Bonds, Baseball & The Tax Code

So the tax implications of Barry Bonds’ 756th home run ball has been discussed by several “experts” and all have failed to see the obvious: this is utterly ridiculous. I can’t think of something more American than eating a hot dog, drinking a beer and catching a home run ball while enjoying America’s past time: baseball.

And I can’t think of a better example of how deranged our tax code has become that we have made it economically infeasible to keep said memento. Seriously, you go to a game, you catch a ball, you suddenly owe the government $250,000+!!! Why is no one else objecting to the seer lunacy of this? “I feel like I’m taking crazy pills!” (Mugatu)

If poor Matt Murphy had decided not to sell his souvenir he would still owe 35% of whatever the IRS guess-ti mated it’s worth. The fair market value of a one of a kind ball (until the record is again broken) mixed with the taint of an asterisk? We’re talking a range of hundreds of thousands of dollars here. So who picks the worth?

Now I’ve heard several people argue that the ball’s value IS that so high because a few people would be willing to pay an exorbitant amount for it. But lets take that logic and apply it else where – like Real Estate. The South, lately, has been getting an influx of people retiring from the North East. These people are paying 2 to 3 times the normal rate per sq ft for homes marketed to them because they’re idiots their cost of living comparison is such that those homes still seem cheap to them. Does the fact that some people are paying 3 as much for a house down the street from mine triple the value of my house? Did clever distance marketing just triple my property taxes?

Or take the plot from Indecent Proposal, a rich man offers $10 million for your wife… you refuse. Does the IRS come calling for the capital gains? Can you use the fact that she’s worth $10M in the divorce settlement when you’re splitting up the assets? I know, I can already here the well trained husbands now “but my wife is priceless”. Ok, can you claim a tax deduction then since she fell in value from “priceless” to $10M?

These examples may seem extreme, but no more so than the original $200k tax liability falling from the sky. Now let’s look at a better tax system: The Fair Tax. Since the Fair Tax is a retail (new) sales tax system, sanity would prevail and guesswork would disappear.

When Matt Murphy catches the ball under the fair tax nothing happens. If he keeps the ball – no tax liability. If he sells the ball – no tax liability. (This is a used ball therefore the tax already was paid by the Giants when they purchased the new ball) “But wait!” you say, “That’s unfair! We need to tax the rich/lucky/people other than me.” If and when Matt Murphy sells the ball (or when his grand kids sell the family heirloom) they would receive money ($700k or whatever). That money would then be used (or why sell the ball?) in one of two ways: 1) Stuff is purchased and the fair sales tax is paid (no guess-timating here). 2) The money is saved/invested. No tax is paid here again, but the money is put back into the economy through investing (saved money is invested by banks) which means the businesses spend the money (which is often taxed) and eventually all business money finds its way to individuals bank accounts (be them employees, executives, or stock holders). That money is then spent and taxed but only AFTER it has helped the economy get a little stronger. So with the Fair Tax you get less hassle and guess work, and either A) the same tax revenue (if the money is spent) or B) a stronger economy and more tax revenue (if invested).

While this is all well and good, what should Matt Murphy do in the here and now. First of all he needs to fire his tax lawyer and get a good one. A creative tax attorney would see that the value of the ball increased dramatically only once it was a home run (not when it was hit). We have seen several instances where a fan can create a home run or stop an crucial out. The opposite is also true, a fan could bobble the ball back onto the field negating a home run and possibly causing an out. Because of this, the fan’s action on the ball effects the out come of the home run – ergo, the ball does not become a home run ball until AFTER it is in his possession. Which means when Matt obtained the ball it was only worth the same as any other Bond’s hit ball ($10? $50?), therefore his income would be $50 and from this basis he’ll have to pay capital gains taxes when he sells it.

So with good advice he could keep the ball essentially tax free. And when he sells it pay the lower capital tax rate (assuming he holds it for two years). The Long term capital gains rate is typically 15% but I believe collectibles are an exception that can be somewhat higher – but even the highest exception rate of 28% is lower than 35%. Worst case this advice would save him $52k of the $263,713 he is paying now; best case would save him $150k. Would you pay a better tax attorney ten grand to save $52k+? I would.