Tax Quarry

On Tuesday, August 7, 2007, San Francisco Giants’ Barry Bonds hit his 756^th home run to beat the previous record held by Hank Aaron.

The history making home run ball was caught by a 21-year old New York college student who was awaiting a connecting flight to Australia.

Some have speculated that given the particular significance attached to this ball, which makes Barry Bonds the greatest home run hitter in history, if sold the ball’s value could range anywhere from US$500,000 to $3 million in the open market. These estimates are based on previous sales of Mark McGuire’s home run balls and other notable historical moments in the sport.

The question that has been raised by some commentators, including Marcus Wohlsen, an Associated Press Writer in his article “Mets fan could face big tax bill over Bond’s home run ball,” is whether the unsuspecting fan will be hit with a hefty tax bill if he chooses to sell the ball. If sold, the proceeds will likely be treated as capital gains or it may also be taxed as income at the highest marginal tax rate.

How do you determine if the proceeds will be income or capital property? Under Canadian law, a person must include in income money earned from an office, employment, business and property. Section 248 defines property as real or personal property which includes but is not restricted to the ownership of shares, money, timber resource property or the work in progress of a business. Under 9(3), capital gains and capital losses are not included in the definition of income or loss from property because they are included under section 3(b) of the Act. In general, a capital gain is a gain on the sale of “capital property” as defined under section 54.

There is extensive case law on whether gains or losses are on income or capital account. According to David Sherman’s Notes in the Practitioner’s Income Tax Act (31^st ed.: Thomson Carswell), the general principle is that property purchased (or acquired) with the intention, including secondary intention, of selling it at a profit is normally treated as income. Property purchased with the intention of generating income such as rent or dividends is capital gains. Gains on capital property are only half taxed whereas income is taxed at marginal tax rates up to 50% in Canada.

The analogy that the courts often use to determine if an item is income or capital is of a fruit-bearing tree. According to Beam, Laiken and Barnett in Introduction to Federal Income Taxation in Canada (27^th ed: CCH),

"An investment or capital asset is likened to the tree which produces
or can be expected to produce income in the form of fruit. Just as the
sale of the tree would be regarded as a capital transaction, the sale of
an investment that can produce a form of income from business or
property can be regarded as a capital transaction."

Based on this analogy, presumably, if the college student keeps the ball and opens a Barry Bonds 756^th Home Run Ball Museum and charges admission to view, touch or play with the ball then the money he collects from admissions will be income from the fruits of his labour and will be taxable at his marginal tax rate. However, if he decides to market it on eBay and brings in a mere $1 million in exchange for his home run ball, then this will likely be treated as capital property because he would have sold his tree and can no longer bear any fruit from it. If he returns the ball the Barry Bonds without receiving any consideration, arguably, the student will have no capital gains or income from that transaction because he returned it to the original owner and no value accrued to him.

At this point it is not certain what this young man’s tax liability will be.  Specifically, it is difficult to determine at this stage whether the IRS will determine that he has generated income or capital gains from his acquisition.   If the law in the US is similar to the law in Canada, the courts will look at the specific facts and circumstances and what the student’s overall intentions were at the time he acquired the ball and subsequently when he disposed of it. But what is clear is that he is now under the IRS radar screen and at some point he will have to account for his exceptional summer vacation activities when filing his tax return next year.

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By: Marsha Henry