assured the group that all taxes associated with the trip would be “handled by the Oprah show”; so the trip would truly be 100% free. The CPA also explained that Oprah would cover all sightseeing costs and travel-related expenses, including passport costs for people who could not afford them. It was a big change from Oprah’s 2004 controversy when she famously gave away brand-new cars but saddled audience members with as much as $7,000 in income taxes.

Answer 1

Discuss any tax aspects or problems with this statement.

Answer : The vacation may not be 100% free. Australia will pay around $2.7 million of the costs for the 300 vacations, but the trip is considered a taxable prize or award under IRC §74(a) and not a nontaxable gift. Reg. §1.74-1(a)(1) requires all amounts received as prizes and awards (unless such prizes or awards qualify as an exclusion from gross) to be included in gross income. Prizes and awards which are includible in gross income include amounts received from radio and television giveaway shows. Reg. §1.74-1(a)(2) further states that if the prize or award is not made in money but is made in goods or services, the fair market value of the goods or services is the amount to be included in income. Thus, the lucky recipients would have to pay taxes on the fair market value of the trip, not the amount actually paid for the trip by the Oprah show.

Oprah states that she is paying any taxes of the lucky fans. Under Old Colony Trust Co., 279 U.S. 716 (1929), the amount of any tax liability paid by Oprah is also taxable income. See Reg. §1.61-14. If the initial tax liability is paid, another amount is taxable. Thus, an infinite amount of taxes would need to be paid by Oprah to make the vacation trip totally tax-free. The only way to make the prize tax-free is for Oprah to “gross up” the prize for any taxes due. Keep in mind there are also probably state taxes to be paid. All in all, this tax problem should create a lot of work for the accountant Oprah chose to handle the tax problems of the 300 taxpayers.