Who Caught Aaron Judge's Home Run Ball? Someone Who Needs a CPA

In the context of a million-dollar baseball, the tax bill would come to $332,955 for joint filers after the 37% top marginal rate is applied. State income taxes could send the final tax bill to $50,000 to $100,000 higher.

The tax code also might trigger a gift tax obligation for any unsuspecting fan handing a million-dollar ball back to Judge or the Yankees, an expensive proposition given the 40% top marginal rate.

Whether the IRS would ever apply the treasure trove analysis or the gift tax is another question.

In 1998, when McGwire and Sosa were locked in an epic battle to be crowned home run king, an IRS spokesman unleashed a storm of fury, even within Congress, by saying that any ebullient fan handing a record-setting ball back to the player would be served with an onerous gift tax bill. Rossotti called in Graetz to help resolve the bubbling tax dispute.

That resulting three-paragraph press release, Graetz currently concedes, only solved a portion of the tax problems.

Interpreting tax law principles that permit a taxpayer to decline a prize with no tax consequences, the IRS said at the time no income or gift tax obligations would be triggered if the person returned the million-dollar baseball. With a flourish, Rossotti added the fan "deserves a round of applause, not a big tax bill."

The IRS, however, punted on the larger tax questions for those choosing to sell their new-found treasure, or park it in a display case for possible sale at a future date. The agency offered little clarity, commenting "the tax results may be different if the fan decided to sell the ball."

Good Publicity

The academic debates around the literal requirements of the treasure trove regulation drive former IRS chief counsel Donald Korb bananas.

As a matter of reasonable tax administration, there's no way the IRS would demand a taxpayer immediately recognize a million-dollar baseball under the income or gift taxes, said Korb, who is now of counsel with Sullivan & Cromwell LLP.

"If the IRS Commissioner Chuck Rettig were asked the question, there is no doubt in my mind that he would say that merely catching the ball does not result in taxable income for the lucky fan," said Korb, a lifelong supporter of Cleveland's baseball team.

The IRS should keep its mitts off any million-dollar baseballs until the fan decides to sell it, he advised. Depending on the timing, the sale might be characterized as a short-term capital gain or a long-term gain. In the context of a short-term gain, the ball would be taxed at the same rate as ordinary income.

Record-setting baseballs held for more than a year would be taxed at the 28% long-term rate on collectibles.

Graetz said he's sympathetic to abandonment of the treasure trove logic and adopting Korb's approach, adding that IRS commissioners need to apply the code in a practical fashion.

"As Rossotti figured out, this is not good publicity for the IRS," said Graetz, who roots for Atlanta's baseball team. "Why would the commissioner want to give everyone who loves the Yankees a reason to hate the IRS?"

'Fair and Manageable'

Andrew Appleby, a tax law professor at Stetson University, offered a hybrid solution that blends features of the treasure trove and capital gains strategies.

The only "fair and manageable" solution is for the IRS to immediately tax the lucky baseball catcher on the retail price of the baseball, roughly $25, and then treat the increase in value as unrealized gain. Using this logic the gain would be taxed when, if ever, the historic baseball is sold, Appleby said.

The appraiser Heffner has said he's heard many of these theories over the years, and he's still confused.

"The tax advice I provide is, please talk to your accountant," he said.

Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.