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Penngrove family may face hundreds of thousands in income taxes; property tax doubles


Last year, the Pope family got an "Extreme Makeover" of their aging Penngrove house worth an estimated $1.5 million.

Now they are facing an extreme tax bill.

Their property tax doubled to $6,500 a year, and private tax experts say the family also might face six-figure income tax bills.

For the Popes, who live on a modest income, it's a frightening possibility.

"This is very scary for us," Caroline Pope said. "What if this house gets taken away?"

They are dipping into their small savings to pay the higher property taxes, she said.

As for income taxes, federal and state tax officials say they've made no determination about what tax liability "Extreme Makeover" families may face.

However, several private tax experts said there is a significant chance the families will have to pay federal and state income tax on what they received from ABC's "Extreme Makeover: Home Edition."

The show, which premiered in December 2003, remodeled the homes of 31 families, 21 of them from California, during its first two seasons.

In July, while the Popes enjoyed a vacation in Washington, D.C., Endemol Productions, the show's producers, demolished most of their 100-year-old farmhouse and rebuilt it as an elegant country mansion, aided by about 70 local companies and 1,500 volunteers.

Caroline and Matt Pope knew their property taxes would go up. But they have not been expecting to get a big income tax bill, she said.

Endemol officials have said families like the Popes won't be subject to income taxes on their new homes and furnishings because of the way their participation in the show was structured.

But some tax law experts question Endemol's interpretation of the U.S. Internal Revenue Code, saying "Extreme Makeover" projects aren't exempt from income taxes, which cover prizes.

In the case of the Popes, experts said, combined state and federal income tax liability could total $664,500.

That figure is based on local architect Mark Quattrochi's estimate that the Popes received about $1.5 million in goods and services. Quattrochi designed the house and was intimately acquainted with the details of the project.

The Sonoma County assessor recently valued the house at $603,600. The assessment excludes several hundred thousand dollars worth of improvements intended to protect the Popes' 14-year-old daughter, Shelby, who is allergic to sunlight.

Caroline Pope is a special education assistant at Penngrove Elementary School, and her husband is a consultant for Moss Adams, an accounting, tax and business consulting firm. They have a second daughter, Madison, who is in grade school.

"Why would they (the tax agencies) want to come after us?" Caroline Pope asked. "This is something that came from the heart of a 12-year-old girl," she said, referring to the letter her daughter wrote to the show two years ago.

The new home is 833 square feet larger, has deep wrap-around porches, a covered pool and a family room/wine cellar.

But living in a millionaire's house doesn't mean the family is living like millionaires, Pope said.

"We are struggling. Those are the facts," she said.

After seeing their PG&E bill zoom up from $120 to $500 a month, the Popes turned off their new hot tub. With no money for a gardener, the thousands of dollars in new landscaping they received is looking somewhat the worse for wear these days, she said.

Neither ABC or Endemol responded to requests for comment about the tax situation.

Endemol officials have said they help the families avoid federal income tax by leasing their properties and then declaring the value of the improvements as rent.

According to Endemol, that is permitted under U.S. tax code provisions that exclude from taxation income from rentals 14 days or shorter and tenant improvements, under certain circumstances.

Maybe, maybe not, the tax experts say.

"The question is: Is there a legitimate rental going on here or is it a disguised prize that is taxable," said Frederick Stein, a senior tax analyst at RIA, a New York-based company that provides advice and other services to tax professionals.

Prizes from TV shows always have been taxed, he said, noting Richard Hatch, the first winner of the CBS show "Survivor" is in trouble with the Internal Revenue Service for failing to report his $1 million in winnings.

"There is a reasonable chance that these people are going to have trouble," Stein said, referring to "Extreme Makeover" families. "I'm not sure it's a 50-50 chance, but there is a fair chance."

Other experts reached similar conclusions.

"If the IRS decides to go after it, I think there will be tax due," said Robert Maize Jr., a Santa Rosa attorney certified as a tax law specialist.

As for the state Franchise Tax Board, Maize said, its employees know the state is "desperate" for revenue.

Denise Azimi, a spokeswoman for the board, said it would "follow federal laws in this area and defer to the IRS for guidance."

JoAnn Ritko Pozzi, a Petaluma certified public accountant, said there is a "definitely a basis on which they could pursue" a tax payment.

Whether the IRS will do so is another matter, she said, noting tax officials may choose to avoid the bad publicity associated with going after people like the Popes, who were selected for "Extreme Makeover" because of their daughter's condition.

"It may depend on whether people raise enough of a stink about it," she said.