Barry Bonds' 756th Home Run Ball: The (Tax) Catch

Barry Bonds' Home Run #756: There Could be a (Tax) Catch

by Joseph B. Darby III, Esq.

Sometime in the next week or so, San Francisco Giants slugger Barry Bonds is expected to hit the 756th home run of his controversial career (as I pen these words, Bonds is rounding the proverbial third base with 755) and thus break Hank Aaron’s major league career record of 755. At the climactic moment, Bonds will deposit into the bleachers (and into the hands of a very fortunate fan) a standard-issue major league baseball with a normal retail value of about $14 that, upon arrival, will instantly appreciate in value to hundreds of thousands or even millions of dollars, if sold in the baseball memorabilia market.

This home run will certainly be an historic event. The question is whether “Catch 756” will also be a taxable event for the “lucky” fan.

This issue is instantly intriguing, and more than just academic. In 1998, when Mark McGuire hit his 70th home run in 1998 to set what was then a single-season home-run record, baseball collectibles (like almost everything else in 1998) were in the throes of a market frenzy; the ball was subsequently sold for a staggering $3 million. Similarly, Hank Aaron’s 755th home-run ball sold earlier in the 1990s for $650,000. Bonds’ record blast will be somewhat stigmatized by the steroids controversy that swirls around him, but even so the ball is estimated in advance to be worth approximately $500,000, and perhaps far more.

Faced with that kind of instant revenue, it would not be surprising if the Internal Revenue Service (IRS) decided to play a little hard ball itself.

The tax issue is as highly charged as a typical Bonds home run blast. Whether “Catch 756” is or should be taxable has been discussed in a variety of publications, including The Wall Street Journal, and suffice it to say that most baseball fans (and taxpayers) are appalled at the thought that a home-run ball falling into your lap as a souvenir could be followed in short order by a tax bill from the IRS.

However, taxation of Catch 756 is not far-fetched. In fact, if the tax law is applied with the same careful scrutiny that umpires give to a typical major league game, it is not even a close call: A ball worth $500,000 is an “ascension to wealth” and is taxable income.

There are, however, a number of additional tax questions that may be a curve ball even to the IRS. Is the ball taxable when caught or only when sold? Can Taxpayer 756 treat his ticket cost (and maybe his hot dog and beers at the game) as either deductible expenses or as tax basis in the ball when he sells it? If the ball generates taxable income when caught, is it ordinary income or capital gain? Does the answer to the preceding question change if Taxpayer 756 holds the ball for a year and a day and then sells it on eBay?

These are things that inquiring tax minds want to know. And, with this record-breaking hit imminent, I have taken it upon myself to hunker down behind home plate and play the role of tax umpire. Like every good umpire, I promise only this: I will call ’em the way I see ’em.

Strike 1: Catch 756 is Income to Taxpayer 756

The first thing to realize is that, when it comes to tax law, the IRS is playing with a definite home field advantage. In a recent tax case with the too-good-to-be-true name of Murphy v. IRS1 (it was instantly dubbed “Murphy’s Law”), the United States Court of Appeals for the D.C. Circuit examined in fulsome detail the question of what constitutes “income” for purposes of U.S. income taxation.

The Murphy case was the tax-law equivalent of a Casey-at-the-Bat moment: In its big chance at the plate, the federal court of appeals, being not particularly well versed in the ground rules of the tax game, whiffed badly. What the court did was reach the astonishing (initial) conclusion that § 104(a)(2) of the Internal Revenue Code (Code) was “unconstitutional,” a decision that not only ignored about a century or so of jurisprudence but also, for all intents and purposes, abolished the Internal Revenue Code, and with it, the United States government.

The initial Murphy decision was booed vociferously by tax experts and other fans of coherent legal results, all of whom let the court know in no uncertain terms that it had dropped the ball. After several months of jarring ridicule from the cheap seats, the Court voluntarily vacated its decision,2 and, on rehearing, reached the legally correct conclusion that the term “income” is defined very broadly for purposes of the Code, and basically includes any “ascension to wealth”3 that is not expressly excluded from tax under the Code.

