By: A.J. Cook


Gary B. Bauman put four nickels in a progressive slot machine, and out poured $73,733. Accustomed to making $10,000 a year, this looked pretty good -- until the Internal Revenue Service arrived.

Bauman, of Kingman, Ariz., had supported himself with his nontaxable disability check and a small amount of interest income. After the big winnings, he started a spending binge: travel, furniture, a van, a mobile home. In a year and a half, he'd run through it all.

As was his custom, Bauman didn't file a tax return.

The IRS came calling for its share. The agency refused to accept his reason for not filing, so he went to court. He testified, "I always heard that, if you're on Social Security disability and you hit a jackpot, . . . you didn't have to pay any income tax."

That didn't compute with the judge. "The taxpayer's argument is misguided," gambling winnings are always taxable. The judge ordered Bauman to pay the taxes plus penalties.

The Moral: Win, lose or draw -- pay, or the IRS can take it all.

A Nobel prize isn't taxable, but an award for sales promotions is. And when it comes as a vacation, you pay on its market value.

But what is market value? Can you prove it?

Nathan L. Wade, owned a Subaru car dealership in Salt Lake City. He advertised so much that over three years he won trips to Greece, Paris, Israel, Acapulco and Monte Carlo. The prizes included transportation, hotels and some meals.

The IRS challenged the amount he reported as income, so Wade appealed. Other recipients, he said, sold their awards for $2,000 each, so that's market value. But he presented no witnesses or other evidence.

In contrast, the IRS called representatives from award sponsors. They told the court exactly what the trips cost, much more than $2,000.

The judge accepted as Wade's income the figures given by the IRS's witnesses.

The flaw here seems to have been the scarcity of evidence by Wade. In a similar case, but with witnesses for the taxpayer, the court accepted as market value the price other winners received from selling their awards.

The Moral: Sometimes it seems taxpayers can't win for losing.


A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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Released 7-19-93