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Home Runs and the Capricious Tax Man

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Everyone was appalled when a spokesman at the Internal Revenue Service said that a big tax bill lay in store for the fan who retrieved Mark McGwire’s record-breaking 62nd home-run baseball and returned it to the slugger. Then everyone breathed a sigh of relief when IRS Commissioner Charles Rossotti said, in effect, “never mind.”

All’s well that ends well? Not so fast. There’s a lesson here and we’d best learn it fast.

The U.S. government, and many state governments, tax gifts. But it is not the receiver who is liable; it’s the giver. When it comes to taxes, it is more blessed to receive than to give. The federal tax kicks in when the gift is worth $10,000 or more. If it is something other than cash, the tax is figured on the “fair market value” of the object. There has been at least one offer of $1 million for McGwire’s baseball.

Because of a recent change in the law, the first $625,000 of value is exempt from tax. But any value above that amount could be taxed at 40 percent. That could mean a $150,000 tax bill for the generous person who retrieved the ball and gave it back to McGwire. The tax exemption is a once-in-a-lifetime event. If the lucky fan were to take the exemption now, his estate could not take it later when he dies. (The ball was retrieved by a St. Louis Cardinals employee, who gave it to McGwire.)

A few days before McGwire hit his record homer, IRS spokesman Steven J. Pyrek was quoted as saying, “The giver of the gift is required to file the gift tax return. We’d have to take a look at all the circumstances: the value of the gift and who owns the baseball.” Pyrek’s remark caused a national groan. Politicians of both parties got into the act, denouncing the IRS for pouring cold water on the national celebration of McGwire’s impending Herculean achievement. White House press secretary Mike McCurry said the IRS position was “about the dumbest thing I’ve ever heard in my life.”

The reaction apparently left the recently public-relations-conscious IRS no choice but to take its poison words back.

Said the IRS: “In general, the fan in these circumstances would not have taxable income.” In other words, he wouldn’t owe tax. Giving the ball back would be, the IRS said, like declining a sweepstakes prize.

Commissioner Rossotti found his own cute but understated way to turn the issue into a PR-coup: “Sometimes pieces of the tax code can be as hard to understand as the infield-fly rule. All I know is that the fan who gives back the home-run ball deserves a round of applause, not a big tax bill.”

So everyone’s feeling good. But maybe we shouldn’t. Of course, we should be pleased anytime anyone is able to keep his own money out of the hands of the taxman.

Nevertheless, we should be more than concerned about a tax code that is so open to interpretation that the IRS on any given day cannot tell whether something is taxable or not. Worse than that, we seem to have a tax system in which the bureaucrats can waive a tax in a particular circumstance whenever it suits their interests.

This is the rule of law? I don’t think so.

The man who retrieved the valuable ball did indeed give a gift to Mark McGwire. It is frighteningly capricious for the IRS to say, under the pressure of baseball fans, that the gift is not taxable.

Should the lucky ball-retriever have to pay the tax? Of course not. But the way to relieve him of the tax is for Congress to repeal the stupid gift and estate tax-and to make the repeal retroactive for everyone.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.