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Saturday, August 11, 2007
 
The Tax Implications of Bonds' Home Run Balls


Believe it or not, there are far more interesting legal issues surrounding the new home run record than steroids. For example, what are the tax ramifications to the fans who caught the record-tying 755th home run ball and the record-breaking 756th home run ball? Here on the blog, we very rarely discuss tax law issues in sports. It's one of those areas that people tend to shy away from either out of fear or boredom. But tax law and policy is actually a fascinating and intellectually stimulating subject area. My advice to any law student interested in eventually practicing sports law is to strongly consider taking a basic federal income tax course.

The fan who caught number 755 announced yesterday that he was going to sell the souvenir ball through SCP Auctions and SCP expects the ball to fetch at least $75,000 to $100,000. But the fan who caught number 756 told NBC's "Today Show" on Thursday that he was leaning toward keeping the ball, even though it could fetch around $500,000. So here's an interesting tax question: Does the fan recognize taxable gain when he catches the ball and takes possession, or does the fan recognize the gain when he sells or disposes of the ball?

There is a classic case in all the casebooks about a taxpayer who suddenly finds a bag of cash stashed away in an antique piano that he purchased years before. The court held that the taxpayer recognized taxable gain in the year he found the cash, not when he obtained the piano, because the cash wasn't reduced to possession until he actually found it. But I don't see how the IRS could take the position that the fan recognizes taxable gain when he takes possession of the ball. The reason being that the ball is not like cash, which would be recognizable gain because cash is immediately liquid. The ball is more like stock; until it is liquidated (i.e. sale or dispossession), its value is not recognized by the taxpayer. Treating the gain as taxable on sale or dispossession of the ball makes sense from a policy standpoint as well. While the IRS could determine the amount of the gain prior to sale or dispossession based upon a reasonable estimate of the ball's value at the moment, that value is subject to major fluctuation up or down (much like stock) depending upon the results of baseball's steroid investigation as well as the future prospects of A-Rod challenging Bonds' record (which, by the way, is becoming more difficult for him as Bonds keeps hitting more home runs).

On the other hand, lottery winnings and non-cash prizes are subject to tax withholding. For example, if the fan had instead won a car at the game that night, the value of the car would be taxable to the fan this year. The ball is distinguishable from lottery winnings because it's not in the form of liquid cash like lottery winnings. But is the ball analogous to a non-cash prize such as a car? While both contain the element of "an accession of wealth," non-cash prizes (unlike the ball) typically result in immediate use and benefit to the taxpaper, e.g. the taxpayer gets to drive around in a brand new car or wear a shiny new watch out on the town.

The Associated Press notes that the IRS seems reluctant to clear up the confusion:

With six-figure treasures so rarely falling out of the sky, the agency declined to comment Wednesday on what regulations would apply and whether they would be enforced in the case of the Bonds ball. History does not provide much of a guide since most fans who have been lucky enough to snag previous long balls have chosen to sell their mementos. And at least one ball was as much a source of embarrassment for the IRS as revenue. As Mark McGwire chased the mark for most home runs in a season in 1998, IRS officials initially said the ball that broke Roger Maris' long-standing record could be subject to taxes even if it were returned to McGwire. The statements were ridiculed by politicians and quickly disavowed by the agency's top brass. "All I know is that the fan who gives back the home run ball deserves a round of applause, not a big tax bill," then-IRS Commissioner Charles Rossotti said at the time.

And then there is the issue of whether the gain is ordinary gain subject to higher ordinary income tax rates, or capital gain subject to lower capital gains rates. Don't worry, I won't torture you any longer.....






15 Comments:

I would hope that the IRS would be persuaded that the ball should have a tax value that is essentially nominal because the ball has no value different from any other caught home run ball until placed into the market. The potential values being bandied around vary widely.

Bonds 70th home run ball recently sold for $14,400 after being purchased for $60,000 previously.

Anonymous Anonymous -- 8/11/2007 9:42 AM  


Rick-
I know this sounds like a koan, but how are there laws for a law that doesn't exist?...

Blogger D-Wil -- 8/11/2007 9:45 AM  


...to clarify my previous comment....

i.e. a law that only pertains to Federal employees and corporations (if I'm not mistaken), but certainly not the personal ownership of a baseball?

Blogger D-Wil -- 8/11/2007 9:52 AM  


Prof. Karcher, great post!

This is definately a good question, but it would seem that he couldn't get taxed until after he sells it, since he hasn't actually realized a gain until the ball sells. Now, its been a year or so since I had tax law, and I have tried my best to forget it :), but I guess you could make the argument that what he paid for admission to the ballpark was an investment, and what he got out this investment was the ball, therefore, the difference between the price of his ticket and what the ball sold for is a return on his investment, thereby subject to capital gains tax of 15% instead of just tacking it on to regular income. sounds like a long shot but thats my capital gains argument.

Blogger Jimmy H -- 8/11/2007 11:25 PM  


Anon,

You raise a good point. Even if the IRS took the position that the fan recognizes gain upon possession, how is the gain to be determined? It would seem that the fan would have adequate support in which to successfully challenge any assessment of its value prior to a sale.

d-wil,

Love the koan reference. While I believe contemplating your naval can be healthy for the mind and soul, unfortunately it doesn't help on April 15 when individuals (as well as corporations) must pay tax on gains accumulated from the sale of appreciated property, unless the tax code expressly enumerates an exception, e.g. the sale of your primary residence.

