Big winnings mean big bill from the IRS

NEW YORK — Tax day provides an especially harsh reality check for contestants of reality TV: Some find their dream homes come with a whopping tax bill.

Take the Rosier family of Lemont, Ill., which received a form 1099 from the producers of Fox’s “Renovate My Family” saying they would owe taxes on $529,148 in “additional income” from the rebuild of their house in July.

“They didn’t even send us a list of what we were paying taxes on,” said Gary Rosier, who said the contractors hired by the show completely tore down his old house and built a new one customized for his son who was paralyzed in a snowboarding accident.

Tax issue looms large for most reality TV formats in which cash, merchandise or services change hands, but the issue is becoming critical for a popular crop of wish-fulfillment shows, where a dream house can destroy a family’s finances.

“You can ruin someone’s life by giving them everything they want,” said Eric Schotz, topper of LMNO Prods. “If you take a log cabin and replace it with a mansion, there are tax consequences to that.”

But the tax consequences don’t stop with the initial improvements. Inevitably, the home is reassessed and property taxes go up, as do insurance rates and utility bills.

“You’ve got to find a way around it,” one producer said. “You can’t give them a home they can’t afford to own.”

Endemol USA, which produces “Extreme Makeover: Home Edition” for ABC, has an innovative scheme to get around at least the initial tax hit. The company leases the property for the purposes of shooting the show for 14 days. Any improvements made during the lease are tax-exempt.

“That’s the approach we take, and we haven’t had any issues with it,” Endemol USA prexy David Goldberg said.

Rocket Science Laboratories, producer of “Renovate My Family,” said it looked at Endemol’s approach but decided to pay families a lump sum to cover tax liabilities. But since the payment itself is also classified as taxable income, they adjust the amount so in the end the families owe zero.

Lawyers, CPAs at work

“It’s a crazy extrapolation you have to do, and we’ve had a lot of lawyers and a lot of tax experts spending time on it,” Rocket Science prexy Chris Cowan said. “We wanted something that would stand up to IRS scrutiny today and not be something where they get audited in five years and have nowhere to turn.”

Taxes on winnings have been a reality for gameshow contestants for years. It comes as a shock to no one that the winner of a million-dollar prize usually takes home closer to $500,000 after taxes. Some of the 276 audience members who were given a free Pontiac G6 from Oprah Winfrey later complained that the giveaway didn’t cover their taxes on the prize.

Richard Hatch, winner of the first “Survivor,” is facing federal charges that he failed to pay taxes on the $1 million he won on the hit CBS show.

Tax implications

Goldberg said Endemol producers sit down with families and go over the tax implications of adding what in many cases amounts to thousands of additional square feet to a home.

“When you increase the value of the home and improve the quality of life, a small property tax increase is certainly worth it in the long haul,” Goldberg said.

Rocket Science first faced the issue with “Millionaire 2,” in which contestant David Smith won a 70-acre Texas ranch. Company covered the taxes on the $500,000 gift, and it is trying to do the same with the Rosier family, recently offering $215,000 to cover their tax liabilities.

Quality of life

Rosier rejected the offer and said talks have broken down over other quality issues with the house. Rosier wants the producers to buy the house outright. “They’ve been trying to get out of this as cheaply as possible,” he said.

“Most of these things are severe win-win situations,” said Cowan, who believes they will soon reach an agreement with the family. The company’s policy in most cases, he said, is “do the calculation and cover the taxes.”

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