Sunday, December 4, 2005
We previously blogged a student note on a topic extensively discussed on TaxProf Blog, The Extreme Home Renovation Giveaway: Constructive Justification for Tax-Free Home Improvements on ABC's Extreme Makeover: Home Edition, 73 U. Cin. L. Rev. 1665 (2005), which concluded:
Extreme Makeover: Home Edition is a truly remarkable endeavor. It is a perfect example of everything that is right about a free market economy.... Does the IRS really want to tear down something that has become such a success in so many different ways? It remains to be seen. At the very least, though, should the IRS choose to take a closer look at the situation, it would certainly not be forced to act against the families. The justifications against doing so are strong. Valuation difficulties in situations where great disparities exist between the subjective value of an in-kind prize to an economically depressed family and the objective value of the same prize create a degree of uncertainty as to the true value on which the prize should be taxed. The difficulty in principle of levying heavy tax burdens on poor and physically disabled individuals has the potential of creating serious public relations issues for the IRS. Such factors should justify the IRS's acceptance of the tax strategy used by ABC and Extreme Makeover: Home Edition, so that all parties can continue to benefit from such a worthy pursuit.
A second student note has been published on the subject, The Unexpected Consequences of "Extreme Makeover: Home Edition", 40 Gonz. L. Rev. 481 (2005). Here is the Conclusion:
This is an unexplored area, but the families who have received such goodwill from Home Edition have reason to be wary. Aside from the known property tax ramifications, there remain tens of thousands of dollars of potential income tax burdens lurking in the shadows. The families' lawyers (in reality, the show's lawyers) have assured them that there is nothing to worry about; but the situation is not black and white. Although income stemming from the rental of property for less than fifteen days is tax-free, as are lessee improvements of rental property, the tax advantages are only applied to a valid lease. If the IRS alleges a deficiency in taxes paid, the court may use a substance over form analysis and find that the parties had no reason to fashion the transaction as a lease, aside from the obvious tax advantages. In fact, using a license rather than a lease would have allowed the parties the same opportunities, minus the income tax savings. If the courts declare these leases invalid, the families will not be able to take advantage of the Code sections discussed in this article. Another outcome is that Home Edition will have a hard, if not impossible, time finding families that are willing to have their homes renovated only to pay huge tax bills. The television series prides itself on helping needy families. Hopefully its good deeds can continue. The IRS has a difficult decision before it; does it start collecting the potentially deficient taxes, thus enforcing the spirit of the tax code, or does it allow this goodwill to continue?