As San Francisco Giants slugger Barry Bonds closes in on Hank Aaron's career home-run record, a thorny question looms: If you're the lucky fan who catches the record-breaking home run ball, what are the tax consequences?
The short answer: Find a very smart accountant -- and if you don't like the answer, try someone else. "Everyone's sure they know the right answer, but there's very little agreement" on what it is, says Phillip Mann, a tax lawyer at Miller & Chevalier in Washington and a former head of the American Bar Association tax section.
Common sense might suggest the answer is simple: The lucky fan who catches the historic ball shouldn't owe tax until he or she sells it. But relying on common sense to interpret tax laws can often lead to trouble. Asked whether any fan who has ever caught a valuable home-run ball has had to pay tax on it before selling it, an IRS official declines comment. Some professors, such as Alice Abreu of Temple Law School, feel strongly the answer is clear. "It's taxable income" to the fan the instant that person catches the ball, Prof. Abreu replies. How come? "It's accession to wealth," and nothing in the tax code specifically exempts from taxation a Barry Bonds-propelled baseball. Lawyers say this view logically stems from cases saying that someone who finds a "treasure trove" owes tax on it right away.
But other lawyers disagree. They also say it's highly unlikely that the IRS would be willing to risk the wrath of a baseball-loving nation by taxing the fan right away. Yale Law School Prof. Michael Graetz, a former Treasury Department official and co-author of a leading course book on federal income taxation, says that the Bonds issue "would make a great law-school exam question." Actually, there's way more than one question. Will the Internal Revenue Service require the fan to pay tax immediately, based upon the ball's estimated fair-market value? Or only after the fan sells the ball? Will the fan have to pay tax based on regular federal income-tax rates, which range up to 35%? Or, if the fan waits to sell the ball for more than a year after catching it, would any profit qualify as a long-term capital gain taxed at the maximum rate of 28% on collectibles?