By Gail Perry, editor-in-chief
Christian Lopez, the 23-year-old baseball fan who returned Yankees' Derek Jeter's 3,000th career hit ball to the player, allegedly out of the goodness of his heart, received autographed bats, balls, and jerseys and four box seat tickets for the rest of the Yankees 2011 season from the appreciative team.
Lopez is quoted as having said, "I'm not going to let the IRS stand in my way from enjoying myself," in response to expectations that the IRS will want to tax the value of the merchandise he received, estimated to be worth somewhere between $30,000 and $50,000, although one estimate mentioned in The New York Times puts the value at closer to $120,000. The ball itself is estimated to be worth $250,000 to $300,000.
It's expected that Jeter will donate the ball to the Baseball Hall of Fame in Cooperstown, NY.
The gift tax dilemma
First, let's address the issue of gift tax. Since Lopez gave the ball to Jeter, and it appears the ball has a current value of, let's say $275,000, is Lopez responsible for paying gift tax on $275,000? If the answer is yes, presumably there wouldn't be any actual tax owed because the $275,000 is probably under Lopez's lifetime threshold for tax-free gifts and he could beat the tax that way. Under current law, Lopez would have to have given more than $5,000,000 in gifts to make this gift a taxable event.
Or perhaps one could argue, as Columbia University law professor Michael J. Graetz told The New York Times, that a gift given out of detached or disinterested generosity is not subject to the gift tax at all.
There is also precedent from the IRS that suggests that the IRS isn't going to look for gift tax on this transfer of ownership. In 1998, when Mark McGwire broke Roger Maris's single season home run record, the IRS generously agreed to forego gift tax on the transfer of ownership of that ball from the fan to McGwire.
There's no gift tax owing if you simply return the item you received. Then IRS Commissioner Charles O. Rossotti compared the fan's return of the ball to McGwire to the act of declining a prize. "This conclusion is based on an analogy to principles of tax law that apply when someone immediately declines a prize or returns unsolicited merchandise. There would likewise be no gift tax in these circumstances."
The taxation of the gifts Lopez did accept is a different animal. He had the right to decline those prizes as well, and he chose not to do so. Income tax most definitely applies. If Lopez works out a deal with the New York Yankees whereby they help him out by paying his tax bill (a gesture that would also be a taxable event), that will not change the fact that Lopez is responsible for declaring the value of the prizes as revenue and paying income tax on the amount.
Tax issues go into extra innings
But what if this story had gone into extra innings and played out a bit differently? Instead of returning the ball to Jeter and giving Jeter the opportunity to contribute the ball to the Baseball Hall of Fame, what if Lopez had decided to take the ball to Cooperstown himself and make a donation? Would he be entitled to an itemized deduction for his contribution and also the related tax savings?
Paul Dailey, CPA, tax principal in the New York office of Rothstein Kass, got the ball rolling by mentioning that as soon as Lopez caught the ball, it became a capital asset. A tax deduction for a contribution of a capital asset is limited to the donor's cost. In this case, Lopez's cost of the property is zero, thus there is nothing to deduct. However, if Lopez were to report the value of the ball as taxable income on his 2011 tax return and pay tax on that value, then he could take a deduction for the value of the ball. In a best case scenario, the deduction would do no more than offset the income, thus there would be no tax savings by using this approach.
Mike Bekas, tax partner at New York CPA firm Marks Paneth & Shron hit the ball out of the park with his analysis of the situation. "If [Lopez] had called me and said, 'Mike, what should I do?,' I would have told him, 'You have to hold onto it. You need to hold on to this ball until July 10, 2012, a year and a day after the game. Now it has become long term capital gain property.' " At that point, Bekas explained, Lopez could donate the ball to the Baseball Hall of Fame and take a charitable contribution for the market value. "And a year from now, it might be worth more than it is today," added Bekas.
By waiting a year and then donating the valuable baseball to the Hall of Fame, Lopez would have caught much more than 15 minutes of fame and a nasty tax bill. His donation would have netted him a cool $275,000 (or possibly more) charitable tax deduction, worth $41,250 in reduced taxes in the 15% tax bracket.
Unused charitable contribution deductions can be carried over to up to five future tax returns, so the tax savings wouldn't be lost even if Lopez's taxable income isn't high enough to cover the deduction (charitable deductions of this nature can't exceed 50% of adjusted gross income).
Rather than getting the cool swag and the box seats, Lopez could be looking at a gift from the IRS in excess of $40,000 – that could have gone a long way toward paying his school loans, or even buying his own box seats, and the ball would have ended up in the same place that it probably will anyway.
And who knows, the Yankees might have given him the cool stuff anyway in exchange for the donation.