After the dust settled from the excitement of Derek Jeter’s 3,000th hit, and the generosity of Christian Lopez, the fan who returned the ball instead of selling it for between $100,000 and $250,000, the questions about taxes began flooding in. After all, there have been a number of organizations lining up to shower Lopez with gifts, including the Yankees, who gave him autographed items and some pretty sweet tickets for the rest of the season.
The question becomes: Will Christian Lopez be hit with income taxes for all the freebies he’s been getting? The answer: It depends.
Taxed on Your Good Fortune
You probably expect that income taxes would need to be paid on cash prizes. If you win the lottery, win cash in a game show, or hit it big at the casino, you are expected to report the income and pay taxes on it. Things become a little murkier, though, when you win prizes, instead of cash. The IRS considers these prizes as income. Remember back in 2004 when Pontiac famously gave away cars on Oprah’s show? The recipients were on the hook for income taxes – even though they didn’t receive cash. The options for the recipients were:
- Accept the car and then come up with the cash to pay the income taxes.
- Accept the car, sell it, and then pay the taxes out of the proceeds.
- Decline the car, and owe nothing (but not have a new car).
In the case of Christian Lopez, the taxes he may have to pay will be figured according to whether or not the IRS views the items he received as gifts or as income. Already, there are some reports that the IRS is viewing the items that Lopez received from the Yankees as “payment” for the ball – so the value of those items would have to be estimated and then figured as income.
New York Magazine estimates that the total face value of what Lopez has been offered, from the stuff from the Yankees, to Mitchell Model’s 2009 World Series ring, to Brandon Steiner’s pledge of $25,000 toward Lopez’s student loan bill, to add up to a value of between $161,749.92 and $177,049.92. The estimated taxes might be as much as $14,000. In order to meet that requirement, Miller High Life has offered to pay Lopez’s income tax. It’s important to understand, though, that even that contribution might be considered taxable income by the IRS. So, if someone were to pay Lopez’s taxes, it would involve a calculation where his new marginal tax bracket would be figured, and then enough extra to cover the tax payment – and the taxes on the tax payment.
What if the Items are a Gift?
Some of what Lopez is receiving might be considered a gift. If the IRS does classify some of the items as gifts, then Lopez wouldn’t have to pay taxes on those items, since the taxes paid on a gift are paid by the giver, not the receiver. (Givers can receive an exclusion of $13,000 per individual on taxes, up to a lifetime limit.) If Lopez is able to separate his items into “gifts” and “income,” it would lower his tax liability. However, there are some rules that apply to what constitutes a “gift”:
- It must not be received in exchange for services or something else. (The IRS is likely to consider what the Yankees give Lopez as an exchange for Derek Jeter’s 3,000th hit ball.)
- It must be given with donor intent, meaning given for charity, admiration or generosity. (Under those definitions, there might be an argument that Modell is donating his ring in admiration for Lopez.)
- It must be given without expectation of gain. (One of the reasons that the Pontiac car giveaway didn’t count was because a giveaway like that is considered a marketing promotion. The givers were doing it with the expectation of raising their profiles and hopefully selling cars.)
Of course, there could be arguments made that Steiner and Modell – and even Miller – are providing their “donations” to Lopez as forms of promotion, and that the generosity could be seen as a giveaway, rather than as true gifts. That’s something that the IRS will have to decide, and that Lopez will have to determine when it comes time to report his income. The fact that this is such a high profile situation, and that no one offering these gifts to Lopez is related to him muddies the “gift” waters a bit.
It is also worth noting that if something your receive increases in value, and you sell it later, you will need to pay taxes on the gains. So, if you receive property as a true gift, you don’t have to pay taxes on it now, but if you sell it later, you will have to pay taxes on the increase. For Lopez, he will likely pay income tax on the autographed balls he received from the Yankees. Then, if he sells them in a few years, he will have to calculate the difference between the fair market value of the balls when he received them this year, and what he sells them for – and pay taxes on the increase.
What Do You Think about Taxes on Such Items?
Some argue that it isn’t “fair” to charge taxes on non-cash items of value. After all, if Lopez never sells his autographed Jeter merchandise, just lets it sit on display at his home, he won’t receive any cash for it. But, even so, he will have to taxes on the fair market value of the items – meaning he will have to come up with the cash. If Miller really does offer to help him with the taxes, that will be a problem solved (provided Miller gives enough to cover the taxes on Miller’s tax help – if it isn’t classified by the IRS as a gift). Or, he might have to apply for the IRS payment plan to break down his tax liability into payments.
What do you think? Do you think merchandise should be considered “income”? Should people be taxed on items when they receive them, or would it be fairer to only collect taxes if the items are actually sold?