Every time someone suggests giving away a check for the taxes along with the airplane, it seems like there's a bunch of people who claim it wouldn't work because you'd still have to pay tax on the cash portion out of pocket. Let me ask you, how does a lottery winner afford to pay the taxes on a $150M lottery prize out of pocket? If you won a $150M lottery would you tear up the ticket because you couldn't afford to pay the taxes out of pocket?
There is absolutely no reason any organization couldn't award an airplane along with a cash fund of a sufficient amount to cover both the tax on the airplane and the tax on the cash fund. Why is this so hard for some to understand?
This was the Richard Hatch argument. I think he's serving 5 years in the fed pen. While it can be done through some torturous, and decietful mechanisms that operate on the lending, or options system(a 1099-C will be coming later), it isn't hard to understand that when you receive a prize, gift, stipend, gratuity, or something else of value, you owe taxes on it. Now, the hypothetical you gave was a lottery winnings. That would be reported on a W-2G(gaming) because it was the result of purchase, or inducement to purchase a gaming ticket.
This is not the same at all as winnings from a contest entered where no purchase(ticket, wager, etc) is required. In this case, the total value of the contest is taxable. So, it doesn't matter if it's a $20k C150 and $380k in cash, or $300k in plane, and $100k in cash, the total contest renumeration is $400k, and that is the basis of the tax due. The total value of that prize will be reported on a 1099-MISC, regardless of the cash or non-cash nature of the prize. You may use the cash given to you to pay the tax, or sell your non-cash winnings to pay the tax, but it doesn't matter, you still owe the tax.
Now, where things get sticky. Suppose John Doe owes $133k in tax on his winnings, and the Acme company steps up and says 'I'll pay John's taxes'(John will get a 1099-MISC from Acme). You would think, as long as the IRS get's their cut that it wouldn't matter where the money came from. Not so, ruling based on winnings from the game show back in the '50s settled it, and form 525 is where you report:
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Expenses paid by another. If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income.
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So, if the Acme company is paying your personal expenses(tax), then you have to report that, and pay tax on what you've received.
Perhaps you're thinking of the Offer In Compromise program by the IRS? In that, a third party can in some cases pay the taxes due for another person, but the limitations are due to hardship, and many other payment programs must have been exhausted first. It would not be considered for one who just received $400k in prize winnings, hardly a hardship situation.
Now if you can get someone, or some company to just give you the cash, with no 1099, or W-2 of any kind, I suppose you could say you've kept the money in your matress and use it to pay the taxes owed, but that seems rather improbable.
