It's A Free Ride, as Long As You Can Pay For It

Man wins free ride to space in an Oracle-sponsored sweepstakes! IRS insists he owes tax on the value--$25K, sucker. He glumly gives up. Fox has the full story.

Well, at least it's another sign of the growing, wonderful normalization of space travel. Our own Katherine Mangu-Ward surveyed the latest trends in private space flight in this soaring Reason feature in our January issue.

Comments

[Richard Hatch]

An outrage! It's unfair that the IRS doesn't suspend the law in cases such as this one and mine so other taxpayers can't subsizide us.

[NAL]

Taxation, even with representation, is still tyranny.

[Adam]

"An outrage! It's unfair that the IRS doesn't suspend the law in cases such as this one and mine so other taxpayers can't subsizide us."
This might be convincing if the income tax measured income in a way that approximated reality. It doesn't, so it's not.

[nocaliban]

Didn't they ever tell you:

There's no such thing as a free launch.

NC

[Brian Doherty]

Nocaliban---Damn, I wish I'd thought of that for the headline. Consider it the honorary headline now.

[Madpad]

It's unfair that the IRS...

Jeez...just pick an ending for this sentence.

[nocaliban]

Thank you. Honor accepted.

[pigwiggle]

Rich, it's a special kind of asshat that considers a tax break a subsidy, especially on a prize (cause if they don't tax this guy, what, all those other sweepstakes are at a competitive disadvantage?).

To think, I've been generously subsidized by all those poor folks that were mugged, and all the while I've gone unmolested. ... enter ubiquitous retort about freeways and fire protection ....

[Jennifer]

It's unfair that the IRS doesn't suspend the law in cases such as this one and mine so other taxpayers can't subsizide us.

So how, exactly, am I supposed to be hurt if this guy is allowed to ride into space without first paying $25k?

[Adam]

"Rich, it's a special kind of asshat that considers a tax break a subsidy, especially on a prize (cause if they don't tax this guy, what, all those other sweepstakes are at a competitive disadvantage?)."
Of course it's a subsidy. If I bought this trip on the open market, I'd have to do it with after tax dollars. If he gets without paying the tax, then he pays for it with pre-tax dollars. The subsidy equals the amount of tax he would have had to pay. Not too complicated.

[David]

It's telling of how strange the system is that even if Oracle had included the cost of the taxes in the prize, this poor bastard would have to pay tax on cost of the tax being covered.

I wonder if they could have declared that the ride is not transferable therefore has no cash value, or hired the guy to "work" on the flight.

[Mike]

I don't understand how it counts as a subsidy if you refuse to charge income tax on something that's not income. If giving somebody a free good time is taxable, then you better go back and tax all the chicks that took me up on my offer for free mustache rides. Pwned!

[Lost_In_Translation]

Here's what I don't get. Why doesn't the space company pay those taxes? Its not like it will break the bank. Most giveaways like free vacations are "All expenses paid" INCLUDING TAXES!!!!

[Lost_In_Translation]

Ok, I didn't read David's post before putting mine up. Would the government really try and tax someone for something even if someone else paid the taxes. That's like winning the lottery, being taxed on what you won, then being taxed on the remainder again.

[Dave B.]

I wonder if they could have declared that the ride is not transferable therefore has no cash value

If they didn't declare this, then he'd have to be a moron to not sell it. The article seems to have indicated that he simply declined it. How much do you think a trip to space would go for on e-bay?

[haywood\'s proxy]

The "Richard Hatch" comment was mine - a reference to the guy who didn't think he had to pay taxes on his Survivor winnings.

Anyway, it amounts to a subsidy because if the government requires X amount of money to operate, then if somebody doesn't pay his fair share, the rest of us have to pay more.

Anyway, everybody should know that income is taxed. The fact that this guy was too stupid to realize that is what led to him being "crushed", not the mean ole IRS, who is simply doing its job in collecting legally owed tax.

[Ramon Rozas III]

Lost in Translation - yes they would. One of the first income tax cases the Supreme Court considered in the '20's was where a corporation attempted to pay the income tax of the CEO. The Court ruled said payment was "income" itself, and he also owed taxes on that attempted payment.

