Tax implications of catching #756

[Imalawman]

A question for those of the profession. What is the tax implication if the person who caught the ball simply takes it and puts it in a box and forgets about it? It is no different than anyone who finds a rare coin on the ground, takes it home and throws it in the spare change jar.

You could also compare it to winning the lottery, which would be taxable.

I thought that you paid taxes only after exchanging the winning lottery ticket for cash. If I buy the winning ticket, and forget about it, I would still be liable for taxes? That doesn't seem right.

What I'm saying is that if you forget about the ticket and the IRS never knows you have it, no, you won't ever have to pay taxes. If they were to somehow find out that you own the winning ticket and could cash it in at any moment, they might find you in constructive receipt of income - even if you later forget to cash it in. That said, if you took steps to reject the winnings, then you likely wouldn't have to pay taxes on it.

What might be more likely is someone winning in November, but waiting until Jan. 1st to cash it in so as to get a years worth of interest before paying taxes or mixing it with some losses in that year. The IRS would probably not like that too much and require payment in the year you had constructive receipt. I've only read cases dealing with checks and the like, not a winning ticket, so I'm not certain about this exact issue. Its only my opinion from the constructive receipt cases I've had/have.

[silversopp]

What I'm saying is that if you forget about the ticket and the IRS never knows you have it, no, you won't ever have to pay taxes. If they were to somehow find out that you own the winning ticket and could cash it in at any moment, they might find you in constructive receipt of income -even if you later forget to cash it in.

This may be a very stupid question, but wouldn't it follow the same line of reasoning that one should be taxed when the stock you own goes up in value, since you could "cash it in" at any moment? Likewise, one is not taxed on the increasing value of their homes until they sell it (property taxes are, but not income tax). How is not excercising the option to cash in your lottery ticket any different than not excercising the option to cash in stocks or your home?

Another question. Suppose I win the lottery, and plan to cash in the ticket tomorrow morning. At night, my house catches on fire and burns everything to the ground. Will I be able to write off the loss of the value of the lotto jackpot when I file income taxes?

It seems that the reasoning behind when something should be taxed is inconsistent. I guess that's why it takes years or studying to figure it out.

[Cpt Banjo]

From this morning's Tax Notes Today, an article by Jeremiah Coder headlined, "IRS TRYING TO AVOID SECOND STRIKEOUT":

With all the hoopla surrounding Barry Bonds's 756th career home run, Tax Analysts was reminded of similar events in 1998, when Mark McGwire had a record season in baseball. Back then, the IRS hit a foul ball -- and nearly struck out with the public -- when it got involved in discussions surrounding the tax implications of possessing McGwire's record-breaking ball. Fortunately, the agency seems to have learned its lesson and is staying in the dugout this time.

After McGwire tied Roger Maris's record of 61 home runs hit in a single season, an IRS official, in response to a sports journalist's question about the tax effects on whoever captured the 62nd home run ball, said a fan who returned the ball to McGwire would face gift tax liability in return for his generosity.

That didn't sit well with the public or with members of Congress, both of whom immediately were in uproar over the statement. Then-Commissioner Charles O. Rossotti hastily issued a press release changing the IRS's official position, saying gift tax liability would not be incurred because returning the ball was analogous to declining a prize or returning unsolicited merchandise. That appeased the public, but it didn't sit well with tax lawyers who thought the IRS was capitulating in a way that ignored what the law really said.

Fast-forward to 2007. After Bonds's record homer on August 7, the IRS is declining to comment on the taxability of the ball that 22-year-old college student Matt Murphy caught. But that still leaves unanswered questions.

