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.....

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