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Monday, August 6, 2007

For the record

Given what I do for a living, it's natural that readers would be asking me about the tax consequences of a fan's catching the historic Barry Bonds home run baseball. It's certainly a highly valuable piece of property, and the person who catches it will be greatly enriched by it, but is catching the ball income for tax purposes?

We went through all this when the original steroid titan, Mark McGwire, broke the single-season record for home runs. There was a great deal of speculation that the catching of the ball constituted income to the person who caught it, and that if he or she gave the ball to McGwire, it would be subject to gift tax. After being hounded about the issue for quite a while, the IRS caved in and said that neither tax would be imposed. It never fully explained why.

Later on, a couple of wise tax prof pals of mine came up with a theory of how catching the ball does not constitute income. They point out that a fisherman or fisherwoman does not have income upon catching a fish -- he or she is taxed only if and when the caught fish is sold. The same is true for farmers and their crops, and miners and their minerals. Just harvesting them is not an income-producing event. Attending a ballgame where a high-priced piece of memorabilia is about to be created is kind of like fishing, they reasoned, and so catching the prize, even if one keeps it rather than giving it back to the player, is not an income moment.

A bit strained, perhaps, but as a theory it works.

On to the gift tax. When wealthy people make huge gifts, they're subject to a tax, separate from the income tax, called the gift tax. When rich folk die and leave big wealth to their families, the tax is known as the estate tax. If an adoring fan who catches the ball gives it to Barry Bonds, is that a taxable gift?

I think so, but the IRS isn't pressing the point. The act of giving the ball to the player is not what they call a "qualified disclaimer," specifically exempt from the gift tax, because in order for a disclaimer to work, the fan couldn't say who gets the ball. By presenting it to Bonds, the fan is naming a new owner. Before it goes over the fence, the ball belongs to the home team of the game being played. And so it would seem that only transferring the ball back to the home team could constitute a tax-free disclaimer -- or so some think. But the IRS isn't going to use up the political capital to impose such a tax.

And what about Bonds? If he gets the ball back, either from the fan or from the home team, is that income to him? He seems like an artist, whose work is not taxed until it's sold. If I create a beautiful work of art and hang it on my own wall, that's clearly not taxable. For Bonds, that ball is value he created with his own efforts, and so it's what they call imputed income -- not taxed.

Thanks to everyone who's been alerting me to this pressing issue of national tax policy.

Comments (16)

But doesn't it belong also to the pitcher, who intended to deliver it to his teammate, the catcher, and who hoped that Bonds would NOT have any contact with it. Why is it analyzed as if it was Bonds's only?

As I understand the property rules, the ball never belongs to any of the players, unless it goes into the stands and a fan gives it to one of them.

Why not treat the value of the physical ball as income, say $10? Then, if and when the ball is sold, tax is due on the capital gain above and beyond the original $10 value of the baseball.

How does this compare to athletes who receive awards that have aftermarket value? For example, did OJ have to pay tax when he won his Heisman or only after selling it to pay legal fees? What about a Heisman winner who gives his trophy away or an heir who inheirits it? I don't know, I'm just thinking out loud here.

Of course, all of the rules can be changed by Congress at any time, but under present law:

Receipt of a prize is income.

Income received "in kind" is measured by the fair market value of the property received, not its cost.

The ball clearly has some kind of imputed value, but as we have no asset tax on individuals the guy who caught it is home free until he sells it. I agree with Chad on how it should be treated, but expect something much more complicated.

The ball has a clear and ascertainable fair market value the moment it's caught. That is the value that would be subject to tax if the tax indeed applied.

as we have no asset tax on individuals the guy who caught it is home free until he sells it

Even without an asset tax, increases to wealth are taxable as income. Which is why prizes are income.

But does the ball have a "clear and ascertainable fair market value?" The value cannot be determined, let alone realized, until it is sold. It makes more sense to me for the government to wait until it is sold so that real (as in reality) income has been realized.

And as far as the gift tax goes, the team or MLB as an organization would be liable for "giving" the ball to the lucky person. Does the gift tax apply to corporations?

The value cannot be determined... until it is sold.

I disagree. There are many sports memorabilia dealers who could easily appraise that ball even before it goes over the fence.

Does the gift tax apply to corporations?


Jack wrote:
"When rich folk die and leave big wealth to their families, the tax is known as the estate tax."

Jack, Jack, Jack...
You've failed to learn the Republican-speak of current years. The Repubs use the term "death tax" rather than "estate tax."

So much for their theory of Inculturation-by-Osmosis!

Throw it back. It's bogus.

The Repubs use the term "death tax" rather than "estate tax."

And it's quite effective. Too bad we folks on the left are not quite so clever, or nasty.

Reading between the lines, are you saying that the best thing to do if I catch such a ball is to give it to my kids to sell?

For reasons not germane to this post, I don't think giving it to your kids to sell will save much tax, at least if they're under the age of 18. And if they're over 18 and you really give them the ball, you may never see the money!

The corollary to the following is what?

"It is enough to justify the deduction here that the transaction causing the loss was completed when the seizure was made." (274 U.S. 398)

Seems like a simple case of Recognition vs Realization of income. I suggest the person who has the home run ball keep his ticket stub to establish basis. I'd also keep my receipts for hot dogs, cotton candy, the $10 cups of Budweiser, parking, hotel rooms (if any - I've stayed at that hotel with the skybridge to the ballpark, not when the Padres were in town) connected to the game, the price of food purchased before/after the game in the Gas Lamp District and all the other costs associated with attending the game.

The realization vs recognition matter is a no brainer. Your CPA can make that case. If you're going to pay a tax attorney, you should go for every dime you can get, or what are they good for anyway? It's sort of like paying your physician to tell you what your RN knows better.

Whatever income is realized in this situation would automatically be recognized. The question is whether there has been realization, or just imputed income.

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