There is debate over the proper tax treatment in situations like this. One camp (which includes a majority of the tax bar) thinks capturing a ball is like discovering a treasure trove -- it's taxable income as soon as you get possession, valued at the fair market value at the time of possession. Others (like the IRS in 1998) say there's no tax consequence on receipt until the possessor sells the ball. (For an in-depth analysis of those positions, see "Home Run Balls and Nettlesome Tax Problems," Tax Notes, Sept. 14, 1998, p. 1364, Doc 98-27931, or 98 TNT 177-78; "IRS Hits Foul Ball in Home Run Race," Tax Notes, Sept. 14, 1998, p. 1250, Doc 98-27586, or 98 TNT 174-2; and "Professors Look at Taxing Baseballs and Other Found Property," Tax Notes, Aug. 30, 1999, p. 1299, Doc 1999-28287, or 1999 TNT 167-94.) Only true tax geeks could get excited about figuring out if a baseball is an item of ordinary income or capital gain and its appropriate basis. There's also the unlikely but important question of whether a gift tax is involved should Murphy give the ball back to Bonds. (Bonds said he doesn't want it.)

Murphy is reportedly undecided about whether to sell the ball. Regardless of the outcome, the issue exposes how easy it is for the IRS to draw the public's ire when the tax code forces it to make an unpopular call.

The remark about "tax geeks" was uncalled for, doncha think?

[Imalawman]

From this morning's Tax Notes Today, an article by Jeremiah Coder headlined, "IRS TRYING TO AVOID SECOND STRIKEOUT":

cool article omitted

The remark about "tax geeks" was uncalled for, doncha think?

Absolutely. Totally unfair.

[jg]

See http://www.cafepress.com/taxnerd

[webhick]

From this morning's Tax Notes Today, an article by Jeremiah Coder headlined, "IRS TRYING TO AVOID SECOND STRIKEOUT":

cool article omitted

The remark about "tax geeks" was uncalled for, doncha think?

Absolutely. Totally unfair.

Section 179 deductions are a turn-on. I mean, the whole standard of dating should be rested on the one phrase, "we can 179 it".

[webhick]

Sorry. Thought of this just now and I almost choked on a barbecue chip.

Woman: "Honey does my ass look big in this?"
Man: "We can 179 it."

[Randall]

What might be more likely is someone winning in November, but waiting until Jan. 1st to cash it in so as to get a years worth of interest before paying taxes or mixing it with some losses in that year. The IRS would probably not like that too much and require payment in the year you had constructive receipt. I've only read cases dealing with checks and the like, not a winning ticket, so I'm not certain about this exact issue. Its only my opinion from the constructive receipt cases I've had/have.

I recall a case where someone held a winning lottery ticket while s/he filed for divorce hoping to keep it all. The plan was to cash it after the divorce and not have to include it in the settlement. The other spouse noticed the drawing was actually before the filing, cried foul and ended up with half the winnings.

[BBFlatt]

I don't think the constructive receipt doctrine would apply to holding a winning lottery ticket until the next year. A winning lottery ticket is not a negotiable instrument, and claiming the prize requires verifying eligibility and other red tape. Most states allow the winnners to elect whether they want to receive a lump sum or an annuity, and that option alone would probably serve to prevent taxing the winnings in the year they are won rather than when received.

That said, a lottery tickent is a bit different that the 756 baseball. The ticket is virtually worthless when aquired, it only becomes valuable when the winning numbers are picked. That baseball became valuable when it crossed the outfield wall in fair territory, before Mr. Murphy caught it. It was an accession to wealth when he nabbed it, and if the tax law is to be applied even-handedly it should be taxed when received.

Good public relations may require a different outcome however.

[Imalawman]

I don't think the constructive receipt doctrine would apply to holding a winning lottery ticket until the next year. A winning lottery ticket is not a negotiable instrument, and claiming the prize requires verifying eligibility and other red tape. Most states allow the winnners to elect whether they want to receive a lump sum or an annuity, and that option alone would probably serve to prevent taxing the winnings in the year they are won rather than when received.

I see your points and they're good. However, I'm looking at it from an enforcement perspective and I'm not sure that I agree with you. If someone cashes in on Jan. 1 after holding it for 6 months, I'm not sure that they would be able to take the money in that year. That's all I'm saying. It's a question that was something of side issue and maybe I'll do research on the issue when I have some time. I was simply stating how I have taken the position on a check that's cashed to avoid a tax year.