I hate defending the IRS, but of course whenever someone gives you something, that is "income." Whether you earned it by work ("wages"), or they gave it to you gratis ("gift"). I suppose the question is whether we should tax "gifts." The problem would be that immediately, to avoid taxes, my corporation (of which I am the sole employee) would no longer pay me a salary and instead simply give me a gift at beginning of each month, tax free.

Can someone come up with a principled rule delineating "gifts" from "wages" or other income?

[haywood\'s proxy]

Taxation, even with representation, is still tyranny.

Only in the sense that representation, even with taxation, is welfare.

[Jennifer]

Anyway, it amounts to a subsidy because if the government requires X amount of money to operate, then if somebody doesn't pay his fair share, the rest of us have to pay more.

I know I shouldn't feed a troll, but the government's operating costs didn't go up when this guy was offered the free space ride, and didn't go down when the guy declined.

[haywood\'s proxy]

I know I shouldn't feed a troll, but the government's operating costs didn't go up when this guy was offered the free space ride, and didn't go down when the guy declined.

So?

[Chuck]

Can someone come up with a principled rule delineating "gifts" from "wages" or other income?

Sure. Cash=income, non-cash=non-income. I realize that this is vastly different from current laws. You asked for a principled rule, and you got one.

[tarran]

Out of curiosity, if a hospital provides life-saving treatment that they nominally would charge $1,000,000 for, does the IRS count that gift as income too?

[jablomey\'s voting stock]

Of course it's fair to pay the taxes. The Government spent a lot of money making space and other planets for us to launch rockets at, and those expenses have to be recouped somehow.

[swillfredo pareto]

Only in the sense that representation, even with taxation, is welfare

Re-iterating Jennifer's admonition on troll-comestibles, income taxes aren't the toll for representation, we had representation for the first 140 years before the 16th Amendment was ratified. Taxes pay for goods and services and we aren't getting our money's worth.

[smartass sob]

[ I know I shouldn't feed a troll, but the government's operating costs didn't go up when this guy was offered the free space ride, and didn't go down when the guy declined.

So? ]

"So" if costs did not go up OR down, then no one was "subsidized".

[David]

If they didn't declare this, then he'd have to be a moron to not sell it. The article seems to have indicated that he simply declined it. How much do you think a trip to space would go for on e-bay?

Dave,
I can't imagine that the guy wouldn't sell it if it was an option. If he could and chose not to, then he's a fool. If he was forced to sell but really wanted the trip, it still feels like he's getting screwed.

I think it's more likely that the prize is non-transferable, but had an approximate cash value which, to my thinking, makes taxing it unfair.

Either way, the IRS rules have made it so that only the very rich are eligible to win prizes and keep them.

[haywood\'s proxy]

"So" if costs did not go up OR down, then no one was "subsidized".

The costs stayed the same, but the revenue went down. So others have to pay more, and SpaceBoy gets the same benefits while paying less.

Not a hard concept, folks. Really.

[Cab]

Didn't the Oprah audience get all pissy when they realized they had to pay taxes on the cars she gave away during one show? I remember something about that. They walk in just going to a show and they walk out with a car and a tax bill for $7000.

[Scandalrag]

Tarran:

Actually, the hospital would never "give" anyone treatment, they would send a $1,000,000 bill for the service then write it off as bad debt on their taxes. Then the recipient would owe taxes on the amount "forgiven" as bad debt. That's why the first thing you should do when diagnosed with some horrible disease is give away all your assets and declare bankruptcy. The IRS has to settle under unfavorable terms rather than just seizing everything.

[smartass sob]

[The costs stayed the same, but the revenue went down. So others have to pay more, and SpaceBoy gets the same benefits while paying less.]

The revenue does NOT go down; it stays the same. And "SpaceBoy" is not paying any less than he was paying before, except, possibly, as a percentage of income.

[Mike]

Haywood - that's fuzzy politician math. Revenue did not change. If they were to collect tax on the gift, revenues would have gone up. If they don't collect tax on the gift, revenues stay the same. The claim that a stagnant (or slowly-increasing) number constitutes a decrease is a rhetorical gimmick usually reserved for congressional budget hearings and the subsequent sound bites in the media. (E.g., "He wants to reduce welfare funding by increasing it by less than I want.")

