Take Me Out to the Ball Game
On October 4, 2022, Aaron Judge, the New York Yankees right fielder, slugger and superstar, hit home run #62. In doing so, Judge has become the first American League player to hit 62 home runs in the regular season, thereby surpassing the records previously held by Roger Maris (in 1961) and Babe Ruth (in 1927).
Judge’s 62nd home run, hit while playing the Texas Rangers in Arlington, Texas, wound up in the possession of Cary Youmans, a fan attending the game. So what are the tax consequences to Mr. Youmans by virtue of catching “The Ball”? There is speculation that The Ball might be worth hundreds of thousands of dollars, maybe more than $1 million. Does that mean that Mr. Youmans has income for federal income tax purposes in that range by virtue of catching The Ball?
Already articles have been published suggesting that Mr. Youmans could have a big income tax bill by virtue of catching The Ball, likening Mr. Youmans’ situation with the facts of a fairly well-known case – Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969). In that case, Mr. Cesarini purchased a used piano at a garage sale. While cleaning the piano after its purchase, he discovered about $4,400 of currency that was hidden in the back of the piano. Under the law of the state of Mr. Cesarini’s residence (Ohio), the money was considered owned by him (as opposed to any former owner of the piano). The Cesarini case holds that the unexpected and discovered cash was income to Mr. Cesarini for federal income tax purposes.
If one is walking down the street and finds a $100 bill, and assuming the law is “finders/keepers,” it is clear that the individual has $100 of income for tax purposes. When Mr. Youmans caught The Ball, there is no doubt that his net worth increased dramatically and instantaneously. So, does the instant enrichment of Mr. Youmans translate into income for federal income tax purposes? Typically the answer to that question is “no,” unless and until there is an event of realization. When it comes to an appreciated asset (i.e., an asset the value of which is greater than its original cost), realization normally occurs when an economic benefit is converted through the sale or exchange of the appreciated asset. For example, the increase in value of a corporate stock, whether the increase occurs in a short or extended period of time, is not income until the stock is sold or exchanged. (A sale or exchange is not the only way to have an event of realization.)
Why then did Mr. Cesarini have to report his windfall as income? The obvious difference between Mr. Youmans and Mr. Cesarini is the fact that the unexpected and instant enrichment of Mr. Cesarini was the discovery of cash. Like finding the Benjamin on the sidewalk, the discovery of cash while cleaning the old upright is income. No argument here that Cesarini was incorrectly decided.
When it comes to Mr. Youmans’ situation, here is an alternative thought: When a fan pays for a ticket, she has paid for the right to keep any balls coming her way, whether they are home runs, foul balls, or thrown into the bleachers at the end of an inning, the thought being that the fan paid a price for the opportunity leave the game with a ball. Consequently the fan has no income upon catching the ball; that’s the contract Major League Baseball has made with the attending fan by virtue of her ticket purchase. So catching The Ball, although clearly an increase in Mr. Youmans’ net worth, does not translate into “income” that should be taxed. Make no mistake, Mr. Youmans will certainly have significant income tax consequences when he sells or disposes of The Ball for valuable consideration. If he sells it, then every dollar of the sale price will be subject to income tax. (The Ball is a capital asset and if he sells it before holding it for a year, his profit will be treated as ordinary income, taxed at the same rates as salary and wages; if he holds if over a year, the federal tax rates would be more favorable.)
What if a valuable home run ball becomes the possession of someone who is not a fan, i.e., someone who did not purchase a ticket? That actually happened in 1998 when Chicago Cubs outfielder Sammy Sosa hit a home run that literally left the park and was recovered by someone on the street – someone who had not purchased a ticket to the game. Sosa was in a highly publicized home run race with Mark McGwire at the time, so the ball was of considerable value. Would that person have income in the amount of the value of the ball? Certainly the argument can be made that, under those circumstances, coming into possession of the ball is akin to finding cash on the sidewalk.
The IRS addressed Mr. Youmans’ dilemma in 1998, at least partly. Then, slugger Mark McGwire of the St. Louis Cardinals was on track to break the single-season home run record. Speculation swirled about the tax consequences to the person who caught the record-breaking home run ball. The IRS initially indicated there could be significant tax consequences, but under political pressure the IRS wound up announcing that the baseball fan who caught McGwire’s home run ball would neither have taxable income nor be treated as having made a gift for gift tax purposes provided he/she immediately returns the ball to McGwire or the St. Louis Cardinals. IR-98-56, September 8, 1998. That same announcement also stated: “The tax results may be different if the fan decided to sell the ball.” Indeed, the results would be dramatically different.
Just last year, the same issue arose in the NFL. Tom Brady of the Tampa Bay Buccaneers threw his 600th touchdown pass. The teammate who caught the ball, wide receiver Mike Evans, apparently did not realize its significance and gave the ball to Byron Kennedy, a fan who was wearing Evans’ #13 jersey. Kennedy was persuaded to give the ball back, and the next day the Tampa Bay Times reported that Kennedy would receive two signed jerseys and a helmet from Brady, a signed jersey from Evans, Evans’ game cleats, $1,000 credit at the Buccaneers team store, and two season passes, one for the remainder of the 2021 season and another for the 2022 season.
The football was estimated to have a value of $500,000 – $900,000 (Brady is the only NFL quarterback to throw 600 touchdown passes). No doubt, Mr. Kennedy has income in the amount of the value of the “goodies” he received; his surrender of the ball for those items was an event of realization. At least IR 98-56 should protect him from an argument that he made a large gift to Mr. Brady in the process.