Tax Memo Sample Tax Memorandum

Requested by:

FACTS:

Through sheer happenstance, the taxpayer caught an historic homerun ball at a baseball game you recently attended. At the point the ball flew over the wall of the playing field and into the stands of bleachers -- whereupon it became essentially non-playable -- the status of the ball changed from an ordinary baseball to a collectable item of considerable worth. Since the taxpayer received the valuable ball through luck (and the ability to catch a baseball inflight), the baseball is considered to be a gift. Had you (the taxpayer) taken specific action to select a seat that is commonly targeted by homerun balls (were such a thing possible), possession of the baseball might be considered a gambling win. However, no rules of gambling are applicable to this event.

ISSUE(S):

Is the ball considered a gift? A gift is any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

When is the caught baseball taxable? Technically, the ball is taxable when caught and when sold. The donor of the gift is generally responsible for paying the gift tax, however, at the time the baseball was thrown, it did not have any value beyond the cost of an ordinary professional baseball quality piece of equipment. Under these circumstances, the ball...

Moreover, the gift tax has liberal cap -- as of 2014 -- of up to $5.34 million in a lifetime before the gift tax is calculated and owed: provisions for corporations such as the baseball league are likely to differ.
How is the value of the ball calculated? The general rule is that your basis in the property is the same as the basis of the donor.

The value of the ball is calculated at Fair Market Value, which is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

If the ball is sold, is the return recognized ordinary income or capital gain?

Assets held for more than one year before disposal (sale) are considered long-term. An asset held for one year or less is considered short-term. Net capital gains from selling are taxed at a maximum 28% rate. Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.

CONCLUSION:

The taxpayer does not owe gift tax and has the option of selling the baseball after one year from the date acquired in order for the gain to be taxed as long-term capital gain. The receipt of the historic baseball is considered to be a gift and not a gambling win. As such, gift…