Jeter baseball fan catches bad tax advice
Posted by AccountingWEB in Tax, Income Tax on 07/13/2011 - 11:23
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.
Related articles:
- Bonds' homer ball creates tax controversy
- Hot dogs, peanuts, shredded documents: Andersen night at the ball park
- Mark McGwire: IRS throws foul ball into all American pastime
- 12775 reads
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Gail Perry, CPA
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Travel tips
I think that Christian Lopez have to pay income tax on the items he received from the New York Yankees in exchange for returning Derek Jeter's 3,000th career hit baseball .
Jeter Baseball article
I think the conclusion of the article over looks a few risks:
- I would think the IRS would argue value of the ball would need to be included in income in 2011, the same as any other prize or award. Assuming he waited until July 2012 at the earliest to try to claim a fair value charitable deduction, this miss-match would cause an adverse cash tax consequence in a later tax audit.
- I believe there's a 30% of AGI limit on donations of appreciated cap. gain property. If he waited the year and if Mr' sLopez's annual income is $100,000 he can only deduct $30,000 so even with the 5 year carryforward he might not be able to claim the full value of the ball.
- This type of propery has tricky appraisal issues both on the inclusion of income side and the donation side. Plan to incurr alot of time and aggravation when visited by the IRS. !!
A bargain sale to charity might make sense- a payment from the Hall of Fame might make Mr L whole for the negative tax arbitrage and it gives the transaction a little more certainty.
Baseball
The baseball belongs to the club which lost it in the club's own stadium. The fan who found it merely returned the lost property to an agent of its owner. It's kind of like when my neighbors throw their beer bottles over their railings into my yard and I throw them back. I'm returning lost property. There is no taxable event at this time. Now the reward is another issue altogether.
To have to pay tax on unasked for gifts - ridiculous!
Being from the UK, I have trouble getting my head around the concept that if you win a prize in the USA, the Federal Government wants a share.
Did they contribute towards buying the tickets? Hardly.
Are the cost of tickets, which probably came from taxed income, tax deductible? I think not.
In the UK, wins from gambling are totally tax free, unless the gambling itself is a profession. Horses, dogs, lotteries - all tax free.
I digressed. Getting back to this particular case, the ball belonged to whomsoever bought it initially, presumably the club. By returning the ball, surely it just went back to its rightful owner(s) or representative?
I don't quite see how anyone can place a value on a baseball such as has been mooted in the article. To me, it would be worth no more than a couple of dollars and I'd be reluctant to even pay that amount as it is not even new; it has been used.
Now, whilst the ball is a tangible asset which can be valued, in its used condition - next to worthless, there is apparently some invisible value because it was hit by a lump of wood held by some sportsman. That adds an intangible asset which is extremely difficult to value, especially under IFRS guidelines.
The gift of tickets etc does not appear to have been conditional upon the return of the ball or by reason of the donor's employment and was therefore ex-gratia. In the UK, such "payments" are tax free.
Jeter: Valuing the Yankees tickets
As to the value of what Lopez received from the Yankees, I do not agree with what people are saying. I would take the position with IRS that since this suite (tickets) were unsold for the year, the market value is significantly less than face value since the “market” did not buy them. Therefore under the willing buyer-willing seller concept for valuation, the buyers were not willing to pay what the seller asked etc. There is a value, but much less.
Mike Bekas, partner, Marks Paneth & Shron