Sports Law Blog
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Tuesday, August 28, 2007
Taxing and Selling the Barry Bonds Home Run Ball
Rick commented several weeks ago on the tax consequences that might befall Matt Murphy for catching Barry Bonds' 756th home run ball. Last week came reports that Murphy was going to sell the ball specifically so he could afford the coming tax bill.
Andre Smith, FIU colleague who teaches and writes on tax and frequent guest at Sports Law Blog, adds his two cents:
I disagree with IRS attempts to collect taxes presently from Matt Murphy, the catcher of Bonds’ 756th home run. In my view, catching a baseball is not a taxable event pursuant to section 1001 of the Internal Revenue Code.
“Income” includes accessions to wealth, CLEARLY REALIZED, over which the taxpayer has dominion and control. Glenshaw Glass v. Commissioner. Section 61 of the IRC requires taxpayers to include in their gross income “income from whatever source derived.” In section 61, Congress provides a list of types of income, but also declares that the list is not exhaustive. Fortunately for Mr. Murphy, Congress specifically contemplates his situation, “gains derived from dealings in property.” Unfortunately for the IRS, gains derived from dealings in property are determined pursuant to section 1001, which states that “the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis.”
When Mr. Murphy caught the baseball, he had not experienced a taxable event, he merely established his ‘basis’ in the property such that if he eventually disposed of it his tax liability would be based on how much he got over what he spent to get it. His basis in the ball is either zero (likely), or the price of his ticket (unlikely). When, and only when, he disposes of the ball does section 61 require him to report his “gains from dealing” with this property. Until then, his dealings with the property have only begun. He may have wealth in a theoretical sense, but no actual wealth has been realized.
The Supreme Court has held that found money constitutes income, even though finding things is not specifically listed as an income generating activity. Cesarini v. U.S. In the Cesarini case, a taxpayer found $5,000 hiding in a piano they purchased. The court held that treasure trove is includable in gross income. But Cesarini is distinguishable because in Cesarini the taxpayer found money where Mr. Murphy ‘found’ property. Had Mr. Murphy caught $5,000 in cash, he would be taxed presently with no argument. However, Mr. Murphy’s wealth is theoretical, not real. To the extent Cesarini is the basis for taxing Mr. Murphy, it is being abused by the IRS.
The realization requirement with respect to property cannot be overstated. It is why the IRS cannot tax you on the present value of your stock portfolio. Yes, you have wealth, wealth you can even put to use by using it as collateral for loans. Still, the IRS cannot tax you until you realize it, until you dispose of that property for something else (cash or other property or services rendered). Regardless how much we “know” about the ball’s value, it is not taxable until that value is realized by the taxpayer.
Another counter-argument the IRS may use is that the receipt of property for free has been taxed with less controversy. Remember the small furor over taxing entertainers on the value of so-called ‘goodie bags’ they received when participating on award shows like the Oscars. Another close analogy is taxation on the present value of stock options. These situations are also distinguishable, in that Congress specifically deals with them in section 61 under “compensation for services, including fees, commissions, fringe benefits, and similar items.” Mr. Murphy is not receiving any form of compensation. Thus, these situations are irrelevant.
Mr. Murphy is not living the good life off of profits earned while leaving the rest of us to pick up the tab for our massive federal government. He caught a ball that will likely have value when he disposes of it (provided he makes sure the dog doesn’t get to it). But the IRS must wait until he disposes of it, until he actually gains something from dealing with it, before they can tax him on it. Otherwise, if you discover an oil well or diamond mine, the IRS can tax you on its value before you ever attempt to extract a drop. Until cash is derived, an oil well is just a hole in the ground and Barry’s 756th is merely a tightly wound ball of string with a small dent in it.