Hamill: The tax implications of a $1.56M baseball

As we kick off another Major League Baseball season, I decided to take the opportunity to use the MLB to explain tax planning.

All tax planning can be placed into one — or more — of four categories. First, what is income? Second, to whom is it taxed? Third, when is it taxed? Fourth, how is it taxed?

Income is generally any economic benefit received. However, the tax law excludes certain items. One example is gifts. Another is employer-provided health care.

It is generally best to delay reporting income as long as possible. In some cases, the tax law allows income or gains to be deferred.

Identifying the proper taxpayer can be important because not all taxpayers are in the same tax bracket. Some are even classified as tax-exempt.

Income can be ordinary, taxed at regular rates or subject to a special rate, such as applies to capital and section 1231 gains, or qualified dividends.

Tax planning attempts to optimize the tax result of a particular transaction. This planning considers what income is, to whom it is taxed, when it is taxed or how it is taxed.

Back to baseball. In the 2024 World Series, game one at Dodger Stadium, the Yankees held a 3-2 lead in the bottom of the ninth inning.

The Dodgers had the bases loaded and Freddie Freeman at the plate. Freeman hit a walk-off grand slam.

This was, obviously, a big deal and Freeman would have loved to have the ball. The ball was recovered by the Rudermans, who didn’t want to share.

Zach Ruderman is a 10-year-old boy. His father is Niko Ruderman. The ball landed in right field and ended up on the ground in the bleachers.

This provided an advantage to the young boy, who went to the ground and, according to Zach, “knocked it over to (my) dad.”

Niko retrieved the ball pushed toward him by Zach. Niko then handed the ball to Zach. The Rudermans put the ball up for sale at an auction. It sold for $1.56 million.

The sale of the ball occurred in December 2024, the same year that Zach and Niko recovered the ball.

Is this income? Seems to be. The Rudermans received $1.56 million minus costs. But when does the income “vest?”

It could be when the ball was first retrieved. Or maybe only when it was sold. The tax result can be different even though the ball was both retrieved and sold in 2024.

Let’s say the income event is when the ball was retrieved. We must then estimate the value. Let’s say $1.25 million is a reasonable estimate.

Then there is $1.25 million of ordinary income. When the ball sells for $1.56 million, there is also a $310,000 short-term capital gain.

Why can’t they report capital gain for the Oct. 25 recovery? Because there was no sale or exchange of a capital asset.

The December sale produces a capital gain. The amount depends on whether income is first reported in October.

I doubt the ticket price can be subtracted as “basis.” The tickets were not purchased to acquire the ball.

The Supreme Court developed an “origin of the claim” test to classify expenditures. The origin of the cost (claim) of the ticket was to see the game.

To whom is it taxed? Zach first touched the ball but did not retrieve it. Niko retrieved the ball but only due to the assistance provided by Zach. Is this a partnership?

If this is a partnership, the income must be split. Would that be 50% each or more heavily weighted to one or the other?

If Zach reports some income, it matters if that income to a 10-year-old is “earned” or “unearned” income.

A special tax — colloquially called the “kiddie tax” — applies to the unearned income of a child. The tax rate is the higher of the child or the parents.

Given the sale price, perhaps they would both be in the highest bracket. But earned income — not any reported capital gain — could fund a retirement plan contribution.

A father and a son went to a baseball game. The tax law joined them. They walked through a door ripe with tax options — into the twilight zone.