Television: Tax Trouble For Abc's 'Extreme' Winne

Last fall Trent Woslum, a National Guardsman who was deployed in Iraq, got an e-mail from his wife. She'd been contacted by a new TV show called "Extreme Makeover: Home Edition," which wanted to do a big renovation of their southern California home--free of charge. By mid-December the family had new furniture, appliances and even a backyard baseball diamond. Estimated value: as much as $250,000. The production company gave the Woslums a letter saying its accountant believed the family didn't have to pay taxes on their windfall, but when the family's own accountant read it, he grew wary. "I'm living in fear and trepidation," says accountant Brett Porter. If the IRS looks closely, he worries, the family could owe thousands in taxes. "There's no way I'd be able to pay," says Woslum, whose savings ran dry during his deployment.

It's common knowledge that lottery or TV game-show participants must pay taxes on their winnings. On "This Old House," homeowners routinely pay taxes on donated products. But the producers behind ABC's "Extreme," which picks cash-strapped families for a seven-day home renovation, think they've found a way around the taxes. According to documents obtained by NEWSWEEK, the show leases participants' homes, paying $50,000 for 10 days' rental. Instead of cash, the show gives the family flat-screen TVs and appliances. Since the IRS allows tax-free rentals of less than 15 days, the homeowners don't owe taxes on their new goodies. And by renting the home from the family, producers apparently believe the renovations are tax-free under a "leaseholder improvement" loophole.

But NEWSWEEK ran that logic by a half-dozen outside tax professionals. While some called it clever--even "elegant" --most scoffed at the show's approach, saying the IRS would be highly unlikely to agree with all aspects of it. "When you look at the big picture, these provisions were not meant for this," says Jim Seidel of RIA. The result: if audited, the "Extreme" families could be hit with huge tax bills. The IRS, ABC and the show's producers and accountant declined to comment.

For Woslum, the problems go beyond taxes. He describes leaky bathrooms and cracked stucco. One of the snazziest additions--a carwash shower--has never worked; he claims producers used air compressors to make it appear functional for the show. Rivals aren't surprised. "You can't do a quality job in one week," says Norm Abram of "This Old House," which spends up to 12 months on projects. He worries that the "Extreme" winners are really "victims of the program." As for the taxes, if the Woslums are audited they may sue the producers. Sounds like the makings of a great reality show--for Court TV.