Charlie Sheen's Oprah Problem

Of all of the odd news concerning Charlie Sheen in recent weeks, one particular tidbit caught my tax-professor eye.  The actor is holding a raffle for two tickets to his roadshow in Detroit on March 22, 2011. "Winner and guest will hang out with Charlie at the VIP after-party," the "WINNING for Charities Raffle" site proclaims here.   The site also claims:

• Winner will receive a cash prize in the amount of $907.50 to mitigate the Winner's tax liability that results from winning the raffle. This prize is withheld and paid, on behalf of the Winner, directly to the IRS ($750) and the Commonwealth of Massachusetts ($157.50)

Note the carefully worded statement.  The cash will "mitigate the Winner's tax liability."  The payment of the winner's income tax liability is, itself, additional income.  So the value of the prize is income, and so is the amount paid to the government .  So the contest organizers can "mitigate" but not "eliminate" the associated income tax liability.  This is what I think of as a doom loop of federal income taxation.

Paul Caron has blogged about the similar context of Oprah's televised "giveaways" (see, e.g., here, here, here, here and here). 

H/T Alexis Stevens.

Comments

[Gregg Polsky]

Bridget,

The gross up payment amount does reflect that the payment itself is taxable. They value the total prize (including the tax payment) at $3,000; $750 reflects the 25% withholding rate on prizes.

The "mitigate" language was used to reflect that, if the winner is subject to a marginal tax rate higher than 25%, the winner would owe additional tax on the prize.

[C]

Gregg is correct - Sheen can only guess into which marginal tax rate the ultimate Winner will fall. If the Winner has no other reportable income for the year, the $907.50 mitigation payment would likely be a windfall.

Assuming the marginal rates of 25% (federal) and 5.25% (state) are correct, Sheen could mitigate all the tax affect with an additional $1,301.08 payment, instead of $907.25, thus eliminating the "doom loop."

[John]

For any tax rate it can be *eliminated*. The series converges (quite rapidly I might add). See, Zeno's paradox.