Tuesday, July 31, 2007

Tax Report

Tax Report - WSJ.com: By TOM HERMAN

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?" ...

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....

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?

If the prize catch does qualify as a long-term capital gain, what would the fan's cost be for tax purposes? Zero? The price of the ticket? The ticket price plus the value of a new baseball? What if the fan purchased a season ticket? Could he or she consider the cost of the entire season package as the cost basis? Would it make any difference if the person who catches the ball isn't a fan but rather a player standing in the bullpen? Or a groundskeeper?

These are just some of the curveballs that IRS officials don't want to try hitting. ...

"More than innocent-spouse cases, more than small-business owners losing their businesses, more than IRS modernization failures, the prospect of the IRS taxing this hypothetical good-hearted fan unleashed the fury of the American people, not to mention their representatives in Congress," Mr. Rossotti wrote in his memoir, "Many Unhappy Returns."

The IRS quickly reversed itself. Mr. Rossotti issued a statement saying that if a fan caught the ball and gave it back to Mr. McGwire, the fan wouldn't be taxed. "Sometimes pieces of the tax code can be as hard to understand as the infield fly rule," Mr. Rossotti explained. "All I know is that the fan who gives back the home-run ball deserves a round of applause, not a big tax bill." ...

Yale Law Prof. Graetz helped advise the IRS on the Mark McGwire flap in 1998 before Mr. Rossotti issued his statement resolving the issue. In return, the grateful Mr. Rossotti sent Prof. Graetz a baseball signed by Mr. Rossotti, saying: "Thank you for saving us from a strikeout on national TV."

So did Prof. Graetz declare the Rossotti ball on his tax return as income?

No, Prof. Graetz replies with a chuckle, explaining: "I don't think it has a lot of value to anyone but me."

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