Covered in Scorpions -

Feb. 4th, 2011

10:20 am

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There was just an ad on TV for one of those evil gambly "auction" sites (the ones where you pay to bid rather than paying for the item), and one of their example things was a car that "sold" for about $500 on a $35000 car. And it struck me, when you buy a thing at a discount, the difference doesn't count as income for tax purposes (unless maybe you're a business). But when Oprah gave people cars, they got screwed with a huge tax bill and it caused all sorts of silly problems.

Perhaps you've already spotted where I'm going with this - when a TV show is giving out prizes, perhaps instead of contestants winning a car, they should just win the option to purchase a car for 1 cent. Logically the buyer in this transaction can't be taxed without also attempting to tax every customer every time a supermarket has a discount on cereal, every time someone buys a new car without paying full sticker price (ie. every time someone buys a new car at all)... basically, any time anything is discounted from "full price" in any way. It would be ridiculous to try to enforce that. (I'm sure the US government is that ridiculous though.)

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From:notthebuddha
Date:February 4th, 2011 08:51 pm (UTC)
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Other problems are that the 1 cent car can't be insured for more than 1 cent. If someone steals it, it won't even be a felony. If I vandalize it, you can only claim 1 cent worth of damage. It stays at the crap valuation until you sell it, then you have capital gains tax. If you sell the 1 cent car to a buddy for $10,000 and he sells it back to you for $10,000 so you can have the proper valuation, you still have capital gains and are under suspicion for money laundering.

You might be able to donate it to a charity and claim the going market value as a deduction from your taxes, but I couldn't swear to it.
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From:ravenblack
Date:February 4th, 2011 09:37 pm (UTC)
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I wouldn't consider those to be significant problems, and would far rather have the 1 cent car with no non-third-party insurance than the car where I have to pay $5000 in taxes *and* pay for non-third-party insurance in order to insure it for a higher value (that I'll then have to battle the insurance company for 6 months to claim in the unlikely event that a situation calls for it).

I'd also be fine with the capital gains tax upon selling it, that's the point at which you actually have a cash profit and are in a position to pay a tax on it. I also personally (though I imagine this is not the case for Oprah's car-receivers) wouldn't mind so much paying the tax when I get the car if I could deduct the depreciation upon selling it, but only businesses are allowed to do that. (Giving to a charity doesn't count as this since that's sacrificing still extant money for a tax break, not getting a tax break for magically vanished money.)

That last thing you said is the worst thing about this situation - if you got the "free car" from Oprah and immediately donated it to a charity you'd be screwed on taxes because the going market value of the car is not the sticker price you were taxed on. So you'd be getting a tax break on a loss of, say, $20000, and being extra-taxed on ridiculous sticker price of $35000, leaving you still out of pocket several thousand dollars. (Of course you could sell it for actual cash to cover the tax burn, but the loss to tax and off-the-lot depreciation combined is ridiculous.)
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From:notthebuddha
Date:February 4th, 2011 10:11 pm (UTC)
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but only businesses are allowed to do that.

Becoming a business is not hard; I'm two of them myself.

and off-the-lot depreciation combined is ridiculous.

This is not insurmountable; if title transfers while it is on the lot/below maximum mileage to be considered a new car, you can make arrangements to transfer it while it is still there. If title transfers after this point, like if they have a production assistant drive it 2 hours to your home and get your signature, then you have standing to claim you received a post-depreciation used car.
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From:ravenblack
Date:February 4th, 2011 11:05 pm (UTC)
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I'm pretty sure you can't, as an individual, sell a car for its sticker price even if it's still on the lot. "Off-the-lot depreciation" is a misnomer.
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From:notthebuddha
Date:February 4th, 2011 11:36 pm (UTC)
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As I alluded to above, the feds consider it a new car purchase unless it has over 300 miles when it changes hands. That PA might have to drive it more like six hours, I guess.

While you may not be technically or practically able to sell it for sticker price on your own, you may be able to arrange for the dealer to otherwise dispose of it in return for a favorable consideration.
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From:ravenblack
Date:February 5th, 2011 05:03 am (UTC)
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Which still means you didn't at any point actually receive sticker value in any way, and so it's unjust to be taxed on the sticker value as if it was income. (This isn't so important when you're buying a car because you're not being taxed 20+ percent on a purchase, at least not in most of the US.)
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From:mayfly182
Date:February 4th, 2011 08:55 pm (UTC)
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In this country, if you sell a house, say, to your child for £1, they do find a way to tax it. Not sure how it's done, exactly, and can't be arsed to check. I would suggest the difference is that the taxed things are offers only open to very specific people whereas the auction is open to everyone. Otherwise I'm sure they would be selling cars for 1 cent rather than giving them away.
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From:ravenblack
Date:February 4th, 2011 09:45 pm (UTC)
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Yes, I'm sure there's some sort of bullshit loophole that would apply and no court would uphold the letter of the law over the bullshit. The "open to everyone" thing probably wouldn't cover the Oprah situation since she gave a car to everyone in the audience that day. Again, you could very easily construct a situation to destroy that excuse; Oprah goes "cars for one cent for anyone, next two minutes only!" and now it's open to everyone, or if it's not then "half price Kelloggs cereal this month at Walmart" or whatever is also not open to everyone.

