IRS backs off from challenging political heavyweights

Should big political donors pay gift tax? IRS won’t say

Earlier this year the story broke that the IRS had notified five bigfoot political donors that they could owe gift taxes on secret contributions made to nonprofit political advocacy groups which then shuttle the money over to political campaign efforts. The New York Times weighed in with an editorial, saying, “The Federal Election Commission should be policing some honest disclosure here, but it has abdicated its responsibility. So it is commendable that the tax agency has the will to enforce existing law, particularly if it puts some caution in the minds of donors preparing to flood the next elections with secret money.”

Eh, never mind.

This month the IRS did a rarely-seen bureaucratic backbend, dropping any audit programs aimed at bigwig political moneybags. In a three-paragraph memo, an IRS deputy commissioner said, “This is a difficult area with significant legal, administrative, and policy implications with respect to which we have little enforcement history.”

Translation: IRS is backing off, and another barrier is removed to a 2012 flood of political advertising beyond anything we’ve ever seen. Did the agency come under political pressure? Who knows. But when Senator Orrin Hatch says in a statement, “The decision today ensures that the IRS remains free from even the hint of undue political influence,” does it make you think that maybe there was some political influence?

Derek Jeter, generous fan Christian Lopez, and the cheap-o Yankees

Following the last post, here are three scenarios for the possible tax consequences to Christian Lopez, the Yankees fan who caught Derek Jeter’s 3000th-hit home-run ball and gave it back to the Yankees. The Yankees gave Lopez a pile of swag, including signed jerseys, and tickets for the rest of the season.

Scenario #1: Lopez owes tax on the full face value of the tickets.

This is the simplest calculation and the one that The New York Times used in its story . The four “Legends” seats tickets the Yankees gave Lopez for a game last week sell for up to $1358.90 each. They also gave him four “Champions Suite” seats for every remaining game, which could be bought through the Yankees website for a total of somewhere between $44,000 and $75,000, depending on exact location. So Lopez under this calculation could owe tax on somewhere between $50,000 and $80,000 of income.

Scenario #2: But, in the real world, Yankee Stadium tickets aren’t so precious.

Anyone who has seen a Yankees game on television in the past two years has probably also seen an embarrassingly vast sea of blue behind home plate. These are the empty overpriced seats that the Yankees first tried selling for up to $2,625 per game (that is not a typo). Those tickets have been Bronx Bombs with fans who think that any seat selling for $1,000 or more should at least have a flight attendant and transatlantic movies.

What are these seats really worth in the marketplace? Well, you can buy those $1,358.90 Legend tickets in Suite 25 directly from the Yankees’ website to see New York play the Seattle Mariners on Monday, July 25. Or you could get them on Stubhub at more than 60% off, where seats in the same section were being offered as of July 12 for $500 apiece. Prices for less desirable games tend to drop further as game day approaches.

Then there are the four “Champions Suite” tickets the Yankees gave Lopez for every remaining game. These are less desirable than the Legends seats. That’s right, the Yankees cheaped out and didn’t give him tickets in the best sections THAT THEY HADN’T SOLD ANYWAY. Again, a quick check on StubHub shows tickets in the same sections selling for anywhere from 25% to 60% below face value.

So the actual market value of all these tickets could be closer to $25,000 than $80,000, depending on just how good the seats were that the Yankees parted with.

This is a gray area, just as it is for game show contestants. People win a trip to an all-inclusive Jamaican resort, or a washer-drier combo–they have to pay tax on the value of that prize. It’s pretty easy to figure out what an appliance is worth. But there can be a significant difference between the “value” of a trip as quoted on a game show and what consumers are actually paying for the same trip on discounters like Expedia. These are the kinds of issues that keep tax pros like me fully employed.

Scenario #3: Lopez doesn’t owe anything.

It’s possible! Columbia University law professor Michael J. Graetz, who helped advise the IRS on the tax treatment of Mark McGuire’s 70th home run ball (sold at auction for $3 million), told the Times that it might be able to make the case that the Yankees gave Lopez everything out of, “detached and distinterested generosity,” and without any business motive. In that case, Lopez might have received tax-free gifts, and would owe nothing.

The New York Yankees. Generous to their fans. Why do I think that one’s not gonna fly?

A potentially costly catch

Derek Jeter’s slog to 3,000 hits mercifully ends, and with a home run no less. A fan, Christian Lopez, is in the stands for his 23rd birthday and catches the ball. Fan agrees to give the ball back to Jeter. Yankee management buries fan in a pile of swag, including signed jerseys, bats, and premium seats for the rest of the Yankee’s home games this year, including any postseason games.

Just a sweet feel-good story all the way around, right?

derek jeter 150x150 A potentially costly catchHa! As Kay Bell pointed out on her blogsite, Don’t Mess with Taxes, Lopez may owe taxes on the value of everything he received in exchange for the ball.

Paul Caron, a tax professor at the University of Cincinnati’s Law School, told The New York Times, “Pretty clearly he’s going to have to report as income the value of all the stuff he got for the ball.”

Three thoughts on this:

1. Mr. Lopez sounds like a heck of a nice guy to be willing to give the ball to Jeter instead of auctioning it off.

2. Mr. Lopez also has $100,000 in student loans. Derek Jeter makes $17 million annually playing baseball. The New York Yankees are worth more than $1 billion. Are the Yankees really going to leave this kid with a potential five-figure tax bill for the stuff they gave him?

3. Do you have any idea how hard it is going to be for me to feel bad for anyone who’s a Yankees fan?

More on this later this week.

Hey, Charlie Brown, come kick this football!

When it comes to dealing with Congressional Republicans on budget issues, President Obama has often seemed to be bidding against himself. The results have been almost predictable–no rollback in the Bush tax cuts for the wealthiest Americans, a tax system that continues to assess workers’ earnings more heavily than the money made on invested wealth, and a focus on budget deficits rather than spending to create jobs and boost the economy.

Now comes word that the President would consider doubling proposed federal spending cuts in exchange for unspecified revenue increases. House Speaker John Boehner has met secretly with the President at the White House to discuss a deal in which tax laws would be overhauled in exchange for cuts in programs such as Medicare and Social Security.

I can already see where this could wind up. House Republicans, under the umbrella of so-called tax reform, agree to changes that eliminate some deductions and simplify some parts of the tax code while not coincidentally reducing the highest tax rates–changes that would overall provide greater benefit to taxpayers earning more than $400,000 a year. In “exchange,” the White House proposes cutting future spending on Social Security, Medicare and Medicaid–programs that benefit all Americans.

I’d be happy to be proven wrong on this. But the recent political history is not encouraging. And as I keep hammering home, remember: When the current batch of Republicans running the House of Representatives talk about cutting spending, that’s often code for cutting benefits received by average Americans. And that’s the same thing to your wallet as a tax increase.

Bad banks behaving badly

Apparently, banks don’t have trouble just with tracking who actually holds some of the loans they make. They also can screw up on tracking property tax payments on the loans they service–and then send borrowers incorrect threatening warnings that they owe taxes and could lose their home.

bank of america 150x150 Bad banks behaving badlyBrent Hunsberger of The Oregonian has the story about BAC Tax Services Corp., part of Bank of America, which sent these letters to close to 5,000 Oregonians. Imagine getting this Your-Lender-May-Promptly-Begin-Foreclosure-Proceedings letter that BAC sent out.

BAC, by the way, is an arm of BAC Home Loan Servicing LP, which previously agreed to pay at least $20 million for allegedly foreclosing illegally on 160 members of the military.