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?”
