Hello, please see attached assignment I need help with thanks In the event a fan is lucky
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Hello, please see attached assignment I need help with thanks
In the event a fan is lucky enough to catch a home run baseball, there are a few different things the lucky fan can do with his valuable new collectible. The lucky fan can: a) sell the ball before the end of the year; b) give the ball back to the player who hit the home run; c) donate the ball to the Hall of Fame or another charity; or d) keep it. Any rule the Service seeks to implement regarding the taxation of the home run ball should effectively address all four possibilities while remaining in relative harmony with current tax law. Even if one were to accept the Service's analysis as set forth in IR-98-56,5 9 it fails to offer clear guidance on three of the four issuesselling the ball, keeping the ball, or donating the ball to charity-and fails to state whether the receiving player has any tax liability if the lucky fan returns the ball. Therefore, to adequately analyze how the law should currently handle each of the four possible situations, it is necessary to supplement IR-98-56 with current tax law. A. The Lucky Fan Sells the Ball The simplest thing the lucky fan could do, from a tax perspective, is sell the ball in an auction that ends prior to the end of the year in which the ball is caught. This way, the fan's income is an exact amount determined by the sale price, which can then be reported accurately so the Service can get its share without controversy. The situation is the same as any sale made by an individual-if you sell an item for more than you paid for it, you must pay income tax on the profit. This analysis is clearly supported by Code 61(a): "gross income means all income from whatever source derived." B. The Lucky Fan Gives the Ball to the Player A lucky fan can also give the ball back to the player. Currently, this appears to be a non-taxable event under IR-98-56 . However, IR-98-56 is merely a notice-not controlling authority-and fails to resolve income tax issues concerning the specific situation that it covers. Under IR-98-56, the lucky fan would have no taxable income to report and no gift tax to pay if he returned the ball to the player that hit the home run. However, IR-98-56 fails to cover other aspects of the situation. Does the lucky fan have to report the fair market value of his tertiary benefits, such as a free trip to Disney World or memorabilia or tickets, as income? Under established tax law the lucky fan should, but that is not expressly stated in IR-98-56. It does not appear that failing to report those amounts can be reconciled with the Code, which includes "all income from whatever source derived" in a taxpayer's gross income. In addition, if you return a valuable prize in exchange for other, less valuable prizes, how can it be said that there was no transaction or that the item being exchanged (the ball) is not the property of the exchanging party (the lucky fan)? Another important issue not addressed by IR-98-56 is the question of who, if anyone, will pay income tax on the ball. There are a few different ways to look at it. If it is established that there is an unbroken chain of ownership by the home team from the time the ball was put into play until the time it was returned to the player, an agent of the team, then there should be no tax consequences at that point. It is well established in tax law that if A owns something, and it increases or decreases in value during A's ownership, there is no recognition of gain or loss until such gain or loss is realized, usually through a sale.6 " However, if the ball is a prize owned by the home team and declined by the lucky fan, who then gives it to the player, then the player is the recipient of a prize and should be required to report its value as income. Even if the ball is considered as some type of performance bonus, the player would owe income tax based on its estimated value. At best, IR-98-56 establishes that, in Forneris's specific situation, abandoned property found by a party, then transferred to a second party with no property right, gives rise to no tax consequences whatsoever as to the first party, and may have no tax consequences as to the second party. If this logic is extended to any other situation involving found property, it leads to absurd results. As demonstrated above, IR-98-56 leaves too many situations unaddressed, leaves open too many possibilities for the situation it does address, and presents a lack of uniformity in the law. Therefore, it should be replaced by a better rule that addresses the very same situation in the same manner, while also addressing all other possible situations. C. The Lucky Fan Donates the Ball to Charity Donation to a charity falls outside the scope of both IR-98-56 and Code 74, which governs the transfer of certain prizes and awards transferred to charities. One could argue that the Code allows for an exception when transferring awards or prizes to charities, but the exception is a narrow one. Code 74(b) allows for the awardee to avoid income tax on the award by transferring it to charity if it qualifies as an "amount received as [a] prize [or] award made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement." Catching the home run ball certainly does not fall into any of these categories. In addition, 74(b)( 1) requires that "the recipient [be] selected without any action on his part to enter the contest or proceeding." In the event of a caught home run ball, the lucky fan purchased a ticket to the game. This could easily be considered an action to enter the "contest." While it does happen on occasion, it is rare that a fan can catch a home run ball without being in the stadium. Because donation to a charity falls outside the scope of IR-98-56 and Code 74, a fan who catches the ball and donates it to charity would have to go through the normal process of claiming the ball's value as