Applying Murphy’s Law to the matter of Catch 756, it is clear that catching a baseball worth hundreds of thousands of dollars is (assuming you can keep nearby fans from wrestling it away from you) an immediate and valuable ascension to wealth. Granted, the recipient/beneficiary/ball catcher has done nothing whatsoever to “earn” the income, but this does not mean it is not income—it merely means that it is not subject to social security or self-employment taxes on earned income and wages.

Income over the years has been defined to include prizes and awards, gambling winnings, lottery winnings, lost property found by the taxpayer, buried treasure dug up by the taxpayer, and even the benefit enjoyed if someone else pays your income taxes.4 Income even includes the rewards paid by the IRS to people who provide information that leads to the collection of additional taxes.5 (This legendary IRS program, known as the “drop a dime” program, even has its own form, Form 211, which also comes in Spanish, Form 211(SP).)

Under Murphy’s Law, every ascension to wealth is income unless there is an explicit exclusion from taxation under the Code. For example, a scholarship received by a college student is not income—but only because it is expressly excluded in Code § 117. When a lessee makes improvements to a landlord’s property, and the improvements revert to the landlord at the end of the lease, this reversion is not income to the landlord—but only because of the exclusion contained in Code § 109.

If you own your own home, federal income tax law does not currently treat you as realizing income equal to the rental value of your house—but it probably could. In fact, this issue was considered rather seriously when the very first U.S. income tax was imposed during the American Civil War. Fortunately, President Abraham Lincoln and his administration sensibly recognized that, if they tried to take that position, they would have a civil war on their hands—in addition to the one they were already fighting—and so this particular ascension to wealth has not, historically, been considered taxable income. Neither has catching a souvenir baseball at a baseball game—but there is a first time for everything.

The point is, just because it seems unfair to tax something, that does not make it exempt from taxation. I once represented an individual who won a £100,000 shopping spree at Harrods department store in London, as a part of an airline promotion. The taxpayer, giddy with delight, called me to ask about possible tax consequences. The bad news was that receipt of the £100,000 prize was fully taxable as income (at approximately a 40 percent combined federal and state income tax rate) plus, all purchases brought back from London to the United States would be subject to a 20 percent duty (another £20,000 in tax). In effect, the £100,000 “free” shopping spree was taxable at a combined rate of 60 percent, and thus amounted to a 40 percent discount on the first £100,000 of merchandise. The taxpayer went from giddy to morose—taxes can have that effect on people.

The point is that Taxpayer 756 does not want to be caught off base. Taxpayer 756 might be tempted to slide one past the IRS by trying to keep a low profile. However, this plan has certain drawbacks. For example, every camera and microphone in America will be trained on the person who makes Catch 756, and so relying on anonymity to protect you has obvious shortcomings.

Rather than try to avoid the tax tag, Taxpayer 756 may just decide to proclaim his ascension to wealth and pay the tax. After all, sitting in the bleachers and having $500,000 drop into your lap would, by anyone’s standards, constitute a real steal: No one would blame Taxpayer 756 if he felt like he, too, had just hit a home run. Taxpayer 756 can reap the glory, sell the ball—and pay the taxes.

Still another distinct possibility is that Taxpayer 756 might well decide to catch the ball, tuck it away, and then run for luck. After all, the IRS, to this author’s knowledge, has never attempted to assert that a baseball caught at a baseball game is taxable income. In short, there is a very distinct possibility that the IRS will drop the ball on this one. However, banking on an IRS error seems, to say the least, a chancy strategy.

Strike 2: Catch 756 Is Taxable at the Time of the Catch

The next interesting tax question raised by Catch 756 is when, in time, the income is recognized by Taxpayer 756. Is it when he catches the ball? Or is it when he goes to sell the ball? The correct answer should be that the income event occurs at the time of the catch. That is when the taxpayer experiences the “ascension to wealth.” The fact that the ascension arrives in the form of a Rawlings baseball should make no difference from a tax perspective. After all, when it comes to income taxes it does not matter whether you are paid in cash or in “kind”—cash or cabbages, stock or (Barry) Bonds home-run balls, it is all the same to the IRS.

