Catching The Ball: An Income Tax Nightmare

You don’t need to be a fan of the New York Yankees to congratulate their Captain, Derek Jeter, for becoming only the 28th player in the 135 year history of Major League Baseball to reach a career milestone of 3,000 hits. At a time when so many other professional sportsmen have chosen to inject their bodies with artificial steroids, Mr. Jeter’s performance decline in the twilight of his career is apparent testimony to his decision to rely solely on his natural skills.

Unfortunately, Mr. Jeter’s dramatic quest for his 3,000th hit led to another drama, one that is currently playing out in the offices of the Internal Revenue Service. The IRS, as always, is simply applying the tax law in the manner that it has been written by politicians. The details of this particular drama, though, may lead us to wonder whether those very politicians ever anticipated this particular situation.

During a week in which President Obama repeatedly called for the closure of tax loopholes for the very wealthy, a working class fan who caught a baseball found himself immersed in a debate about tax fairness. His gracious actions, and their resulting tax implications, reveal much about our government’s fiscal policies.

See the Ball, Catch the Ball

On July 9th, Derek Jeter began a baseball game against the Tampa Bay Rays with a career total of 2,998 hits. He would eventually hit successfully in all five batting appearances that day, ending the game with 3,003 in total.

His second appearance, though, led to the historic event that allowed him to ascend to the 3,000 hit level. And he met the challenge in a most dramatic fashion, socking a home run that soared into the stands instead of simply grounding a ball through the infield.

The nature of his hit set off a series of events that ultimately involved the Internal Revenue Service. A 23 year old cell phone salesman named Christian Lopez caught the ball and returned it to Mr. Jeter after the game as a keepsake. Jeter and the Yankees, grateful that he didn’t sell the ball at auction, rewarded him with game paraphernalia, autographs, and free tickets for future games.

How much could Lopez have earned by selling the ball at an auction? There’s no way to know for sure, but Bloomberg speculated that he might have received as much as $250,000. It may have sold for a far higher amount; Barry Bonds’ record breaking 756th career home run ball, for instance, actually sold for a whopping $752,467 in 2007.

Enter The Tax Man

Although Mr. Lopez did not pay or receive any money as a result of these events, he is now in need of expert tax advice. That’s because his brief catch represented a compensatory activity that resulted in his receipt of an item with resale value. In other words, to put it simply, he did some work and received compensation, thus making him liable for income taxes on his receipt.

Wait a minute … he gave the ball back to Mr. Jeter, didn’t he? Yes, but his generous gesture represents a personal gift, and donors of personal gifts must pay taxes on gifts of items with values exceeding $13,000 under American tax law. In other words, the loss that he incurred by “gifting” the ball back to Mr. Jeter cannot fully off-set the value that he received by catching the ball earlier that day.

Furthermore, the fan’s receipt of the merchandise and tickets may itself represent the collection of taxable compensation. Thus, he may need to pay income taxes on his receipt of those items, whether or not he ever actually resells them. And although a number of organizations have stepped forth and volunteered to pay some or all of his tax obligations on his behalf, such acts may themselves represent taxable gifts, leading to additional tax obligations for the firms or Mr. Lopez.

Back in Washington

Meanwhile, while these events were unfolding, President Obama continued his tussle with Republican Congressmen over the tax code. The Congressmen continued to insist that the federal government already overtaxes the American people and should not attempt to balance the federal budget through additional tax increases, while the President responded that many wealthy Americans are beneficiaries of tax loopholes that can be equitably closed.

One group of beneficiaries, the President notes, consists of wealthy managers of hedge funds. Such individuals generally pay a relatively low 15% capital gains tax on their “carried interest” earnings, an amount that is less than half of the current 35% top marginal tax rate that Mr. Lopez may end up paying on his earnings and gifts.

It may take months for Mr. Lopez to sort out all of the tax implications of his moment of glory. Hopefully, though, our representatives in Washington will not wait that long to reassess the practical implications of their taxation policies on fans who catch baseballs in the stands.