Jimmy,

I think the property held for investment purposes is the best argument for capital gains treatment. But if it's capital, maybe it would be treated as short-term and subject to ordinary rates? -- sounds like a potential law review article topic for you.

Blogger Rick Karcher -- 8/12/2007 7:28 AM  


This comment has been removed by the author.

Blogger Lou Pickney -- 8/12/2007 11:21 AM  


This reminds me of the discussion about the possibility of taxes being due on a McGwire or Sosa baseball even if the person who caught it gave it back.

SI article from 1998 on the topic

Blogger Lou Pickney -- 8/12/2007 11:22 AM  


Oh if I was still in school I would have done an article on this in a heartbeat, but without westlaw access its a tough one, you should definately try to get someone in the certificate program to do it as an ALWR.

Blogger Jimmy H -- 8/12/2007 2:01 PM  


Sports memorabilia prices are such arbitrary numbers. I've collected numerous pieces over the years and my dad always reminded me when I was a kid that something was only worth what somebody was willing to pay for it. I guess my question is that I don't understand how the IRS could come up with a value for the ball until it went to auction (or was sold to an individual buyer). Most estimates have the ball valued upwards of $500,000, but until it is sold I would argue the value remained around $20 (the price anyone could walk into a Sports Authority and buy a ball for).

Anonymous Brad -- 8/13/2007 10:12 AM  


If you stay with the stock analogy, the question for me becomes whether a person taking the ball as a bequest could get a stepped-up basis at death (assuming the holder keeps it for 50-odd years), and what the FMV of the ball would be at the time of the bequest...ostensibly quite high. Not only may this decrease the tax liability owed, but it may serve to increase the price of the ball, as the populous may treat Bonds with a less critical eye 50 years down the road.

However, this plan fails to account for A-Rod potentially breaking the record and significantly decreasing the value of the ball.

Blogger Brad -- 8/13/2007 12:30 PM  


Brad,

Great point to bring in the question of stepped up basis, I didn't even consider that when I started thinking about this issue, I guess I assumed that the ball would just get sold. But if we are talking of pre sale tax liability then stepped a stepped up should definately be a point of discussion.

Blogger Jimmy H -- 8/13/2007 1:11 PM  


To me, there's really no doubt that the ball is taxable at it's FMV at the time it was 'found'. If I find a $60k Rolex in the gutter, I have to pay tax on it. I don't see how this is different. It's income to the catcher.

I also think the tax rate would be ordinary. Here's a bad analogy: My employer requires me to wear socks. I 'invested' in some socks, the return on which is my salary. Therefore, my salary should be a capital gain.

The two questions left are: What's the FMV and what is the IRS going to do. The catcher gets to set the FMV when he declares it on his tax return. He doesn't challenge the IRS's valuation, they challenge his. I would guess that if he puts a reasonable, non-zero number on there, they wouldn't challenge it.

That's if they intended to challenge it at all. A strict application in the McGwire scenario is that the catcher pays income tax on the ball when caught, then pays gift tax when he gives it back to McGwire. Thankfully, the IRS is allowed to be capricious in that case, and they probably would in this case too.

Blogger Dick Kusleika -- 8/13/2007 2:31 PM  


The problem with determining a FMV to the baseball is that it is not the same as the Rolex. There are plenty of facts that suggest what a Rolex should sell for at any given condition of the whatch, we do not have that for the baseball. So what other way do we have of setting a FMV? If we take an IRS scenario of a donated item, we could use expert opinion or sale of comparative items, but could you rely on that here? I dont think so, items such as these are one of a kind, the value is subject to all kinds factors such as popularity, ambiguity, and in this case steroids. Expert opinions won't do us much good either since the "experts" would be the auction houses which all have a financial interest in a future sale, hardly reliable.

If the owner DOES put a $ value on the ball as Dick suggests, chances are the IRS will decide to accept that value and not push it. However, that scenario would then becoame the best support for use of capital gains when the ball is sold, as holding on to the ball would certainly be an investment.

I agree with you Dick, the sock analogy was a bad one...a really bad one... A record baseball can hardly be compared to an everyday item such a sock. And the IRS actually references sports memorabilia as a collection item. Collection items would most likley viewed as investments by the IRS, so capital gains applies here, not ordinary income.

Blogger Jimmy H -- 8/13/2007 3:50 PM  


I'm not sure how catching a batted ball can qualify as income; it is the same ball as any ball batted fair or foul that is allowed, through the agreement between the baseball club and the license-purchaser (ie ticketholder), to be kept as a condition of the contract.

This could be expanded further to include MLB, as the balls for Bonds were supplied from the Commissioner's Office and individually numbered. The fact they were numbered is an implicit assumption that they have inherent value.

A better question might be if I catch a player's (for this instance, Bonds) first home run. That ball, wherever it is, is probably worth a good amount of money, too; at the time of its capture, it had little value. Thus only at the moment of its sale on the market are gains realized, and this is maybe a better argument for a capital gains-oriented perspective on sensational items of memorabilia.

I'm not a tax attorney, alas.

Anonymous tim -- 8/13/2007 3:53 PM  


Bonds last homerun ball will again be worth quite a lot but it may not be evident for up to a year.

OK -- say you find a rare fossil. Say something marketable like a T-rex. What are the tax implications here? What about if you are a researcher who wants to hang on to it for study? What if you want to donate it to a museum? What if you decide to bury it in a pile of gravel? What if you decide to destroy it with a bulldozer?

Do tax laws, in essence, require you to make the most efficient economic decision?

Anonymous Anonymous -- 8/22/2007 8:57 AM  


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