Last night, John Oliver shattered the record for biggest TV giveaway in history, giving nearly 9000 people nearly $15M in forgiven medical debts.

When Oprah gave away cars in the previous record giveaway, the recipients probably had to pay taxes on the car they received. Do recipients of John Oliver's giveaway have to pay (collectively, millions of dollars in) taxes on the forgiven debts?

What would happen if they were in a precarious financial situation that they didn't have the cash to pay that tax? Would they owe a new higher-grade debt to the IRS, plus applicable penalties?

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  • if you consider either of the answers to answer your question, please choose one :) – stannius Sep 14 '17 at 18:01
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    I think both answers are similarly good, though covering different aspects. If I had to pick one, I'd wind up picking my own, which would likely lead to your answer getting less attention than it deserves. – WBT Sep 14 '17 at 20:20
  • Oh, I didn't realize one of the answers was your own. That does complicate your decision. In your shoes I might avoid deciding too. – stannius Sep 14 '17 at 20:33

The CNN article you linked to lists the organization specializing in medical debt forgiveness:

Oliver transferred the file with the 9,000 debtors' personal information to RIP Medical Debt, a nonprofit that forgives medical debt with no tax consequences for the debtor.

That organization's web site FAQ says

Do I Have to Pay Taxes on This?

The forgiveness of the debt does not result in income to the debtor if that forgiveness is a gift that comes from a detached and disinterested generosity. We will not file a Form 1099-C with the IRS.

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According to IRS Topic 431 - Canceled Debt,

Cancellation of a debt may occur if the creditor cannot collect, or gives up on collecting, the amount you are obligated to pay.
In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.

So at first glance, it would appear that the answer is yes, those recipients are going to owe taxes.

However, there are exceptions to taxable cancellation of debt income, including:

Amounts canceled as gifts, bequests, devises, or inheritances

It clearly seems that Oliver's intention is that these amounts are considered cancelled as a gift.
Under this rule, the recipients do not have to pay taxes on the full amount.

In contrast, had the debt been considered cancelled because it was out of statute ("the creditor cannot collect" from the first quoted sentence), the full amount of the debt would have been considered taxable income and the debtors would have owed the IRS in addition to whatever harassment, costs, legal expenses, and/or payments they made on the debt to get collectors off their back. So from that perspective, John Oliver's gift was the best they could have received to help with those particular debts.

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    Generally contest prizes are taxable income. I don't know enough details of Oliver's to know if they're really more like gifts or like contest winnings. (Just because something is called a "gift" does not make it so, any more than calling someone an "independent contractor" definitively makes them one. – stannius Jun 6 '16 at 22:45
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    Should be worth noting that he explicitly states that there are no tax consequences in the segment. I just watched the episode and it says it at the very end. I assume they looked around for consequences carefully before doing this. – Lexi Jun 7 '16 at 0:22
  • @stannius I am under the impression that winning a contest generally requires entering a contest of some sort. – WBT Jun 7 '16 at 1:31
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    @Lexi I'd missed that; it was in the selection of nonprofit that helps do this without tax consequences for the debtors. – WBT Jun 7 '16 at 2:12
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    @Lexi I read one of the articles linked in the question and it says that he's working with an organization that specializes in forgiving medical debt without tax consequences. – stannius Jun 7 '16 at 3:42

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