[Number 6]

What on earth makes some people think that there is a direct correlation between one person's failure to pay taxes (fair or otherwise) and the amount others pay? It simply doesn't work like that. Never does the government say, "Joe blow skipped out on his tax bill, so now we have to go back and get more money from everyone else." Government bookeeping is just not that simple.

[Syd]

I think the similar Microsoft Vista contest gives an additional cash prize to cover the taxes (and the taxes on the additional cash prize).

[Bagger]

Haywood-

Mix in a few "for the children" references into your posts and you can replace Dan T. as the resident troll.

[Ironchef]

Only in bizarro la la land could someone define subsidy like they do above.

[MP]

The only entity at fault here is Oracle. The fact that winnings are taxed as income should not be news to anyone.

[jablomey\'s voting stock]

Look, libertarians: You don't understand how space works.

When planets orbit around the sun, they are actually continually accelerating -- ask any physicist to confirm that. Where do you think they get the ever-increasing energy to do that?

Without ever-increasing revenue, the Government can't keep the planets in their courses, and they'll all spiral into the sun. Taxes are a matter of basic survival, that's all.

Really, folks. It's not that hard a concept to wrap your pointy heads around.

[cgee]

I have won a few big-(or at least moderate-) ticket items in the past few yearsm including two SuperBowl XXXVI tickets from an NFL football team and a package of an elliptical trainer, personal training sessions, and 3-year membership from Bally Total Fitness.

With respect to the SB tickets, I had planned to use the face value for tax reporting purposes, since that amount was clearly less than what I sold one of the pair of tickets for on fleabay (I used the proceeds to pay for my New Orleans transportation, hotel, and "fun" attendant to the use of the other ticket). However, it turned out that the NFL club that sent me the tickets never bothered to file a 1099 reporting my winnings (the face value of the tickets was approx $700 total, so perhaps it was under a threshold?), so I did not declare the prize as income.

With respect to the Bally's prizes, the company did file a 1099, so I had to report the income. However, there is no requirement that one use the figures supplied by the company if they are inaccurate. Bally had simply put MSRP figures down for each prize. As most of us are aware, it is the rare person who pays full retail. I was able to locate an advertised price for the elliptical trainer that was less than 50% of MSRP, and used that as the fair market price for tax purposes. Further, since I was already a lifetime Bally's member with a low annual renewal rate ($25/year), the 3-year membership only had a fair market value of $75, rather than the $800 or so that the membership would have cost someone who was not a member.

With respect to "SpaceBoy", it seems to me that the market value assigned to the prize by the sponsor is speculative at best. In fact, the prize itself is somewhat speculative, being that it is contingent on a number of events that may or may not occur, such as the development of a commercial space vehicle willing to allow him passage. It seems to me that a creative accountant might have figured out a way to deal with this issue that would have allowed SpaceBoy to defer paying income tax on the prize, and/or reduce the amount of tax owed.

[haywood ya drop dead]

It is certainly a subsidy. The government rightly owns all property. That bit that they allow you to keep is a gift or grant; the more you keep the larger the subsidy. Not a hard concept, folks. Really.

[Ramon Rozas III]

Chuck - that certainly is a rule. The question becomes, if my business leases me a car, rents me an apartment and buys all my food for me, is none that taxable income?

[JSF]

More IRS asshattery:

http://www.mysanantonio.com/news/metro/stories/MYSA013007.01A.Prosecutors_Pay.1b5bb48.html

Long story short:

The IRS settles lawsuit for $1.34 mil after spending years investigating a local criminal defense lawyer for not disclosing income, after the Feds lose the criminal trial.

Money quote: The Feds wanted to investigate the federal judge that through out their case...

"Drafted after a federal judge decided agents lacked the probable cause to justify their search of Brown's law office, the report indicated Maxwell not only was unrepentant, he and others began investigating whether the judge, Orlando Garcia, had any links to Brown."

[JSF]

through out their case

make that: threw out their case

[Rex Rhino]

I just want to let you know this:

I have started a new buisness... I post on blogs, in exchange for payment. My fee, per blog, per post, is $100,000,000.00. I haven't charged anyone yet, Reason is my first.

I am going to give Reason magazine my first $100,000,000.00 post for free. However, it *IS* a gift, and so Reason magazine will be liable for a cool $50 million.

