In an Associated Press story that has been posted on a number of news sites (see, e.g., here), we learn that the lucky winner of a sweepstakes has declined to accept his award because of the tax consequences. Having won a "free trip to outer space," our lucky winner calculated that the award (which has a value of $138,000) would cost him about $25,000 in taxes. He concluded that this was more than he was willing to spend, and he declined the award with the philosophical comment: “I was, however briefly, a potential astronaut." The article reports that he "doesn't blame anyone."
That doesn't stop other people from blaming the IRS, of course. The sub-headline on MSNBC.com's website reads: "IRS brings hype over suborbital ticket giveaways back down to earth." Even TaxProf.com, which is notable for its even-handed treatment of tax issues, couldn't resist this headline: "IRS Grounds Prize Winner from Trip to Outer Space." The article, however, makes clear that the IRS did not get involved in this case at all. The prize-winner, having received news of his award, responsibly inquired into the tax treatment of such awards and learned that they are taxable as regular income. He then computed his potential tax payment and decided that he did not want to accept the free trip. This is not even a case where the IRS issued an advisory about a murky issue (such as celebrity "swag bags" at awards shows--which are taxable, by the way). The most that one can say is that the IRS, being the "tax cops," were known to be in the background if the prize-winner had tried to cheat. The IRS is everyone's favorite villain, even when it does nothing more than stand ready to apply the law even-handedly.
The IRS aside, why does the AP think it is worth saying that the prize-winner's dream "was crushed when he had to cancel his reservation because of Uncle Sam," or that space trips "can get mired in that most earthbound hassle: taxes"? As a legal matter, it's completely settled that free trips are "income" and thus taxable. (For that matter, they are also consumption and would be taxed under a consumption tax regime.) As a policy matter, why (and, for that matter, how) would we create an equitable exception for this? Other people have to earn and save $138,000 if they want to take this trip, after paying taxes on their income. This prize-winner was being told that he could take a $138,000 trip for $25,000. He also "became an instant celebrity, giving media interviews and appearing on stage at Oracle’s trade show."
Anyone who thinks that the poor guy should get an even bigger break is free to pay the taxes for him. Several companies that provide these types of prizes, including Virgin Atlantic and Microsoft, reportedly pay cash to cover the winners' taxes. (As the AP article points out, such payments are also subject to taxation, but there is a simple "grossing up" formula to determine how much the prize-winner would have to receive in cash to be able to pay his tax bill, take the trip to space, and not pay a dime out of pocket.) Installment payments are also potentially available. In the meantime, I'm glad that prize-winners are subject to paying taxes on their income under the same rules that apply to taxing everyone else's income, thus preventing the necessity of raising tax rates or increasing the deficit.