The tax on the phone however is significantly lower than the tax on a brand new car and most people shouldn't notice the impact on their tax return documents from a several hundred dollar gift.

You don't pay tax on gifts only winnings.

In the US giving someone that does not work for you up to ~12k/year is tax free, but the person giving the gift needs to pay tax on gifts larger than that. With some paperwork there is a lifetime exception up to 1 million but it comes out of the estate tax exemption.

So, if Bill Gates gave his child 1 billion Bill would need to pay ~400 million to the IRS. However, there is an exception for anyone you are married to, and I think educational / heath care gifts are also excluded.

PS: I don't know if it counts as a "prize" or a "gift" if you hand it out to everyone that shows up, but I just wanted to make the difference clear.

I don't see why it's a big deal. Sell the car to cover the tax. You still come out ahead.

Actually, that's one of the options listed in the article.

Due to something related to tax, none of the Google employees attending Google I/O were allowed to get the phone.

Also worth noting: All Googlers got a G1 for Christmas, so presumably all attending Googlers already have an Android phone. (Not the new one, of course, but still...a nice phone running Android.)