Hey, wait a minute... since you are all getting the gift of my postings as well, you better notify the IRS that you are on the hook for $50,000,000.00, otherwise you are guilty of tax fraud. Superhighways and fire departs, you know!

[fyodor]

I'd like to know the geneology of the IRS's ability to tax gifts and services like they were income. Did they assume such power from the start, or was it in response to something? If it's the latter, I'm guessing maybe it was in response to people using barter to avoid taxes. There's definitely some rationale for thinking barterers are "beating the system" in such a way that might leave more to pay for the rest of us (how much one person is taxed may not be directly correlated to how much others are taxed, but I think it's foolish to think there's no (inverse) correlation at all). Personally, I'm okay with not taxing barter. Barter's a lot less efficient than using money, so if some people wanna go through that trouble to avoid the taxman, fine with me. But people get so steamed over others "beating the system". Even Reagan got the taxation on waiters' tips going, which I thought sucked. I think there should be a way to "beat the system". There's a price for operating in an underground economy, but I don't think we should be trying to make it impossible to go there. (Setting aside issues concerning the morality of taxation in general, of course.)

[haywood\'s proxy]

Haywood - that's fuzzy politician math. Revenue did not change. If they were to collect tax on the gift, revenues would have gone up. If they don't collect tax on the gift, revenues stay the same. The claim that a stagnant (or slowly-increasing) number constitutes a decrease is a rhetorical gimmick usually reserved for congressional budget hearings and the subsequent sound bites in the media. (E.g., "He wants to reduce welfare funding by increasing it by less than I want.")

But if the government can forgive taxes that are legally owed without any effect, why collect taxes at all? Do government expenses magically pay for themselves?

Think about it this way: the government spends X amount of money in a year. These expenses are covered either by the collection of taxes or by borrowing money. If they decide to not tax SpaceBoy, they either have to tax somebody else $25k or borrow an additional $25k, and debt is serviced by taxes as well it still means somebody has to pony up. Or, they could reduce expenditures by $25k but that would mean somebody would be getting $25k less in services.

Either way, SpaceBoy wins and the rest of us lose.

Granted, $25k is not much in the context of the federal budget but nobody's offering me a $25k tax exemption for nothing.

[Kwix]

fyodor,
You can find the history of US Federal Estate, Gift and Generation-Skipping Taxes here.
Barter is taxable at the fair market value of the goods per the IRS but only if it is contracted and formal in nature. Oddly, both sides of the barter exchange owe tax on the equivalent "income".

[fyodor]

But if the government can forgive taxes that are legally owed without any effect, why collect taxes at all? Do government expenses magically pay for themselves?

Well y'know, as usually happens in comments threads, people state objections to this or that without issuing some damn policy statement that explains WHY they object. If anyone here thinks Spaceboy should be individually exempted from the law, your objections have some validity. I suppose one might argue that there are obvious times not to enforce an otherwise good law, but one would at least have to explain why this guy's case is special.

On the very other hand, however, those finding something to dislike in this particular case may object to the general practices of which this case is but one mere example. In that case, everything you are saying, hayward's proxy, is primarily besides the point.

[mediageek]

I only have two things to say:

1) Larry Ellison is a dick.

2) This sort of thing isn't all that uncommon.

[fyodor]

Thanks, kwix, I'll have to check that out when I get a moment!

[Number 6]

Let's look at this another way. If I fail to win the lottery, I have not suffered a financial loss. I simply have not gained anything. The same principle applies here. The government had no idea that this guy would get a prize worth $25K, and certainly didn't budget around the idea that a company might give a prize to somebody and be expected to pay taxes on it. If they did so, and are not precognitive, they would be acting stupidly, even by government standards.
In other words, the "now someone else will have to pay those taxes" argument is a non-starter.

[Kwix]

Okay,
Firstly, according to the guys blog Oracle chipped in $35k for the taxes, approximately 30% of the estimated value of the prize($138,000), and what should have been enough to cover it. Apparently, the IRS(and the State of California) views the prize as "income" and not as a "gift" and therefore he was being taxed at his normal "income" tax rate of closer to 40% (software developer vs. burger flipper), ala $25k short. Secondly, unless he was to fly in 2005(the year he won prize), he didn't actually have to pay taxes on it that year as he had not recieved the "service" in question. He would have owed taxes on the $35k that Oracle chipped in, but not on the spaceflight itself.

