REVIEW & OUTLOOK
Back in the 1970s, the weirdest story in advertising was a book called "Subliminal Seduction," which claimed that the ice cubes pictured in whiskey ads contained subtle images of naked women meant to trigger subconscious desires for the product. The wackiest story today is Pontiac's decision to give away 276 "free" G6 cars to the studio audience on Oprah Winfrey's Sept. 13 show. Nothing subliminal about that message.
Yet while the folks on "Oprah" screamed with excitement over their new rides, out in the real world, tax professionals were trying to calculate the wreckage come April 15. Over on TaxProf Blog, where experts can banter about hypothetical problems -- "Head of household filing status for Frasier while his father Martin lived with him?" -- they're buzzing now about the insanely complicated tax implications of the "Oprah" giveaway.
Of course, there's no such thing as a "free" car, notes Paul Caron, the blog's publisher and a University of Cincinnati law professor. And even if Pontiac were to pay not only the sales tax but all the various income taxes that the recipients will owe on the value of their new cars, there would be taxes due on the value of any "free" tax payments too, a calculation known as a gross up.
Brenda Schafer, a manager for tax analysis and advice support at H&R Block, has heard stunned prizewinners wailing before. The company's clients include former participants on reality shows. Whether they got a "free" new face on "Miami Slice" or a new wardrobe on "Queer Eye for the Straight Guy" or had their $50,000 ranch house turned into a $300,000 mansion -- they'll have to pony up to the IRS.
As for Oprah, Ms. Schafer says, "she's thinking she's giving gifts, but there's no getting around the fact that it's a prize for being in the audience." And according to her rough, unofficial calculation, someone in the 15% federal bracket (making, say, $28,000 as an individual, or $56,000 if filing jointly) and a 5% state bracket who gets a $30,000 car (the figure for the G6 is about $28,500) will owe an extra $6,000 in taxes. For a single earner in the 33% bracket kicking in at $143,500, the car adds $12,000 in tax.
OK, just sell the car, you say. But there is no escaping the tax consequences of first owning it. And what will be the effect of the added income on winners who are, or were, eligible for the earned income tax credit, child tax or education credits, or even welfare payments? Ms. Schafer's estimate is that a married person with two children and an income of $18,000 who receives a car worth $30,000 "will lose over $4,000 in refundable tax benefits plus have a tax due of $1,170," and that's ignoring state tax.
To say that there's a lesson here about the evils of our tax system would be to rain on a parade of 276 jangling new car keys. But apparently some winners have already glimpsed the downside of their new tax status and are exploring the possibility of not taking possession of their cars until next year. No way, says Ms. Schafer. You got it when you got it. You see, there's this thing called the "doctrine of constructive receipt"...
Reprinted with permission of the Wall Street Journal