Here is a Wall Street Journal article (July 6, 2005; Page B1) about Jack McCall, who won an American Airlines contest but turned down the prize of 12 round-trip coach tickets for two (for U.S. or international travel) because of tax considerations. American valued the tickets at $2,200 each, or $52,800 total. Mr. McCall lives in New York City and would have had to pay over $19,000 in federal, state, and city taxes, or $800 per ticket. American placed such a high value because of IRS rules requiring it to value them at their “maximum potential value.” Although tax advisers quoted in the article suggested that the man could have challenged American’s valuation, he declined to do so because he feared an audit:
Contest winners do have alternatives, according to tax experts. Those who don’t agree with the way a company has valued a prize can submit an alternative price with their tax returns, says Martin Nissenbaum, the national director of personal income tax planning for Ernst & Young LLP in New York. He once had a client who won a stereo on “Jeopardy!” that the show valued at $2,000. His client saw an advertisement with a much lower price and sent the Internal Revenue Service the ad with her return to support the lower valuation. It often helps to submit an expert opinion; one from a travel agent would help in Mr. McCall’s case, Mr. Nissenbaum said. Mr. McCall says he was aware of the possibility of challenging American’s valuation of the vouchers on his tax return, but he thought that tactic was too risky. “The problem with that is that if the IRS didn’t buy it, I’d be” in trouble, he says. “And if I report something different than what American does, that’s a red flag for an audit. And who wants to be audited by the IRS?”
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Couldn’t he have taken 4 of them (4×2200 < 10K) and declared them as tax-exempt gifts?
Gil – unfortunately, these would be in the same category as lottery winnings, taxed as ordinary income. The IRS won’t allow them to be classified as gifts, since there would be no motive for such gift. The article indicated that American Airlines would have reported the winning to the IRS, so if he claimed it to be anything other than ordinary income would trigger an audit, then fines and penalties.
I don’t know of any way out of the trap, other than what he did — which is sad.
Incredible. What an outrage that this is accepted and shrugged off. The government is totally out of control…
In Australia even that might not have got him off the hook. He might have been “deemed” to have received that value since he had the resource open to him. This certainly happens if you have funds returning yields here; you don’t get taxed on their return, but on what they would have returned in the highest paying form if they had been in that form.
Airline ticket prices overall have actually dropped over the past several years, the researchers emphasize. However, many of the taxes and fees passengers pay, which fund a significant portion of the costs of U.S. air-traffic control and airport systems, are not linked to the base price of the tickets and have remained about the same.
I guess holly unused tickets have NO VALUE after the original departure date.Under absolutely no circumstances will the airline refund these highly.also heard that The government already plans to invest roughly $20 billion in the airline flight safely upgrades.
Michiel Van Kets
Flying a plane has usually been a dream of mine, enjoyed reading your blog.
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