That said, a lottery tickent is a bit different that the 756 baseball. The ticket is virtually worthless when aquired, it only becomes valuable when the winning numbers are picked. That baseball became valuable when it crossed the outfield wall in fair territory, before Mr. Murphy caught it. It was an accession to wealth when he nabbed it, and if the tax law is to be applied even-handedly it should be taxed when received.

You're certainly not alone, but I really disagree with that analysis. There hasn't been a realization and its not a prize under section 74. I just don't think general principals of taxation support the position of taxing tangible personal property in that manner. I do think there has been an accession to wealth and a gain, but NOT a realization. That's the key. In my opinion it makes no sense to try to come up with a FMV and tax according to that FMV. And just how are you going to come up with a FMV until the ball is actually sold? Its not like you can come up with comparables or some type of beta analysis. Is the IRS and state agency going to take a poll? online survey? Also, the value of the ball is likely to change almost as much as a stock depending on the career, news, and other factors relating to Bonds. At what date are you going to judge the FMV on? You can easily how the situation becomes ridiculous. Thus, in my opinion the ball is not taxable until there is a realization event.

[notorial dissent]

No, I quite agree with you on the cashing in the ticket or selling the ball part, the tax is due and payable at the point of “actual” gain. My only quibble, like so many others, would be in what year is it due, the year you actually got the ticket, or the year in which you cashed it. The is one of the reasons tax lawyers make lots and lots of money.

[BBFlatt]

Imalawman wrote:

I just don't think general principals of taxation support the position of taxing tangible personal property in that manner. I do think there has been an accession to wealth and a gain, but NOT a realization. That's the key. In my opinion it makes no sense to try to come up with a FMV and tax according to that FMV. And just how are you going to come up with a FMV until the ball is actually sold?

Not trying to be argumentative, but FMV of tangible personal property is taxed all the time. If you were looking at an employee who received part of his pay in merchandise, would you say, oh well, no realization event, no tax? FMV is the nut of the matter, and would undoubtedly be a source of controversy, but that's what horse races are made of. If I were they guy who caught the ball, I'd certainly try to lowball the value; you're in a much better position if you stake out a low end, but still reasonable position and make the IRS prove otherwise, than if you don't report it at all and have them come in and slap their value on it.

[Imalawman]

Imalawman wrote:

I just don't think general principals of taxation support the position of taxing tangible personal property in that manner. I do think there has been an accession to wealth and a gain, but NOT a realization. That's the key. In my opinion it makes no sense to try to come up with a FMV and tax according to that FMV. And just how are you going to come up with a FMV until the ball is actually sold?

Not trying to be argumentative, but FMV of tangible personal property is taxed all the time. If you were looking at an employee who received part of his pay in merchandise, would you say, oh well, no realization event, no tax? FMV is the nut of the matter, and would undoubtedly be a source of controversy, but that's what horse races are made of. If I were they guy who caught the ball, I'd certainly try to lowball the value; you're in a much better position if you stake out a low end, but still reasonable position and make the IRS prove otherwise, than if you don't report it at all and have them come in and slap their value on it.

I fully understand where you're coming from, no need to apologize for arguing. That's what we "tax nerds" do. In most situations which pay was substituted for tangible property, there are very sure methods of valuation and more importantly regs which govern those situations. Windfalls, which is what we're talking about here, not compensation, don't really have any statutory sections on point. Thus, you would apply general principals of law. In my opinion, without a verifiable market, the IRS simply couldn't determine the FMV of the ball. For what its worth, the IRS stated during the McGwire years that they would wait until realization until the ball was taxed. I think they would do the same with 756. To me, it makes the most since. If someone performed a service for someone and they gave him the ball in return, perhaps the outcome is different. I don't know. But I am pretty confident that the IRS would wait until a realization event before taxing the ball. IMHO. You know at this point I really should do at least a quick westlaw search on the subject. There's probably something out there that would give some guidance to the situation.

[Quixote]

From the instructions to Form W-2G regarding sweepstakes, wagering pools, and lotteries.

A payment of winnings is considered made when it is paid, either actually or constructively, to the winner. Winnings are constructively paid when they are credited to, or set apart for, that person without any substantial limitation or restriction on the time, manner, or condition of payment. However, if not later than 60 days after the winner becomes entitled to the prize, the winner chooses the option of a lump sum or an annuity payable over at least 10 years, the payment of winnings is considered made when actually paid. If the winner chooses an annuity, file Form W-2G each year to report the annuity paid during that year.

