ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
Guest Column by:
Dan Russomanno (Penn State) and Shelley Rhoades (Villanova)
Christian Lopez is the diehard Yankees fan lucky enough to catch Derek Jeter’s 3,000th hit on July 9, 2011. In a show of traditional values and sportsmanship too often lacking by fans that have been in Lopez’s seat before, Lopez did the right thing and returned the historic ball to Jeter stating “I did it because he (Jeter) deserved it”. As Grumpy Accountants, we applaud Lopez’s actions and display of the sort of ethics many accountants could learn from.
In gratitude for giving back the ball, the Yankees gave Lopez four luxury seats for every remaining home game of this season and an assortment of Jeter-signed memorabilia. The value of these items is estimated to range between $50,000 and $70,000. The Yankees may have been motivated by generosity, or may have sensed the public-relations value of the situation. Either way, their award to Lopez may ultimately cost him some cold hard cash.
Although the IRS has not publicly commented, Grumpy Tax Accountants seem to agree that Lopez will owe tax on the value of the seats and memorabilia. Why? Because he received them in exchange for the ball! In essence, he gave something of value to Jeter, and received something of value in exchange. The value received is income, subject to federal income tax. The tax due will depend on the value of the items awarded to Lopez and his marginal tax rate. Given Lopez’s age (23) and his profession (cell phone salesman), he likely is not in the top federal income tax bracket. Thus, his marginal tax rate probably does not exceed 28%. If so, his tax bill for giving up the ball could range between $14,000 and $20,000. That’s a big pill to swallow for a guy reportedly already in debt for up to $150,000 of student loans.
When the New York Times broke the story of Lopez’s potential tax dilemma, outraged sports fans stepped up to the plate to pitch in. Modell’s Sporting Goods gave Lopez a 2009 Yankees World Series ring valued at $40,000. Modell’s has also declared “Christian Lopez Week at Modell’s” from which Lopez will receive 5% of all Yankees merchandise sold during the week. His expected payment from this promotion is estimated to be at least $25,000. In addition, the owner of Steiner Sports Memorabilia has pledged $25,000 to Lopez. Finally, Topps may have topped everyone by promising Lopez his own baseball card next season!
The tax consequences of these subsequent transfers from Modell’s, Steiner Sports, and Topps to Lopez are potentially less onerous. Since not given in exchange for the ball, they should be treated as gifts to Lopez and exempt from income tax. However, Lopez should be aware that if he agrees to make personal appearances at Modell’s locations or participates in advertising for the sporting goods chain, the IRS could argue the money is payment for services and therefore, fully taxable. If so, the company’s efforts to help him pay his tax bill could lead to a double play (or double pay) for the IRS!
Baseball may be the national pastime, but taxing income ‘from whatever source derived’ is the favorite sport of the IRS.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
The tax is based on the “value” of what is received. Is it what would be paid to obtain it or what would be received for selling it in the secondary market? I think that a good argument could be made that the value is its selling price in the secondary market rather than the potential purcahse price. For art, antiques, houses, and similar items there is a big spread between the bid and the ask, and that the opportunity cost to Christian Lopez is the value that could be received from selling the seats rather than the price he would have paid if he had purchased them.
Mike, great post. I believe you are concerned with the fair market value (FMV) of the package (i.e. tickets and other merchandise) the fan received from the Yankees. Specifically, how should the FMV be measured and could the fan be strategic when selecting the FMV measurement approach to minimize his tax liability?
The autographed memorabilia is less liquid than the tickets. Therefore, a secondary market with comparable items, such as eBay, might be useful to estimate the FMV. However, tickets tend to be more liquid than the memorabilia and similar tickets could be purchased online through sites such as StubHub. Depending on the game (i.e. demand for the ticket), the secondary market price of the tickets may be less than purchasing directly from the Yankees….but may also be more expensive as well. For example, a ticket for the Yankees vs. Red Sox (a coveted rivalry) will sell at a premium over face value on a secondary market. In contrast, tickets for the Yankees vs. Orioles may be selling at a steep discount given the tough year Baltimore is having.
Overall, if a secondary market strategy to measure the FMV of the package is taken, it must be consistently applied independent of whether the secondary market prices are yielding above or below the purchase price directly from the Yankees.
Dan and Shelley,
Nice article! The IRS has set a precendent regarding the finding of the ball and then giving it back (Mark McGwire and Barry Bonds), but in those instances the fans did not have an exchange like has been done in this case. Interesting!
Great article. True to their word Topps has released images of Lopez’s upcoming baseball card debut, which will be released as part of their 2012 Topps Series 1 Baseball set. Seems like a great guy that deserves all the recognition he’s been given.
Would Jeter be on the hook to the IRS for receiving the ball?
Joe, anything is possible!! If the IRS regards the Yankees as purchasing the ball from Lopez and then transferring it to Jeter, the value of the ball to Jeter could be viewed as taxable compensation. If this were the case, the Yankees would get a compensation deduction, so the net tax revenue for the IRS would be minimal.
Great article. As to the Modell appearances, this may also subject him to social security taxes. If paid by Form 1099 he would have to pay the employer and employee match via Schedule SE. Still this guy’s ethics and sense of fair play are extremely admirable and today is the exeption rather than the norm. Good for him!