'Free' doughnuts cost $237

It doesn't get much better than winning 315 coupons for the local doughnut shop, each good for a free doughnut and coffee.

That is, until you have to pay taxes on the prize.

This happened to Bob Choate, who won the coupons at a 2010 Houston Astros Fan Appreciation Day. Bottom line: Being the lucky winner reduced his tax refund by $237.

"Well, that's about as unpleasant of a surprise as tasting a chocolate creme filling when you were expecting Bavarian," wrote "Rockets Pride" at ClutchFans.

Here's how it came to be, according to David Barron of the Houston Chronicle. The story does have a sweet ending.

• Today's best savings rates

After Choate won the coupons -- coffee and his choice of a doughnut or a dozen doughnut holes -- for Shipley Do-Nuts, either the Astros or Shipley sent him an IRS Form 1099, which valued the prize at $927.61. Choate countered that the prize was worth less than $600, which would mean no 1099 required. 

Doughnut chain owner Lawrence Shipley, apparently a very nice person, agreed to pay Choate $237 to make up for the difference in his refund after the $927.61 value of the prize was added to his taxable income. Choate, in turn, said he'll donate $237 to Shipley's favorite charity. Post continues after this Tax Day video, which explains how your tax dollars are spent:

The Astros gave Choate four tickets to the first home game and a baseball autographed by Jeff Bagwell. (Will he also owe taxes on that? Time to check the gift tax laws.)

Choate took away a lesson about sticking to your guns, respectfully. But there is another lesson here, similar to the no-free-lunch maxim. It may not pay to put a prize doughnut in your mouth.

• You are required to pay income tax on the fair market value of prizes, even those that are worth less than $600.
• The prize sponsor must report to the Internal Revenue Service all prizes that exceed $600 in value.
• If you think the prize value listed on the 1099 form is too high, ask that it be amended.
• You can also decline the prize. "If I had known this was going to cost this much, I wouldn't have accepted. It was pretty poorly handled," Choate told the Chronicle before the matter was resolved. By March, he had used only eight of the coupons and had given a bunch away.

More on MSN Money:

• How Uncle Sam spends your taxes
• 8 types of income the IRS can't touch
• Best and worst places for retiree taxes
• Taxes plunge for superrich
• Obamas paid $453,770 in federal taxes