Box 4
Enter the date of the winning transaction, such as the date of the drawing of the winning number. This might not be the date the winnings are paid.

[BBFlatt]

I did a little research over lunch on constructive receipt, just to refresh my memory on the topic. I didn't find anything directly on point to our discussion, but the Aldrich Ames case was interesting. It seems the erstwhile CIA analyst (representing himself before the Tax Court) argued that he shouldn't be taxed on the payments he received from the Russians in 1989 to 94 because he had been told that the money had been set aside for him in 1985, and therefore should have been taxed in that year. He also made a double jeopardy claim that didn't get any further than his constructive receipt arguement. The cite is 112 TC 304 in case anyone's interested.

[Weathervane]

I know what he should do. He should treat the ball as if he inherited a "franchise" and sell it off in pieces. Stitching, cover, core...all separate.

Do you know what just a splinter of a Babe Ruth bat goes for nowadays?

[wserra]

Do you know what just a splinter of a Babe Ruth bat goes for nowadays?

Not to mention a Splinter of a Ted Williams bat.

[Kimokeo]

Would the ball be abandoned property and not taxed upon discovery?

It's like the TV show where they re-build the home, always increasing the property value. If I remember right, the avoidance of the tax is using the abandoned property rules.

In baseball, the pitcher is throwing the ball away. The batter is just hitting the thrown away ball. Someone catches the abandoned property and claims it.

If I remember my baseball stadium rules, the balls hit foul and into the stands may be taken home. The definition of ownership is already known - a foul ball is yours. I think baseball bats have landed in that same definition when flown into the crowd.

It's never treated as a gift from the baseball league and I haven't seen them demand their property to be returned. So, the ball is abandoned.

Just rambling - IMO, I don't see the ball taxable upon receipt but when the sale determines the gain. Otherwise, every time a ball is received in the stands, a taxable event is occuring.

Now, the other day, I saw a player jump into the stands and was caught by a fan. My understanding was the player wasn't abandoned and the fan couldn't keep him. The FMV may have been considerable, but the issue of ownership was clear.

[TheSaint]

Update: the guy who caught the big home run ball is selling it, for fear of having to pay taxes on it:

Cashing in
Record-breaking Bonds ball to be sold by lucky fan

SAN FRANCISCO (AP) -- No. 756 is going to auction.

Barry Bonds' record-breaking home run ball will be sold online, and fortunate fan Matt Murphy figures to be a half-million dollars richer.

The 21-year-old New York man said Tuesday he had no choice but to sell the ball -- several people told him he would be taxed on the souvenir just for holding on to it.

"It wasn't hard. It was simple math. I'm upset by the decision I had to make," Murphy said. "I wanted to keep it. I'm young. I don't have the bank account. ... It would have cost me a lot more to keep it."

(link)

[Imalawman]

Update: the guy who caught the big home run ball is selling it, for fear of having to pay taxes on it:

Cashing in
Record-breaking Bonds ball to be sold by lucky fan

SAN FRANCISCO (AP) -- No. 756 is going to auction.

Barry Bonds' record-breaking home run ball will be sold online, and fortunate fan Matt Murphy figures to be a half-million dollars richer.

The 21-year-old New York man said Tuesday he had no choice but to sell the ball -- several people told him he would be taxed on the souvenir just for holding on to it.

"It wasn't hard. It was simple math. I'm upset by the decision I had to make," Murphy said. "I wanted to keep it. I'm young. I don't have the bank account. ... It would have cost me a lot more to keep it."

(link)

Why didn't he ask for a letter ruling? I would have loved to the IRS actually take a firm stance on this issue. Also, why would a tax lawyer tell him that since the last time I heard the IRS took the position that it wasn't taxable until realization. Well, I suppose it might be too close a call to risk when you don't have the funds to cover the taxes. I still don't see how they'd come up with a FMV and at what time they would say the FMV is to be determined at.