As of today, the flight in question has not taken place and probably will not take place this year(2007). If he could have saved $25k over 2-3 years then he wouldn't have had much to worry about. Perhaps Oracle should have chipped in a bit more to cover the taxes but ultimately it was his decision to forfeit the prize.

As Rex Rhino exemplified, this does raise an interesting question, if somebody were to gift me with a Billion dollar prize that I a)couldn't refuse for whatever reason and b)couldn't sell due to limited interest would I be on the hook for taxes for an item that I never actually wanted based on the supposed "fair market value"?

What is the fair market value on the Eiffel Tower or the Leaning Tower of Pisa or the Shroud of Turin or a trip to space or a blog post by Rex Rhino? The answer is, it is worth whatever somebody is willing to pay for it vs what the owner wishes to recieve for it, but as a gift nobody pays for it so it can be whatever the gift giver says it is, particularly with regards to unique or low production items that are only given away.

[Mean Mr. Mustard]

you can replace Dan T. as the resident troll.

Joe is the resident troll, but he's been here so long we've begun to think of him as family, not vermin.

[keith]

Couldn't SpaceBoy have legally deferred the taxes until receipt of trip? It's not like spaceplanes are available tomorrow -- and to my knowlege no entity currently exists that can guarantee your flight will actually happen, so until that happens, the winner hasn't actually won anything tangible... really, just an option with a very large time value filling out the space between sticker price and zero.

A computer engineer should have been able to scrape together $25K in free cash over 5 years or so without playing the crybaby-sour grapes-martyr card if he really, really, really wanted the trip. He's certainly entitled to the opinion that the tax cost is too much for him, and agreed, Larry Ellison is a jerk for not covering it. But I don't buy that he couldn't have figured out a way of making it work.

[Crassus]

Interesting to note that if a company pays the tax on a prize, this payment is also considered a "prize", so the winner has to pay tax on that too. And if the company pays that tax... Ugh. Reminds me of when I studied iteration in computer science. Is it any wonder that America has a reputation for having the world's most arcane tax system? Still, the "liberation" of Iraq isn't going to pay for itself.

[keith]

Kwix,

Wasn't that scenario part of "Raging Bull"?

Also, if you were to win Powerball, there are fine legal points that have to be observed to prevent the complete net present value of the jackpot from being taxed in year 0.

[Mike]

Haywood - if your point is correct, then should we allow this fellow to forfeit his prize? Aren't we losing the same $25K that we would have lost if no tax had been charged on the transaction? Also, aren't we losing the $35K that Oracle put up in taxes? Now everybody's a loser, because we all have to make up for the $60K that was not paid in taxes, AND SpaceBoy doesn't even get to go into space! Well, shit. I hate how things work out when everything has to be zero-sum.

[MP]

Secondly, unless he was to fly in 2005(the year he won prize), he didn't actually have to pay taxes on it that year as he had not recieved the "service" in question.
Couldn't SpaceBoy have legally deferred the taxes until receipt of trip?
I don't see why the date in which the "service" is to be performed is at all relevant. What was gifted was a "right to service", essentially a guaranteed contract that a service was to be performed.

I don't see why he didn't accept the gift, sell it, and then reported the sale price as the market value of the gift.

[MikeP]

Interesting to note that if a company pays the tax on a prize, this payment is also considered a "prize", so the winner has to pay tax on that too. And if the company pays that tax... Ugh.

If the tax rate is x, then to make the gift "tax-free" the giver must add cash to the gift equal to

x + x^2 + x^3 + ... = 1/(1-x) - 1

times the value of the gift.

Of course, if the series pushes the recipient's income into a different tax bracket, the formula will no longer be valid. But it should still converge so long as he doesn't enter a 100% tax bracket.

[Gilbert Martin]

Whether somebody is being subsidized or is subsidzing somebody else has nothing to to with what is or isn't income and whether it has been taxed or not.

It is a straight forward comparision of the total DOLLARS in taxes a person has paid to a particular level of government (i.e the federal government) vs the DOLLAR value of the particular government activities undertaken by that level of government that have provided some demonstrable specific direct benefit to that person calculated on a user fee basis. If the dollars of taxes paid is higher than the value of services personally received, that person is subsidizing somebody else, regardless of whether a prize he got was taxed as "income" or not.