income (under Code 61(a) and/or 74) and deducting the maximum allowable amount as a charitable contribution. The current maximum allowable deduction to a private foundation (such as the Major-League Baseball Hall of Fame) is generally 50% of the donor's adjusted gross income, which would include the income resulting from catching the home run ball. With the maximum allowable deduction at 50%, to deduct the entire income generated by catching a ball with an estimated value of $1,000,000, the lucky fan would need to report other income in the amount of at least $1,000,000. This would lead to a total adjusted gross income of $2,000,000; the 50% maximum charitable contribution allowed would then be $1,000,000-the estimated value of the ball. Thus, anyone with an adjusted gross income of less than $ 1,000,000 would have to pay some income tax as a result of catching the ball and donating it to charity and would have to carry over the remaining balance and use it to offset income in subsequent years. It could potentially take several years to offset the entire balance, and the lucky fan would lose a great deal due to the time value of money. It is unlikely that the Service intends to tax a lucky fan who catches the ball and donates it to a charitable foundation such as the National Baseball Hall of Fame and Museum while not taxing a fan who gives it back to the player who hit it. However, current tax law arguably leads to just that result. Though it could have, IR-98-56 contains no guidance as to whether its analysis applies to charitable donations or whether Code 74(b) could or would be extended to cover such a situation. The current ambiguity in the law calls for a new rule that properly applies to this situation. D. The Lucky Fan Keeps the Ball Current tax law appears to dictate that the lucky fan who does not sell or "return" the ball is liable to pay taxes on the ball's value, if the value can be determined. Using IR-98-56's analogy comparing returning the ball to declining a prize, it stands to reason that the Service views the ball as a prize or award. Therefore, not returning it immediately should lead to taxation under Code 74. However, as the situation has never come up, it is not clear exactly how it would be treated. This lack of clarity is why Matt Murphy claimed to have sold the Bonds 756 ball. One thing introducing unnecessary ambiguity to the situation is a cryptic statement in IR-98-56: "The tax results may be different if the fan decided to sell the ball. \"This could, at a stretch, be read as "the tax results will be the same unless the fan decided to sell the ball." Either way, both Congress and the Service have remained silent as to the treatment of a fan who decides to keep the ball. A strange situation could arise if catching the ball creates tax liability for the estimated value at the time of the catch, but then the value drops considerably before the end of the year. It could be argued that the lucky fan owes taxes on the estimated value at the time of the catch and is able to realize his "loss" only upon sale of the ball. This outcome would likely force the lucky fan to sell the ball, as he or she would owe income tax that may be in excess of the ball's deflated value. Consider this scenario: Barry Bonds comes back to play in 2009, announces it will be his final season, and hits thirty-seven home runs. His 799th career home run comes in the ninth inning of the season's last game, winning the game for his team with the all-time record-setting home run ball, the last of his career. Immediately after the game, memorabilia experts value the ball at $2,000,000. But then, two weeks later, Bonds recants his statement and signs a one-year deal to play in the 2010 season. Suddenly, the 99th home run is likely not the last of his career and thus not the all-time record-setter. The estimated value of the ball drops to around $50,000. If the lucky fan who caught the ball owes income tax based on the value of the ball at the time of the catch, he will owe nearly $700,000 in income tax at the end of the year-he would belong to the 35% tax bracket because of the value of the ball, so all his normal income would be taxed at the highest rate possible. Thus, the lucky fan would owe nearly $700,000 to the Service for a ball that is now worth around $50,000. Only if he sells the ball will he be able to claim a loss and avoid this enormous tax burden. While this situation is a bit extreme, there is the potential for similar situations involving a drop-in price; for instance, if Alex Rodriguez's name comes up in a steroids investigation, it is likely the value of his 500th home run (and likely all others, as well) would go down, much as the value of the Bonds and McGwire home run balls have gone down since the players were associated with performance enhancing drugs. The memorabilia market is highly volatile and can change based on any of a number of factors completely out of the hands of anyone, and the rule utilized in taxing home run baseballs should take this volatility into account. Current law, coupled with IR-98-56, appears to create income at the time of the catch, rather than at the time of the sale,"' if there is any reliable method of valuation.8 Such treatment leads to the problems outlined above and should be avoided if at all possible. A strict rule determining if and exactly when the lucky fan's tax liability arises is necessary in order to clarify any fact scenario involving taxation based on any valuation method. Current tax law leads to confusion and uncertainty in almost every situation. Either Congress or the Service should resolve this confusion by enacting or interpreting law in a way that will clarify an individual's tax liability in all home run ball situations. Any adopted rule or interpretation should offer guidance for any set of facts and offer fair treatment to the individuals and organizations involved. It should be clear enough to cover a broad spectrum of potential events without the need for "stretching" the law. To reach this goal, any solution must be weighed against all four possible actions of the lucky fan. A well-known principle of tax law is that when an asset increases in value while in someone's possession, the increase in value is not recognized for tax purposes until the occurrence of a realization event-most commonly, a sale. If the Service accepts that the home run ball was not actually a home run ball-and therefore did not have any definitive value-until the player rounded the bases and touched home plate, then the ball was worthless for tax purposes when it was caught (unless the player is very, very fast, or hit the ball very, very high). Its value did not accrue until the home run became official through whichever of the following events the Service adopts: the player touching home plate; the official score report being submitted; or dispute period expiring. Regardless of which event establishes the ball's value, the ball's value will have increased while in the lucky fan's possession. Under well-established tax principles, this increase in value cannot be taxed until the occurrence of a realization event, and the lucky fan has no immediate tax liability. Accepting this characterization of events leads to clearer tax liability if the lucky fan keeps the ball. In addition, adopting a rule that establishes the ball gains value only after the twenty-four-hour objection window closes would solve the issue of liability for each of the lucky fan's four possible actions. A. The Lucky Fan Sells the Ball A sale would qualify as a realization event. The lucky fan would then realize his gain, which would be the amount of the sale price, report it on his income tax return, and pay income tax on that amount. B. The Lucky Fan Gives the Ball to the Player This is where the exact time that the ball became a home run ball is important. To mimic the effect of IR-98-56, the Service should adopt a rule which establishes that the ball becomes a home run ball when the dispute window closes-twenty-four hours after the game ends. If the lucky fan catches the ball during the game, but the ball does not become the home run ball (and therefore does not have definitive value) until the next afternoon or night, the lucky fan can use that window of time to transfer the "valueless" property to the player. Because the ball is without value at this point, there is no gift tax liability for the lucky fan and no income tax liability for the player. This mimics exactly the apparent effect of IR-98-56 without resting upon tenuous analogies to awards and prizes that lead to other difficulties. C. The Lucky Fan Donates the Ball to Charity If the Service were to adopt a rule stating that the ball did not increase in value until the objection window closes, it would be much easier to donate to charity without raising any issues of tax liability. However, the lucky fan potentially would be able to later donate the ball to a charity and claim a charitable deduction for its worth, thus cancelling out ordinary income; this would leave the Service short tax revenue to which it is certainly entitled. To counter this, as part of its adoption of the proposed rule, the Service should make clear that a lucky fan taking advantage of the positive aspects of the proposed rule will not be able to claim any charitable deduction if the ball is later donated to charity. D. The Lucky Fan Keeps the Ball Thanks to the principle that an increase in an object's value is not realized for tax purposes until a realization event takes place, the lucky fan who opts to keep the ball will face no tax consequences. If the Service adopts any of the three choices leading to later realization (either when the player touches home plate, the official score report is submitted, or the dispute window has closed), then the ball's value is non-existent until the occurrence of the adopted event. Therefore, the ball would be valueless from a tax perspective at the time the lucky fan catches it. When the value increases at the time of the adopted event, it cannot be taxed because the increase in value occurred while in possession of the lucky fan and no realization event has occurred. This leaves the lucky fan with no staggering tax liability until he sells the ball, at which point he can afford to pay the tax. In addition, adoption of such a rule would allow the sale of the home run ball to be treated in accordance with the sale of all other types of collectibles. If treated as income at the time of the catch, the ball's value would be taxed in accordance with the lucky fan's tax bracket. If treated as valueless at the time of the catch, the ball's ultimate sale would be taxed in accordance with any other type of collectible, as determined by Congress: If sold within one year of the catch, the sale price would be taxed as ordinary income, but if sold more than one year after the catch, the sale would be treated as a capital gain, under the collectible exception. 10 2 The collectible exception provides for a 28% tax on the sale of collectibles held for more than one year, rather than the normal 15% tax on most types of capital gains.'103 Because the home run ball fits into this exception, the Service does not lose an extraordinary amount of money by taxing the ball later, rather than as ordinary income at the time of the catch. Were the ultimate sale taxed at only the normal capital gains rate of 15%, the Service would stand to lose more than half of the revenue it would gain by effectively forcing an immediate sale at a tax rate of 35% (15% vs. 35%). The collectible exception to capital gains cuts that potential revenue loss to less than a third, a much more palatable number (28% vs. 3 5%). If the Service were to adopt a rule delaying any tax liability until after a sale, the Service would be giving up far less than it seems, while avoiding a public relations nightmare and possibly garnering some much-needed good will from the public. 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