TaxProf Blog op-ed: MTV The Challenge – Did Tori and Devin Just “Win” a Huge Tax Problem?, by Donald Tobin (Maryland; Google Scholar):
Spoiler Alert: if you haven’t finished watching the season, don’t read this.
There is almost nothing better in life than watching trash TV with one's daughter. As a tax professor and former dean, my tax colleagues may be disappointed to learn that, yes, I watch MTV’s The Challenge. I often reduce stress by watching “trash TV” and my favorite TV activity is watching MTV’s realty show, The Challenge, with my daughter. A major problem, however, is that as a tax professor I see tax problems everywhere, and the final episode of the challenge provides a wonderful opportunity to discuss the assignment of income doctrine and the fruit and tree metaphor from Lucas v. Earl, 281 U.S. 111 (1930), and Helvering v. Horst, 311 U.S. 112 (1940). So much for a relaxing evening watching TV with my daughter.
If you don’t watch The Challenge, which I assume is most people reading Tax Prof, it is a realty TV show where contestants engage in difficult challenges to become “Challenge Champions.” In this season’s episodes, people were paired up with their “ride or die” to compete for $1,000,000. In this season, the winning team took home all the money. In past seasons, sometimes the winners were tasked with deciding how much of the prize money should go to other finalists, and in one particularly evil season, “Jonny Bananas” took all of the money, even cutting out his hard-working partner. (I still haven’t forgiven him). In that same season, Devin won third place and split his money with his partner. Devin made a comment on that season that he always promised himself that money would not stop him from doing the right thing. Go Devin!
This year the good-hearted and effective team Tori and Devin won the season. This was especially gratifying for my household because both Tori and Devin have matured over the gazillion seasons they have come close, but never won, The Challenge. This year Tori delt openly about her seeking therapy to deal with major mental health problems, encouraging millions to get mental health help. In fact, it was clear that Tori’s dealing with difficult mental health issues allowed her to win the season.
But this is Tax Prof. How is all this relevant to a basic income tax class? After winning the $1,000,000, Tori and Devin announced that they were “giving” $38,000 of the proceeds to all the other finalists, six in total. Devin even referenced that fact that he was like Oprah, “you get $38,000, and you get $38,000.” And all I could think was, oh boy (OK maybe I used different words), do Devin and Tori have to pay tax on the $228,000 they just gave to the other contestants? It can’t be! Tori and Devin were just trying to be nice – and really nice at that. They had no requirements to give the money away, and it wasn’t even part of the show (as it had been in prior years). And they even gave money to Jonny Bananas (who remember gave no money to his own partner when he had the chance).
Under the assignment of income doctrine, Tori and Devin had complete control of the money with absolute right to it. They cannot assign that income to someone else and avoid paying tax on it. Tori and Devin thus received $500,000 each and need to pay tax on that $500,000. They then gifted $36,000 to each of the other finalists. If that theory holds, Tori and Devin not only gave each player $36,000, but also took a tax hit for their generosity. In assignment of income parlance, Tori and Devin were the “Tree,” and the gave away the “fruit.”
I am not sure my daughter would ever watch The Challenge with me again if I insisted on this argument. Classic assignment of income doctrine probably would tax Tori and Devin on the full $1,000,000. But as I always tell my students, facts matter. I don’t know Tori’s and Devin’s particular information, but they are clearly entertainers who are in the business of entertaining. (The Challenge even refers to participants as the cast). It is easy for them to argue that this is either a business expense deductible under § 162 (assuming they are not employees) from the cash winnings (think Jenkins v. Commissioner -- Conway Twitty case) or that splitting funds is part of the show and that they were simply negotiating with the other players regarding how the funds should be split, which was common on the show. (Though this was a very one-sided negotiation.) There was some benefit to their doing this because they are repeat players on the show. Thus, one could argue that Tori and Devin didn’t really have full control of the funds until the negotiations ended, and they claimed the money from the producers.
In any event, my take is Tori and Devin are okay, but they may want to hire a tax lawyer. At least I hope they are OK. I don’t want to ruin my TV night with my daughter.