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(Bloomberg Law) — Million-dollar baseballs are raining down on fans like pennies from heaven, and the taxman isn’t far behind.
One of those balls, potentially worth $2 million, fell into a fan’s hands Tuesday night when New York Yankee Aaron Judge broke the American League single-season home run record. Both Yankees and Texas Rangers fans erupted as Judge belted out his 62nd, besting the 61-homer record set by Yankee legend Roger Maris in 1961.
For the lucky fan who caught the ball—identified by a local TV station as Cory Youmans (a vice president at a local branch of Fisher Investments)—and anyone else snagging a record-setting ball this season, the Internal Revenue Service’s rules governing the immediate tax implications have all the clarity and precision of a Yogi Berra aphorism.
Chris Ivy, the director of sports auctions at Dallas-based Heritage Auction Galleries, was at the stadium Tuesday night when Youmans made the catch.
“He was asked last night what his plans were for the ball and he said ‘I haven’t really thought about it yet,” Ivy said in an interview Wednesday, and estimated that the baseball is worth at least $2 million.
The only IRS guidance statement addressing rare, record-setting baseballs—a three-paragraph press release from 1998—has limited value for any bleacher bum hoping to capitalize on one of these five-ounce nuggets of gold. Then-Commissioner Charles Rossotti lamented in the thin statement that “sometimes pieces of the tax code can be as hard to understand as the infield fly rule.”
Asked before Judge’s historic home run whether the government intended to update its views after 24 years, Treasury Department senior spokesperson Julia Krieger would only say, “we don’t have anything to add.”
Meanwhile, fans and sports memorabilia collectors are keenly aware that Judge isn’t the only one adding a milestone to baseball’s history. Just before Judge clinched his record, Cardinals veteran Albert Pujols hit his 703rd lifetime homer on Monday. The feat elevates Pujols well into the “700 club,” which includes all stars Barry Bonds (762 career home runs), Hank Aaron (755), and Babe Ruth (714). Fans are also aware that both Judge and Pujols could extend their records before the regular season concludes tonight.
The sport hasn’t seen this kind of hysteria since the late 1990s to early 2000s when Bonds, Mark McGwire, and Sammy Sosa set a string of single-season home run records. While each surpassed Judge’s accomplishments, their records are considered by many to be tainted by allegations the trio used performance-enhancing drugs.
Unprecedented Momentum
A rare constellation of factors—including a “neater, cleaner era” of baseball, a 20-year drought of home run derbies, and spiking prices for sports collectibles—is creating unprecedented momentum behind balls hit by Judge and Pujols, said Michael Heffner, president of the sports memorabilia appraiser and auction house Lelands.
“This is a goldmine for the fans sitting in the stands,” Heffner said. “I don’t think we’ve seen this many milestones and records since the era of Bonds, McGwire, and Sosa.”
So what’s a Judge or Pujols ball really worth?
Values are hard to predict, but Heffner said several of Judge’s late-season balls would likely be worth $1 million and perhaps as much as $2 million. Before Judge’s latest record, Heffner estimated that his 60th home run ball would be valuable because it tied Ruth’s 1927 season record, and the 61st ball would be expensive because it tied Maris. Judge’s number 62 also would be pricey, but any final bleacher-busting ball of the season would likely be the most expensive of the lot.
No disrespect to the significant accomplishments of Pujols, but Heffner said balls surpassing the 700-career homer mark would likely fetch six figures. Judge balls have an edge because “anything having to do with the Yankees makes it more valuable than just about any other team in baseball.”
Treasure Trove
Addressing the tax consequences linked to any of these balls is fraught with “uncertainty” and conflicting opinions, said Michael J. Graetz, emeritus law professor at Yale Law School and emeritus tax law professor at Columbia Law School and a former deputy assistant Treasury secretary for tax policy.
Taken literally, the tax code would pull any fan catching one of Judge’s pricey baseballs into the so-called “treasure trove regulation,” Graetz said. The regulation (Section 1.61-14) holds that windfalls dropping into a taxpayer’s lap must be immediately recognized as ordinary income. In the context of a million-dollar baseball, the tax bill would come to $332,955 for joint filers after the 37% top marginal rate is applied. State income taxes could send the final tax bill to $50,000 to $100,000 higher.
The tax code also might trigger a gift tax obligation for any unsuspecting fan handing a million-dollar ball back to Judge or the Yankees, an expensive proposition given the 40% top marginal rate.
Whether the IRS would ever apply the treasure trove analysis or the gift tax is another question.
In 1998, when McGwire and Sosa were locked in an epic battle to be crowned home run king, an IRS spokesman unleashed a storm of fury, even within Congress, by saying that any ebullient fan handing a record-setting ball back to the player would be served with an onerous gift tax bill. Rossotti called in Graetz to help resolve the bubbling tax dispute.
That resulting three-paragraph press release, Graetz currently concedes, only solved a portion of the tax problems. Interpreting tax law principles that permit a taxpayer to decline a prize with no tax consequences, the IRS said at the time no income or gift tax obligations would be triggered if the person returned the million-dollar baseball. With a flourish, Rossotti added the fan “deserves a round of applause, not a big tax bill.”
The IRS, however, punted on the larger tax questions for those choosing to sell their new-found treasure, or park it in a display case for possible sale at a future date. The agency offered little clarity, commenting “the tax results may be different if the fan decided to sell the ball.”
Good Publicity
The academic debates around the literal requirements of the treasure trove regulation drive former IRS chief counsel Donald Korb bananas.
As a matter of reasonable tax administration, there’s no way the IRS would demand a taxpayer immediately recognize a million-dollar baseball under the income or gift taxes, said Korb, who is now of counsel with Sullivan & Cromwell LLP.
“If the IRS Commissioner Chuck Rettig were asked the question, there is no doubt in my mind that he would say that merely catching the ball does not result in taxable income for the lucky fan,” said Korb, a lifelong supporter of Cleveland’s baseball team.
The IRS should keep its mitts off any million-dollar baseballs until the fan decides to sell it, he advised. Depending on the timing, the sale might be characterized as a short-term capital gain or a long-term gain. In the context of a short-term gain, the ball would be taxed at the same rate as ordinary income. Record-setting baseballs held for more than a year would be taxed at the 28% long-term rate on collectibles.
Graetz said he’s sympathetic to abandonment of the treasure trove logic and adopting Korb’s approach, adding that IRS commissioners need to apply the code in a practical fashion.
“As Rossotti figured out, this is not good publicity for the IRS,” said Graetz, who roots for Atlanta’s baseball team. “Why would the commissioner want to give everyone who loves the Yankees a reason to hate the IRS?”
‘Fair and Manageable’
Andrew Appleby, a tax law professor at Stetson University, offered a hybrid solution that blends features of the treasure trove and capital gains strategies.
The only “fair and manageable” solution is for the IRS to immediately tax the lucky baseball catcher on the retail price of the baseball, roughly $25, and then treat the increase in value as unrealized gain. Using this logic the gain would be taxed when, if ever, the historic baseball is sold, Appleby said.
The appraiser Heffner has said he’s heard many of these theories over the years, and he’s still confused.
“The tax advice I provide is, please talk to your accountant,” he said.
To contact the reporter on this story: Michael J. Bologna in Chicago at [email protected]
To contact the editors responsible for this story: Kimberly Wayne at [email protected]; Kathy Larsen at [email protected]
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