If a fan catches a baseball, does the fan have taxable income?

That’s what Christian Lopez is wondering after the 23-year-old caught Derek Jeter’s home run, which was the Yankees star’s 3,000th career hit. Does it matter whether the fan sells the baseball on eBay, or gives it back to the hitter, as Lopez actually did, but then receives free tickets and merchandise from the Yankees in appreciation? What if the fan simply took the ball home and put it up on his bookshelf to admire for the rest of his life?

What do you think Derek Jeter’s 3,000th hit baseball would be worth in the open market? According to the New York Times, Barry Bonds’s 715th career home run ball was sold on eBay in 2006 for $220,100. In the frothy boom year of 1998, Mark McGwire’s 70th season home run ball sold for $3 million. So we’re not talking small potatoes here.

This is actually a classic law school question because the answer is not entirely clear. The Internal Revenue Service has not ruled on the question, and even if it did, the IRS answer could be challenged in court. I often start by asking, “What do you think the IRS position is going to be?”

The mission of the IRS is to collect as much tax for the government as is authorized by law, and the law places a tax on income, which has been defined by the U.S. Supreme Court as any “undeniable accession to wealth”, except as excluded by statute.

If you earn $100,000 by working for it, that’s taxable income. And if you win $100,000 at a casino or in a lottery, that’s income, too. Same thing if you win a fancy new car, or a luxurious vacation package worth $100,000. And that’s true even if all you did for your prize was sit in the audience of the Oprah Winfrey Show or peel off the sticker from your cup at a fast food restaurant.

So, what if you get lucky and catch a baseball worth $100,000? Shouldn’t that be taxed as income, too?

If you promptly sell the baseball to the highest bidder, then the answer is easy. The sale price fixes the value of the baseball, and that is the amount of the income to the lucky fan.

But what if you return the baseball to Derek Jeter and receive, in appreciation from the Yankees, tickets and merchandise with a retail value of, say, $50,000? A hard line IRS agent might argue that makes no difference. If the ball was worth $100,000 when you caught it, you have income in that amount. It makes no difference what you do with your income, any more than if you spend your income on your kids, or give the Cadillac you won to your parents, or let a friend take the trip you won at McDonald’s.

Believe it or not, however, the IRS is concerned about its public image, and it hates to be seen as a bully harassing virtuous taxpayers. It would certainly be bad publicity for the IRS to try to tax Mr. Lopez on the full market value of the historic baseball that he returned to Derek Jeter. On the other hand, he did receive valuable merchandise from the Yankees, and the IRS may feel it fair to tax Mr. Lopez on the value of what he actually received from the Yankees, though less than the full value of the baseball.

Mr. Lopez might take the position that the merchandise was a non-taxable gift arising out of “disinterested generosity”, which is a statutory exception to the definition of income, like the presents you receive from your grandparents on special occasions, even if they give you a car or a trip. This gift argument could work, particularly if the IRS is feeling wary of bad publicity because Congress has just held hearings where angry taxpayers testified about IRS abuses.

But is your relationship to the Yankees organization really like your relationship to your grandparents?

The hardest case I think would be where the fan doesn’t return the ball to the hitter, and doesn’t sell it, but just keeps it and puts it on the shelf. Then the taxpayer is not quite as virtuous or sympathetic as Mr. Lopez. And the IRS may be more willing to assert income in the amount of the best estimate of the market value of the baseball.

The IRS may be concerned that if it doesn’t tax the baseball when caught by the fan, an heir may inherit the baseball upon the owner’s death. Inheritances can be sold by heirs for full market value at decedent’s death without recognizing any income. The baseball could thus be converted to cash without any recognition of income, or any payment of income tax. That’s an outcome you know the IRS would hate.

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