It is true that some ascensions to wealth are not “realized” immediately. For example, if the “Bonds” you are holding are U.S. Treasury Bonds, and they appreciate in value due to fluctuations in interest rates, this built-in appreciation is not taxable unless or until the bonds are sold. Similarly, appreciation in the value of stocks, or real property, is not taxable until there is a sale or exchange transaction. However, catching a baseball seems analogous to winning a prize in a contest, finding a lost item or discovering a buried treasure—all of which are income at the time that the winner/finder/discoverer has unfettered legal ownership of the applicable property.

Ball 1: I Caught The Ball —But It Belongs to Someone Else

A situation that arises rather frequently with lottery tickets is that two or more people agree in advance to “pool” their tickets and their winnings. Such “lottery partnerships” have been respected by the IRS and upheld in courts as bona fide arrangements for income tax purposes.
It is conceivable that the fans in the right field bleachers (or the kayakers in McCovey Cove behind the right field wall in San Francisco) might do something very smart and agree not to beat each other to a bloody pulp while scrambling for the ball, and instead agree to share the ownership of the baseball jointly among themselves. Getting everyone to sign up would be a considerable feat, but it is not out of the realm of possibility that the ball will be caught, not by an individual sports fan, but by a member of an impromptu “bleachers partnership.” For example, four friends sitting together at the game might agree to share the ball equally if any one of them catches it—in which case the four would split both the economic benefits and the tax consequences. After all, baseball itself is a team game, so why shouldn’t the same principle apply in the stands?

Ball 2: I Should Be Allowed to Deduct the Cost of My Season Tickets

While Catch 756 should generate income to Taxpayer 756 under the principles of Murphy’s law, the IRS would be in foul territory if it tried to deny Taxpayer 756 the right to deduct some of his expenses. For example, going to the ballpark to catch baseballs is probably not a “trade or business” for tax purposes, and instead would be a recreational or “hobby” activity governed by Code § 183. However, that Code section generally allows a taxpayer to deduct expenses up to the amount of any income realized from the “hobby” activity.

In the case of Taxpayer 756, he clearly ought to be able to claim the cost of his ticket as a deductible expense. Don’t laugh: If Taxpayer 756 bought a “scalped” ticket, the cost could be hundreds or even thousands of dollars for a game with this kind of unique historical importance. For that reason, Taxpayer 756 might further assert that he should be allowed to deduct the full cost of his season tickets: The “hobby” activity is attending baseball games, and all costs of the hobby should be netted against the unexpected windfall of Catch 756. As the tax umpire, I think these IRS pitches are outside the strike zone, and I would rule in favor of the taxpayer.

Ball 3: The Beer and Hot Dogs Should Also Be Deductible

Taxpayer 756 might argue that he should also be allowed to deduct all related expenses incurred in attending the game, including parking, seats for the other members of his family (I couldn’t go unless I brought the kids with me!), hot dogs (I had to eat to maintain my strength!), beers (It was hot out there, your honor!), and cracker jacks (I had to keep the kids quiet so that I could concentrate on catching the ball!). These are tough calls for the tax umpire, but I think they are just off the outside corner of the plate, and so I would rule in the taxpayer’s favor on these as well.

The argument for allowing deductibility of these “ballgame” expenses is not totally far fetched, since you can’t catch a baseball without attending a baseball game, and you can’t attend a baseball game without incurring these “reasonable” expenses, so the arguments might well stand up in litigation—although neither the IRS nor the taxpayer would waste the time to take these issues to court. Practically speaking, the IRS would likely agree to any reasonable expenses incurred at the game that Taxpayer 756 could document, since all these amounts added together will be little more than “chump change” compared to the value of Catch 756.

