Last Tuesday, in a brief moment of glory, a nation of Americans forgot about the troubles of the world and held its collective breath while a little white ball spiraled into history.
Mark McGwire's 62nd home run ball was picked up by Tim Forneris, a 22-year-old member of the Busch Stadium grounds crew, and the IRS was watching carefully, hoping no one would realize the great tax benefit that was carried across the stadium with that little ball.
There had been speculation in the weeks prior to the fateful moment when Mr. Forneris' hands touched the ball, that the person who took possession of McGwire's history-making ball would be subject to federal gift tax if the $1 million prize was returned to McGwire.,
The gift tax rules state that property given away is subject to tax. In the case of the famous baseball, the tax could amount to approximately 40% of the amount by which the value of the ball exceeds $625,000. If the ball is worth $1 million, the giver could be subject to tax in the neighborhood of $150,000. This information was handed down recently by IRS spokesman, Steven Pyrek.
And so the stage was set. Pick up the ball and you're stuck with income tax if you sell it, and gift tax if you return it.
In an attempt to appear completely patriotic and magnanimous, IRS Commissioner Charles O. Rossotti said last Tuesday that no gift tax will be charged to the person who returns McGwire's ball to the ballplayer. The foundation for this statement came from a decision to compare the act of returning McGwire's ball to the act of declining a prize. Rossotti stated that, "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."
Let's examine this statement a bit more closely. A person who receives a prize or unsolicited merchandise is not subject to gift tax. If you win a prize or accept unsolicited merchandise, the value of the prize or merchandise is considered income and you are subject to income, not gift, tax on the amount. If you refuse to accept the item there is no income tax. The way the gift tax works is that the person giving the gift is subject to the tax. So giving the ball back to McGwire raises the issue of gift tax for Forneris. However there is a lifetime exclusion from gift tax on the first $625,000 of gifts, so any tax would pe owed only the amount of the ball's value over $625,000 (less any other gifts Forneris might have given in the past).
Since the person who bestows the valuable item upon you might well be subject to gift tax, are we to assume that the gift tax is actually owed by Mark McGwire since the IRS seems to think the ball was awarded as a prize? Well, since the ball was returned to Mr. McGwire, the gift, if we are to call it that, was rejected, so fortunately McGwire is off the hook.
In truth, everyone knows that if you catch a ball at the ballpark, you own the ball. You are not charged money for the ball, it's just yours to keep. That being the case, the original IRS statement was technically correct, Mr. Forneris owned the ball and if he presents it as a gift to Mr. McGwire, there is a gift tax owing.
Furthermore, the IRS last week issued a warning that although it was waiving its right to gift tax, it would be more than happy to collect income tax from the person who picked up the ball and later sold it for a fortune. But how's this for a scenario, one which was slyly omitted from the IRS official pronouncements. Had Mr. Forneris had the wit to hang on to the ball long enough to transport it to Cooperstown (where it ended up anyway), and then made a donation of the ball to the Baseball Hall of Fame, Mr. Forneris would have been looking at a lovely charitable contribution deduction of $1,000,000. Not only would he have owed no tax for picking up the ball, he would have had a charitable contribution which would have wiped out a huge portion of his own personal income taxes for the next five years.
Instead, it would appear that Mr. McGwire will be entitled to that charitable contribution deduction himself, since he personally contributed the ball to the Hall of Fame.
The IRS warnings did a good job of misinforming taxpayers of potential tax pitfalls, without ever mentioning the great tax benefit that awaited the person who handed that baseball to the folks in Cooperstown.
copyright © 1998 Gail Perry - Fun with Taxes
Originally published in the Indianapolis Star