A Sarah Palin Tax Problem?
Back in September, it was reported that a dinner with former Alaskan governor Sarah Palin was being auctioned by charity on eBay with a minimum asking bid of $25,000.
That was sort of funny.
It was later reported that the winning bid was $63,500, from a woman in Alabama.
That was less funny, and less widely reported.
But the tax consequences were apparently not thought about, because she might have realized taxable income of $63,500 with nothing to show for it.
There is a sometimes-overlooked tax regulation that states that you don't realize income by providing services to a charity, but that you do realize income by providing a service to someone else who then pays the charity for that service. (Treas. Reg. 1.61-2(c).)
If Sarah Palin had charged someone $63,500 to have dinner with her, she would have $63,500 of income, and she could later donate that money to charity and claim a charitable deduction subject to the limits on charitable deductions (usually 50% or 30% of adjusted gross income). The point made by the regulation, and by various rulings issued by the Internal Revenue Service, is that Palin can't avoid that result by assigning the right to have a dinner with her to a charity and letting the charity collect the money. As the Supreme Court first ruled back in 1930, the law taxes incomes "to those who earned them." Lucas v. Earl, 281 U.S. 111, 114 (1930).
So Palin should report the $63,500 as income, and then claim a charitable deduction for the same amount. If the charity is a "public charity" described in IRC section 170(c)(1), and she has at least $63,500 of other income, with no other charitable deductions, it might be a "wash," because she will also be entitled to a charitable deduction of $63,500 for the money that was (after all) paid to charity. But if she doesn't have that much other income, or if she claims other charitable deductions, it's possible that her charitable deduction will be less than the income realized, and she will end up having to pay federal income tax on money she didn't actually receive.
Will she? And will the IRS notice if she doesn't bother to report that income?
That was sort of funny.
It was later reported that the winning bid was $63,500, from a woman in Alabama.
That was less funny, and less widely reported.
But the tax consequences were apparently not thought about, because she might have realized taxable income of $63,500 with nothing to show for it.
There is a sometimes-overlooked tax regulation that states that you don't realize income by providing services to a charity, but that you do realize income by providing a service to someone else who then pays the charity for that service. (Treas. Reg. 1.61-2(c).)
If Sarah Palin had charged someone $63,500 to have dinner with her, she would have $63,500 of income, and she could later donate that money to charity and claim a charitable deduction subject to the limits on charitable deductions (usually 50% or 30% of adjusted gross income). The point made by the regulation, and by various rulings issued by the Internal Revenue Service, is that Palin can't avoid that result by assigning the right to have a dinner with her to a charity and letting the charity collect the money. As the Supreme Court first ruled back in 1930, the law taxes incomes "to those who earned them." Lucas v. Earl, 281 U.S. 111, 114 (1930).
So Palin should report the $63,500 as income, and then claim a charitable deduction for the same amount. If the charity is a "public charity" described in IRC section 170(c)(1), and she has at least $63,500 of other income, with no other charitable deductions, it might be a "wash," because she will also be entitled to a charitable deduction of $63,500 for the money that was (after all) paid to charity. But if she doesn't have that much other income, or if she claims other charitable deductions, it's possible that her charitable deduction will be less than the income realized, and she will end up having to pay federal income tax on money she didn't actually receive.
Will she? And will the IRS notice if she doesn't bother to report that income?
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Your argument is all wet, and shows a total lack of even the slightest bit of investigation. The dinner that was auctioned was part of the Wounded Warriors Ride2Recovery fundraising effort, Sarah Palin did not make a dime off the event, it all went to the charity event. Get a life.
October 20, 2009 12:13 PM | Reply | Permalink
Sheesh, gahanson, please learn to read. The article is in complete agreement with the point in your comment:
" because she might have realized taxable income of $63,500 with nothing to show for it."
She didn't need to "make a dime" in order to open herself up to tax liability.
October 20, 2009 1:01 PM | Reply | Permalink
Perhaps it would be helpful if I quoted the Treasury Regulation in question:
So if, as part of a pre-arranged plan, person A performs services for B and B pays a charity for the services of A, A realizes income equal to the payment by B to the charity.
And there are several IRS Revenue Rulings confirming that the IRS believes that the regulation means what it says.
October 20, 2009 6:10 PM | Reply | Permalink
Nothing to see here. Nice try.
http://www.rothcpa.com/archives/005274.php
October 21, 2009 10:56 AM | Reply | Permalink
So if one CPA mis-applies a Revenue Ruling, the problem goes away?
October 21, 2009 5:54 PM | Reply | Permalink
How is it a misapplication?
Also see Rev. Rul. 69-274 where faculty of a medical school were not taxed for fees received from services they performed for low income patients. Also, see Rev. Rul. 65-282 for Legal Aid attorneys. The agency exception is fully accepted, and the only issue in cases is whether the person involved qualifies as an agent.
October 22, 2009 9:47 AM | Reply | Permalink
By the way, rereading it, I apologize for the snarky tone of my first comment. I must have been in a lousy mood when I wrote it.
October 22, 2009 10:47 AM | Reply | Permalink