In Spring 2014, the Sanchez’, of Los Angeles, California, were featured on Surprise Home Transformation, a network television show in which families are chosen to receive a
‘home renovation” by a team of designers, paid for by the show’s producers. The show sent the family to the Disney World Resort in Orlando, Florida for one week, while its team of designers, carpenters, and other construction professionals ripped out substantial portions of their home and made extravagant renovations to impress its television audience. The Sanchez’ applied to be considered for a home renovation on the show’s website. The application process essentially involved the family writing a short essay explaining its circumstances and why it ‘‘deserved’’ to be considered for a home Renovation. The show has indicated that it receives hundreds of essay ‘‘applications’’ per week. Based on their essay, the Sanchez’ were chosen by the producers to be featured on Surprise Home Transformation. They entered into a contract with the producers of Surprise Home Transformation in which they rented their home to the producers for one week, in return for $50,000 worth of home accessories and an all-expenses paid trip to Disney World for the entire family. The estimated value of the Disney World vacation was $15,000. As noted above, the $50,000 rent was paid in-kind in the form of a new state-of-the-art television, new furniture throughout the house, and new kitchen appliances.
While the family was away, Surprise Home Transformation’s team of designers essentially gutted the interior of their home and rebuilt it. They replaced the flooring, wall treatments, all the major appliances, and most of the furniture. They installed a new giant screen plasma television in a new home theater room added onto the house; built a redwood deck in the backyard complete with wet bar, grill, and sink; and installed grass, trees, shrubbery, and wrought-iron fencing. All considered, the show spent approximately $250,000 renovating and remodeling the Sanchez’’ home. The Sanchez’ loved the new home, but even if they had been disappointed, the contract specifically prohibited them from claiming any compensation for damages, real or perceived. The producers assured the Sanchez’ that the rent they received inkind is nontaxable since the rental period was fewer than 15 days. They also assured them that the value of the improvements would not be taxable until they sell the house, because the producers made the improvements as tenants.

Identify the tax issues suggested by these facts and formulate your research questions accordingly. After conducting your research, write a memo to your supervising tax partner explaining your analysis, authority, and conclusions. Use the format described in class. The memo should be addressed to me.

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