Fouled Out of Play: The Catch Generates Ordinary Income; Afterwards, the Ball is a Capital (Collectible) Asset

Deciding whether Catch 756 generates ordinary income or capital gain is a very interesting exercise, in part because one has to decide what, exactly, Taxpayer 756 did to generate the income. First of all, the baseball itself is probably not a “capital asset” in the hands of the taxpayer until it is actually in the hands of the taxpayer. In other words, “catching” the ball is probably the income event, not “holding” the ball. Arguably, catching the ball is an activity that is “ordinary” in nature, kind of like finding buried treasure or answering the questions correctly on Jeopardy.

By contrast, once the ball is in the hands of Taxpayer 756, Catch 756 should thereafter be a capital asset, and eligible for favorable capital gains tax rates if held for more than one year. One significant issue is whether the baseball would be subject to the normal 15% capital gains tax rate, or th special 28% rate imposed on “collectibles.” Remarkably enough, although Catch 756 would probably fit any baseball fan’s definition of “collectible” it may not fit the definition in the Code, which specifies that a collectible is defined in Code Section 408(m), and is comprised of “any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or any other tangible personal property specified by IRS for this purpose.” Thus far, it appears that the IRS has neglected to specify home runs balls within the scope of collectibles, and thus is may well qualify for the favorable 15% rate.

As a practical matter, if Taxpayer 756 decides to hold Catch 756 rather than sell it right away, he might argue that the ball is worth a specified amount, based on an appraisal, e.g., $500,000, at the time of Catch 756. If the ball were then held for a period of more than one year before being sold, the increase in value would be characterized as capital gain, subject to the special capital gains tax rate.

By the way, like the game of baseball, assets have “bases” for tax purposes. In this case, assuming Catch 756 was reported as an ordinary income event in the year of catch (and assuming tax were paid on the reported amount from other funds), the ball should then have a tax basis equal to the amount of income reported. Any growth in value (or decrease in value) after the catch date would represent the amount of capital gain (or loss) recognized on a later sale.

The 3-2 Pitch: What I Think Will Really Happen

Tax experts, like physicists, are notorious for getting immersed in the minutiae. The reality is that much of the foregoing discussion is about tax theory rather than real IRS practice. The IRS to date has been conspicuously silent about how it views the tax treatment of astonishingly valuable baseballs being distributed randomly to fans (or passersby) through the means of batting.

In fact, history suggests that the IRS tends to show up at the same time the money shows up—when a ball is sold. In most cases, a baseball fan will either sell a souvenir ball right away and thus convert the ball to cash in the same year, or (less often, but not infrequently) will return it to the ballplayer. In the former case, the IRS wants its share of any cash; in the latter case, to my knowledge, the IRS has never attempted to tax this act of generosity (although, again, under a strict construction of the tax law the IRS could probably treat a catch-and-return, as (1) taxable income, followed by (2) a taxable gift).

And what if Taxpayer 756 catches the ball and decides to keep it? Based on past history, the IRS has not made a major effort to keep track of and tax such mementos. However, be aware that the IRS in recent years has become aggressive in tracking income of sports stars from card shows and autograph sessions, and therefore the taxation of fans who catch million-dollar baseballs is not out of the question.

In short, if Taxpayer 756 decides to hold onto the Catch 756, don’t be surprised if the IRS tags him with a hefty tax bill. As all of us are reminded every April 15th, the IRS’s job is to take the requisite piece out of every taxpayer’s hide—whether the ascension to wealth for the previous year is received in the form of cash, real estate or cowhide-covered balls.

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1Marrita Murphy v. IRS, No. 05-5139 (C.A.D.C. August 22, 2005), 460 F.3d 79, 2006-2 U.S. Tax Cas. (CCH) paragr. 50,476, 2006 WL 2411372 (D.C. Cir. Aug. 22, 2006), reversing 362 F. Supp.2d 206 (D.D.C. March 22, 2005).
2Docket, case no. 05-5139, unnumbered entry on April 23, 2007, Murphy v. Internal Revenue Service, United States Court of Appeals for the District of Columbia Circuit.
3Income is generally all ascensions to wealth except a return of capital or an unrealized appreciation in value.
4See, e.g., Rev. Rul. 53-61; Reg. § 1.61-14(a).
5Internal Revenue Manual 25.2.2.2(2), 4/27/1999.