Baseball taxes

When is catching a baseball a potentially taxable event? That's a question Tom Herman explores in today's Wall Street Journal Tax Report ($). The issue arises as Barry Bonds is now three home runs away from breaking Hank Aaron's career record. The ball is likely to be worth $500,000 or more to collectors. Arguably, according to the experts that Herman talked to, the fan who catches that home run ball will have taxable income the moment he takes possession of it.

Additional tax issues identified by Herman:

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?

So far, the IRS is refusing to speculate about these questions. They learned a tough lesson in 1998 when someone there suggested that if the fan who caught Mark McGuire's 61st home run of the season gave the ball to him, the fan would owe a sizable federal gift tax on the transfer. Although the observation was perfectly, legally accurate, the assertion outraged fans so much that the IRS Commissioner quickly disavowed it.