Million-dollar baseballs are raining down on fans like pennies from heaven, and the taxman is not far behind. One ball, potentially worth $2 million, fell into a fan's hands October 4th when New York Yankee Aaron Judge broke the American League single-season home run record. Both Yankees and Texas Rangers fans erupted as Judge belted out his 62nd, besting the 61-homer record set by Yankee legend Roger Maris in 1961.

Meanwhile, fans and sports memorabilia collectors are keenly aware that Judge is not the only one adding a milestone to baseball's history. Just before Judge clinched his record, Cardinals veteran Albert Pujols hit his 703rd-lifetime homer on October 3rd, elevating Pujols into the "700 club" with all-stars Barry Bonds (762 career home runs), Hank Aaron (755 home runs), and Babe Ruth (714 home runs). Fans also know that Judge and Pujols could extend their records before the regular season concludes. The sport has not seen this kind of hysteria since the late 1990s to early 2000s when Bonds, Mark McGwire, and Sammy Sosa set a string of single-season home run records. While each surpassed Judge's accomplishments, their records are considered by many to be tainted by allegations the trio used performance-enhancing drugs.

Unprecedented momentum

A rare constellation of factors, including a "neater, cleaner era" of baseball, a 20-year drought of home run derbies, and spiking prices for sports collectibles, are creating unprecedented momentum behind home-run balls hit by Judge and Pujols. Although values are hard to predict, several of Judge's late-season home-run balls would likely be worth $1 million and perhaps as much as $2 million. Before Judge's latest record, it was estimated that his 60th home run ball would be more valuable due to it being tied with Ruth's 1927 season record. Judge's number 62 should fetch even more. With respect to Pujols, experts believe that any balls surpassing the 700-career home run mark could easily fetch six figures.

Treasure trove

Addressing the tax consequences of any of these balls is filled with uncertainty and conflicting opinions. Taken literally, the tax code would pull any fan catching one of Judge's pricey baseballs into the so-called "treasure trove regulation." The regulation holds that windfalls dropping into a taxpayer's lap must be immediately recognized as ordinary income. In the context of a million-dollar baseball, the tax bill would come to about $332 thousand for joint filers after the 37% top marginal rate is applied. State income taxes could send the final tax bill from $50,000 to $100,000 higher. The tax code 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. Another question is whether the IRS would apply the treasure trove analysis or the gift tax.

In 1998, when McGwire and Sosa were locked in an epic battle to be crowned home run king, the IRS unleashed a storm of fury by saying that any ebullient fan handing a record-setting ball back to the player would be served with a heavy gift tax bill. That resulted in a three-paragraph press release which 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.

However, the IRS 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. 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.

Talley's team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.