The Extreme Tax Position of Extreme Makeover: Home Edition

Prof. Caron comments on the extreme tax position taken by the tax attorneys for Extreme Makeover: Home Edition (In short, the value of the improvements are characterized as a type of "short-term rental payment" exempt from income tax). He also points to a forthcoming law review article on the subject.

One argument against imposing income tax on the value of the improvements is that it would be bad P.R. for the IRS since the homeowners lack the liquidity to pay the income tax (assuming, of course, that home equity loans are unavailable). I seem to remember reading in the WSJ a while back (I'll look for the article) that many of these homeowners sell the renovated houses anyway -- to pay for local property taxes! Why shouldn't the IRS be able to tax the payment? (Remember that most gains from sale of personal residences are exempt from taxation, so taxing it at the sale won't "catch" the income.)

Perhaps, though, ABC is onto something. Maybe Publishers Clearinghouse should structure their sweepstakes so that the jackpot is simply a "short term rental payment" for allowing Ed McMahon and his film crew to come inside the winner's house.