Catching Aaron Judge’s record-breaking 62nd home run in the American League is a baseball fan’s dream. It’s a piece of baseball history worth at least hundreds of thousands of dollars and by some estimates up to $2 million dollars. The fan who caught it should be thinking about what he wants to do with it: does he want to keep it? Sell it? Donate it to the Hall of Fame? Or give it back to Judge? All of these decisions carry with them potential tax consequences depending on how aggressive the IRS wants to be. And the uncertainty in the law only adds to the complications.
With almost $80 billion in new funding for the agency, with over half going to enforcement, the IRS may choose to be extra aggressive with its treatment of this lucky fan. Unfortunately for the fan, the IRS’ history with fans who catch valuable baseballs is far from taxpayer friendly and the IRS may already consider the baseball in his hands to be taxable income.
The tax consequences for the fan are the simplest if he simply sells the baseball. In this scenario, the fan would just include whatever he sells the ball for in his income, and it would be taxed at ordinary income rates.
The tax implications of his other possible decisions are unclear. It depends on how aggressive the IRS wants to be.
If the fan were to give the ball back to Judge, he would not be taxed on it, although it has not always been that way. If the fan were to keep the ball, the IRS would likely try to tax it, although the IRS would be running afoul of the Constitution if it were to tax it. If he were to trade it to Judge for memorabilia of some kind, he would be taxed on the full value of what he received. Finally, if he were to donate the baseball to a charity like the Baseball Hall of Fame, he would receive a charity deduction for the value of the baseball.
The uncertainty of the tax code here needs to be addressed and cleared up by Congress. The tax code should not be the deciding factor in what the lucky fan decides to do with this piece of baseball history.
What if He Gives it Back to Judge?
Everyone should agree that if the fan were to give the ball back to Judge for nothing in return, the fan should not be taxed. The fan in this situation never realized income and only temporarily had possession of the ball. Unfortunately, the IRS has not always taken this position.
In the wake of the famous Sammy Sosa and Mark McGwire home run chase in 1998 to break Roger Maris’ 61 single-season home run record, the same record Judge just broke, the IRS spokesman at the time declared that whoever caught the record setting ball would have to file a gift tax return and then the IRS would then examine the value of the baseball to determine its taxability
Back during the famous 1998 baseball season, the IRS wanted to send a gift tax bill to the fan who caught the record-breaking home run. In 1998, the lifetime gift tax exemption was $625,000, so the fan would have been taxed at 40 percent rate for the value of the ball above $625,000. Mark McGwire’s 70thhomerun that season sold for $3 million, so the fan could have faced a $950,000 tax bill had he given the ball back to McGwire under the IRS’ analysis.
The fan who caught the Judge home run thankfully will not be in this situation because the 2017 Tax Cuts and Jobs Act raised the gift tax exemption to $10 million. Adjusted for inflation, the exclusion is now over $12 million. So, there’s no way the fan who caught the Judge ball will face a gift tax bill this year.
The IRS’ position in 1998 sparked well-deserved outrage among the American public and Congress. Senator Christopher Bond called the potential tax “ridiculous” and asserted, “[i]f the IRS wants to know why they are the most hated federal agency in America, they need look no further than this assault on America’s baseball fans.”
The public outcry caused the IRS to change its position and release Revenue Ruling 98-56. This non-binding IRS release stated that the IRS had changed its position and the fan who caught the ball and gave it back to the player would not face gift tax consequences. The IRS analogized the situation to a person who wins a prize and immediately returns it.
In a press release announcing the ruling, then IRS commissioner Charles O. Rossotti said, “Sometimes pieces of the tax code can be as hard to understand as the infield fly rule. All I know is that the fan who gives back the home run ball deserves a round of applause, not a big tax bill.”
We could only wish the tax code were as simple as the infield fly rule.
What if He Keeps the Baseball?
The most unfair result would be if he were to just keep this great piece of baseball history for himself, and the IRS were to tax him on the full value of the ball simply for catching it. While it may seem outrageous that catching a baseball could result in a tax bill for hundreds of dollars, the IRS very likely could take this position. It is the consensus among tax academics that holding onto the baseball would be a taxable event.
The definition of income in the tax code is broad, with gross income meaning “all income from whatever source derived.” The IRS has interpreted this definition in a regulation to include “treasure trove.” The most famous case of a taxpayer finding treasure trove was Cesarini v. United States where a taxpayer found over $4,400 while cleaning out an old piano. A district court ruled that this amount was taxable income as treasure trove.