When liberals start talking about somebody being "subsidized" it usually actually means that person is not being required to subsidize somebody else to the extent that the liberal wants him to be forced to.

[barneca]

the word "troll" flies around here so much, it loses all meaning. then we have nothing special to use for morons like terrorwatch and truthfrei.

as far as i know, "troll" does not mean "someone with whom you disagree".

-cab

[David]

as far as i know, "troll" does not mean "someone with whom you disagree".

Agreed, and it doesn't apply to joe.

[Dan T.]

as far as i know, "troll" does not mean "someone with whom you disagree".

You must be new to this board...Free Minds, you know!

[Lost_In_Translation]

I'd like to thank Kwix for answering my question.

[Number 6]

We need a new term. A term that describes someone who wants to be a gadfly, but just doesn't have the arguments or intellectual capacity to be interesting. Someone who really, truly thinks that it is their duty to show us silly libertarians how wrong we are, and how smart he is.
But "Chronic 13-year-old" is too long.

[Jon H]

He ain't getting screwed.

A $25,000 trip to space is a pretty damn good deal, and defintely attainable for anyone who wants it enough to take out a second mortgage on their home.

Plus, he could probably recoup the $25,000 by selling the service of taking small things on the ride for people who have some need or desire to have something sent through space. "I'll carry some of your loved one's ashes into space! $100/gram)"

He probably could have worked something out with the IRS to make it work.

No, "screwed" would be if he entered because he wanted a much-less-valuable second prize, didn't much care about the space trip itself, and wasn't able to turn down the trip to escape the tax.

That's similar to a situation I was worried about a while back. A New York npr station was holding a giveaway during a fundraiser. There were two prizes. Second prize was a Mac Powerbook and an iPod. First prize was a huge, heavy (200-400 lbs with base), $10,000 Sony top-of-the-line HDTV.

Now, I could handle the taxes on the Powerbook. But I would have been in a spot if I'd won the HDTV. It wouldn't even be easy to *sell* such a beast, because that would require moving it.

*That* is my idea of getting screwed.

[Jon H]

"The answer is, it is worth whatever somebody is willing to pay for it vs what the owner wishes to recieve for it, but as a gift nobody pays for it so it can be whatever the gift giver says it is, particularly with regards to unique or low production items that are only given away."

I don't think that works, unless the "gift" is something like a removed gallstone.

If the gift's value can be estimated, it'll be treated as any gift would be, and somebody's going to get taxed.

Unique and "priceless" artifacts get priced and traded on the market all the time. If somone gives you Cellini's salt cellar for your birthday, someone's going to get dinged hard.

[Stevo Darkly]

We need a new term. A term that describes someone who wants to be a gadfly, but just doesn't have the arguments or intellectual capacity to be interesting. Someone who really, truly thinks that it is their duty to show us silly libertarians how wrong we are, and how smart he is.
But "Chronic 13-year-old" is too long.

How about "amazingdrx"?

[boogieman]

A couple of problems with this:

First of all, why don't government employees have to pay extra tax on the value being selected to go on a space mission ?

Second, why can't taxes be payed as a value for value exchange, instead of just cash ? That is, if I take 15% of a lawmaker all the way up into space with me or a whole lawmaker 15% of the way into space, the matter should be settled.

[Crassus]

"If the tax rate is x, then to make the gift "tax-free" the giver must add cash to the gift equal to
x + x^2 + x^3 + ... = 1/(1-x) - 1
times the value of the gift."

That equation doesn't look quite right, but its been a while since I studied convergent series theory, so I'll take your word for it.

It would seem a bit ridiculous if someone had to go through all this hassle if they wanted to give a prize completely tax free - perhaps the IRS offers a simpler way.

[barneca]

That equation doesn't look quite right, but its been a while since I studied convergent series theory, so I'll take your word for it.

It would seem a bit ridiculous if someone had to go through all this hassle if they wanted to give a prize completely tax free - perhaps the IRS offers a simpler way.

for whatever my opinion is worth, crassus, mikep's equation is correct, tho it's slightly easier to write (and is more intuitive) as x/(1-x). it's really not much of a hassle to multiply the value of a prize by a number. even if tax brackets change, it's not hard.

-cab