I'm pretty much certain the actual practical difference is "this is big and so we want to tax it and you don't have the lawyers to argue", not any sort of reasonable, law-based justification.

I won a "90% off a $1500 water heater" coupon, of which there were only ten, and no tax considerations came up around that, so again, if that's okay then a "99.99% off a $35000 car" coupon should be expected to behave the same way, no? I very much doubt there's a law about "discounts larger than 90%" and even if there were, a 90% discount would still be a good 50% saving over "free but taxed".
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From:ravenblack
Date:February 4th, 2011 09:49 pm (UTC)
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... though houses are different and there are a whole bunch of specific laws dealing with taxes on dwellings. I suppose it's possible that cars are this way too, or maybe the excuse would dubiously become "you won a coupon 'worth' $34999 so that's what you pay tax on." And again the courts would always uphold the taxman's claim no matter how unjustified since that's where their pay comes from.

(Unjustified partly because the car was never worth $35000, it was maybe $20000 at the best, most generous way you could possibly consider it, and partly because of the ad-absurdum arguments I made in the original post.)
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From:bl17zk0d3
Date:February 5th, 2011 09:53 pm (UTC)
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i think the key differentiator is that houses and cars are registered with the government, including record of sale. it's kind of hard to hide the price from the government when you give them a copy of the receipt and attest on penalty of perjury that it's correct. bank accounts and other financial instruments, and firearms and the like have similar tax situations.
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From:ravenblack
Date:February 6th, 2011 02:15 am (UTC)
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I'm not talking about hiding the price though? If you sell a car for a dollar, the price was a dollar. If you (as the gameshow) bought it for more, that makes it a loss. There's nothing hidden about it. As has come up in the comments, perhaps the most unambiguous way to make this equivalent to other things would be to make it so your winner wins a 99.99% off coupon with a 0.01 cent cash value (as coupons are obliged to have), because that way there's simply nothing to tax.
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From:bl17zk0d3
Date:February 6th, 2011 04:57 am (UTC)
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they record price as a proxy for value. you have to pay sales tax on the price of the car, but if the car's free there's no sales tax. you don't have to pay sales tax on free trials either.

the problem is that the car has real value, and they know the car's not really worth $1 and thus the IRS still comes knocking at income tax time. if you recorded the sale price as something a used car might sell for, they might actually accept that as the value without asking too many questions.

but if you're just trying to give something away without the recipient having to pay for the taxes, then you can just do as wheel of fortune does. recently, they added that if you win a car they give you $5000 as well, with the understanding that it helps with the taxes. although i'm sure they still have to pay taxes on the $5000... they're just everywhere aren't they?
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From:ravenblack
Date:February 6th, 2011 06:08 pm (UTC)
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Yeah, I just think the appropriate thing to do would be to let them come knocking. If you really did sell the car for $1 because the buyer had a 99.99% off coupon, what are they going to do? If you, as the buyer, bought a car for $1 and have it insured for $1 and in every way treat it as if it's worth $1, how can they say it's worth $30000. They can't possibly legitimately draw a line - if you bought it for $10000 they wouldn't say you'd got $20000 of income. If you bought it for $4000 they wouldn't say you'd got $26000 of income. There is clearly not going to be, in the tax code, any defined line at which they can say "AHA! This was below that threshold so it's different!" So legally it's not different. There's no way to show that the car is "not really worth" $1 - sure, someone else might pay more for it, but someone else might pay more for a box of cereal and I don't get income taxed every time I buy discounted cereal.

Of course, as alluded to in other comments, how it is legally doesn't matter, if it goes to court the judges are going to say "yeah, they're the tax people so they're right, fuck you" just as they did at the supreme court level for "guy growing his own corn and feeding it to his own animals = interstate commerce." But what I'm saying is, all practical precedent shows that a big discount on a purchase [i]does not[/i] count as income. I am not expected to pay income tax on our 90% off water heater, or on 50% off boxes of cereal. Though I fear somewhat if someone seriously tried to argue this case the resolution would be that there'd suddenly be a lot more income tax on crazy coupon ladies!
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