quiz show taxes?

Question

The taxpayer, a resident of California, appeared on TV quiz show and won a new car. The producer of the program had paid $20,000 for the car. However, the taxpayer had no interest in the car and needed cash. The taxpayer visited several dealers to offer the car for sale. The taxpayer eventually sold the car to a dealer for $16,000. The IRS contends the taxpayer's income from the prize is $20,000. Is the IRS correct?

I want a link too not just a yes or no.

Answer 1

The question here is "What is the fair market value of the car?" The fact that the producer paid $20,000 would suggest that is the figure. I cannot imagine anyone paying more than they have to for a prize, especially if the dealership is getting some advertising out of it.

You also say that the taxpayer "eventually" sold the car. How long after the taping of the show was it? The FMV is based on the value as at the date the taxpayer won the car. If the taxpayer sold the car within a day or two of winning the car and never actually took possession, there is an argument. Otherwise, I think the $20,000 valuation will be upheld.

Answer 2

Assuming the car was sold *unused* within a few weeks (perhaps two months on the outside) to a reputable car dealer (i.e., he wasn't scammed into accepting less than it is worth), it's FMV was stated incorrectly on the 1099.

The FMV is what someone would part with to obtain a similar object. A gift or prize receipt is often marked with a FMV which is actually the retail price of the object. The FMV can be different than the retail price, and indeed is usually the case with cars - and when was the last time anyone paid the sticker price for a car?

The reason for the inflated FMV is that the company donating the prize gets the FMV deduction; it is in their best interests to have a higher FMV. Meanwhile, since your pal sells the car for much less, it's in your pal's best interest to have a lower FMV.

In numerous Tax Court cases (McCoy is the most cited example), the FMV was widgied down somewhere between the FMV reported on the 1099 and the one used by the taxpayer.

You can't ignore the 1099, or you are guaranteeing the IRS will investigate the case. Report the full 1099 value on the return, so that the IRS CP2000 matching computer finds the number it is looking for. The methodology of how to then go about using a smaller sum is best left to expert accountants who are experienced in IRS disputes and audits. I would see a CPA or EA whose practice specializes in disputes with the IRS.

P.S. If it was sold used, you're pal is probably out of luck taking a legal position that the FMV is lower than the 1099 value, and may have to try one of the other creative options listed above.

Answer 3

The $20,000 is the FMV of the auto and must be included income as other income.

The subequent sale for $16,000 does not diminish the original value. This was a fire sale value, the taxpayer was looking for a quick sale, a bargin purchase for the buyer. She visited "several dealers".

If there is a deductible loss on the subseqent sale is a different story. Personal losses are never tax deductible unless permited by specific code. This was not an invenstment (there was not intent to make a profit or obtain a return on the investment), this is not a casualty loss (there was catastrophic event that caused the loss). There was not theft (nothing was stolen).

Would be hard pressed to determine that it was a tax dedtible loss to begin with. This is the same as if the taxpayer went out and bought a bedroom set at Sears for $20,000 and then sold it to her neighbor for $16,000.

Answer 4

Excellent question. First, I would recommend that your friend go to a true CPA firm that offers tax advise and tax returns. Under no circumstances should he/she go to H&R Block or Jackson Hewitt.

Second, there should be a corresponding 1099 along with the car showing the value being $20k. The full $20k should be shown as "Other Income" (not subject to self employment taxes). However, if your friend can prove that he/she did not use it personally (i.e. that is was never a personal vehicle that she used for day to day travels), it may be considered investment. In this case, he/she would file a Schedule D showing a loss of $6k. ($20k on the 1099 less the $16k received). This should was through and limit her taxes to the actual amount received. The litmus test is being able to prove that it was investment income.

See the IRS website at http://www.irs.gov/taxtopics/tc409.html.

Again, I would recommend going to a CPA as soon as possible because in either case (recognizing $20k or $16k), additional taxes may need to be withheld otherwise certain penalties and interest may arise. Good luck!

Answer 5

I would have to guess yes. If the quiz show network reported the earning, value, of $20000, that is all the IRS has to go by. A 1099 misc is reports if the winnings is over $600.

Answer 6

as per rule as admissible