Take Me Out to the Tax Game
Well it’s now September and we are back to work after the long Labor Day weekend here in Colorado. As we tune back into our work schedule we decided to bring you a great business article from Larry Stone. Larry talks about the great American and summer past time – Baseball… with a twist. Read on to be entertained and a little bit flabbergasted.
Every child who attends a “Big League” ball game dreams of catching a foul ball – or even better, a home run. For Tom Sherrill, a California Angels fan from Pomona, California, that dream came true when he caught Albert Pujols’ 500th home run ball on May 22nd. To catch a 500th home run ball is an honor indeed. Only 25 players in major-league history have reached that 500 home run milestone.
But Tom didn’t just catch a piece of baseball history. He caught a tax problem, one that required him to make a vital decision on how to proceed with the bounties of his catch. Yes, the IRS sees this remarkable catch as a “taxable event.” The Internal Revenue Code Section 61 broadly defines gross income as “…all income from whatever source derived.” The taxation of “found” property has been discussed by tax geeks for a long time. (Now, tax geeks and baseball geeks can join together to take their geekery to new levels!)
Recently, Andrew Appleby published in the Vermont Law Review, a 30 page article called “Ball Busters: How the IRS Should Tax Record-Setting Baseballs and Other Found Property Under the Treasure Trove Regulation” (http://www.alstonprivacy.com/files/Publication/6fe419e6-53b4-4f99-af58-cd9129263ce3/Presentation/PublicationAttachment/d9251c12-8c40-4d36-8e7f-d35f6d8c6e11/Appleby%20Article.pdf). It discusses key tax issues such as returning the ball to the player, taxing the person catching the ball for the unrealized gain, taxing the future sale of the ball and the implications of the taxpayer destroying the ball caught.
After catching this record-breaking ball, two choices arise. The first choice is to keep the ball and pay the tax. The other choice is to return the ball and avoid the tax. In returning the ball, you could simply throw it back into the field. The easiest way to avoid all tax implications is to disclaim the property and have no income. An alternative is to return the ball to the hitter. From the IRS perspective, returning the ball to the hitter will still incur a gain to the person catching it and a possible gift tax for returning it. If the person catching the record-setting ball was to give it to charity, they would be required to consider it a gain — and only then would they be allowed to deduct it. But even then, their deduction is limited to 50% of their “adjusted gross income” for that year! (Are you ready to cry foul yet?)
During September 1998, as the nation waited for the home run hit by Mark McGwire to break Roger Maris’s record, the umpires at the IRS announced their policy to apply the gift tax to all persons who return the record-breaking ball to the hitter. This announcement was not well received. After a public uproar and Congressional inquiry, IRS Commissioner Charles Rossotti stated “All I know is that the fan who gives back the home run ball deserves a round of applause, not a big tax bill”.
Although the IRS has conceded that it would not tax a person who caught a record-breaking ball when returning it to the hitter, they point out the results are different when selling it. The IRS has not provided any formal guidance on the precise tax treatment of record-setting baseballs.
As for Tom, he decided to meet with Pujols after the game and returned the ball to him. Does he avoid all the tax implications by returning the ball? Well, he received other benefits by making his record-setting catch. Tom was wearing a San Diego Chargers shirt when catching the ball, the Chargers offered him an on-field pass for when they play Denver. A nutritional supplement company who sponsors Pujols gave him some protein shakes. In addition, Tom’s received travel to games and game tickets to celebrate his moments of fame in catching the memorial ball before returning to the service of his country. All these benefits received by him could be considered as taxable income by the IRS prior to returning to duty to protect our country.
None of us set out for the ball field planning to create tax problems. But as we dream of catching that record-setting home run, we should be aware that if that actually happens, we would need a plan to assist us in making the necessary decisions to save the most money in keeping our taxes low.