It is possible that the IRS would try to tax the baseball as income for being a treasure trove. This could put the ball holder in a long legal battle with the IRS. The taxpayer could not rely on Revenue Ruling 98-56 because it’s a different factual situation of giving back the baseball, and it implies that a fan would be taxed because he would not be giving back the baseball.
A taxpayer who really wanted to hang onto the ball’s best argument would be that it cannot be income because the amount was “not clearly realized.” Income being clearly realized is one of the requirements for income in the tax code. A baseball that is just being held onto has not been realized as money or anything valuable, as it's just a baseball.
This also distinguishes it from the situation in Cesarini when what was found was old currency, which has a set, realized value.
However, there are examples in the tax code of the United States taxing unrealized amounts, so it could be an uphill battle for a taxpayer making this argument even though the taxpayer is making the correct legal argument.
The taxpayer could also dispute the IRS’ valuation of the baseball. Each side would have to present experts on the baseball’s value comparing it to previous famous baseballs sold and current market conditions. In tax disputes, the IRS is presumed correct, and the taxpayer is guilty until proven innocent. The uncertainty surrounding a baseball’s valuation is just further proof that this is not an arena the IRS should be in, and it should not tax the baseball.
The uncertainty surrounding the tax treatment of keeping record setting home runs is one reason why they are often sold. The fan who caught Barry Bonds’ record breaking 756th career home run cited the uncertain tax treatment as one reason he decided to sell the ball rather than keep it. Fans would rather sell the ball for tax certainty rather than face a long battle with the IRS if they want to keep a part of baseball history.
Congress or the Treasury Department could easily put an end to this madness and let fans keep valuable baseballs without having to potentially face a massive tax bill. Congress could pass a law saying that catching a baseball is an untaxable event. The Treasury could also repeal the treasure trove regulation or release a revenue ruling like it did with then gift tax stating explicitly that this is an untaxable event.
All Americans lucky enough to catch a famous home run would appreciate this extra guidance.
What if He Were to Trade the Ball?
If the fan were to give the ball back to Judge in exchange for anything like signed memorabilia and future tickets, this would be a taxable event. The tax codeis clear that bartering is taxable income, and a taxpayer must include the full market value of the goods received as taxable income. These items would also be much easier for the IRS to value than the home run ball as these are bought and sold on the open market all the time.
The policy reason behind this rule is the tax code should not incentivize getting paid in one form over another. To do so otherwise would create a huge loophole where people would just get paid in property rather than cash.
If the fan who caught Aaron Judge’s home run wants to avoid potentially a major tax bill for income that has not been converted into cash, he may want to avoid trading the ball for valuable items.
What if He Were to Donate the Ball?
If the fan were to donate the ball to a charity like the Hall of Fame, it would likely eventually result in no tax. In this situation, he could deduct the full value of the ball and write-off up to 50% of his adjusted gross income (AGI) each year. For the value of the ball he could not deduct this year due to the 50% limitation, he could carryover to the following tax year for up to five years.
So, if the ball was worth $1 million and the taxpayer had a $200,000 AGI, he could deduct $100,000 this year and carry the $900,000 over to future tax years as a deduction.
However, under this strategy the IRS would likely include the value of the ball in the taxpayer’s gross income, and he would just be taking a charity deduction against this income. The end result would be no tax for catching the baseball, but he would not receive any tax benefit from donating the ball to offset his other income.
Taxpayer Should Just Sell the Ball To Avoid A Battle With the IRS
Unfortunately, no matter what the fan decides to do with the ball, there’s a high likelihood the IRS will try to include the value of the ball in his gross income. Rather than try to keep the ball and face a long legal value with the IRS, trade the ball and receive valuable items back, or donate it to charity, the fan who caught Judge’s ball should likely just sell the ball to ensure he has the cash to pay the tax and maximize the ball’s value.
This way, he does not have to battle with the IRS over if the ball is taxable and the value of a once in a lifetime baseball.
It's sad day when baseball fans for tax reasons are advised to sell a piece of baseball history that they caught. Taxpayers often strike out with the IRS, but this is an especially cruel result. Congress should make it clear in the law that catching a baseball is a non-taxable event. Otherwise, a fan may be receiving a letter in the mail from a recently emboldened IRS.