Larry's Tax Law

On the Cesarinis’ 1964 joint income tax return, they reported the money found in the piano as ordinary income from other sources. About six months later, however, they had a change of heart. Consequently, they filed an amended return, seeking a refund of the tax paid on the treasure trove, claiming it was excludable from income. The Internal Revenue Service reviewed the claim for refund, but eventually denied it. So, the Cesarinis filed a refund lawsuit in the U.S. District Court for the Northern District of Ohio.

The taxpayers asserted three arguments (without offering legal support):

• • IRC § 61 does not include money found in a piano;

• • If the money found in the piano is includible in income, it should be included in the year the piano was purchased (i.e., 1957), rather than the year of discovery (i.e., 1964). Since tax year 1957 was closed, the Internal Revenue Service is out of luck; and

• • If the money found in the piano is includible income, it is capital gain rather than ordinary income.

The Internal Revenue Service’s position was equally simple and, in some respects, lacking proper legal support. It asserted:

• • IRC § 61 is broad sweeping—it includes income from all sources. Consequently, unless specific provisions of the Code exclude an item of income, it is includable. Since no provision of the Code specifically excludes treasure trove, the money found in the Cesarinis’ piano is includible in their gross income;

• • It is ordinary income; and

• • It is includible in income in the year of discovery.

Section 61 of the Code provides: “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following…”

Both the Cesarinis and the Internal Revenue Service appear to have failed to review the applicable Treasury Regulations. Treasury Regulation Section 1.61 14(a) specifically provides:

“Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.”

Judge Young, however, did review the Treasury Regulations. Based upon this regulation, he held the Cesarinis had income in the year of discovery. As there was no sale or exchange of a capital asset, the income is properly characterized as ordinary income. Consequently, their request for refund was properly denied.

In the present case, assuming the value of the gold coins is $10 million, and further assuming the California couple has an undisputed right to the gold coins, they will have a combined federal and state income tax liability of approximately $5 million. Despite the Cesarinis’ argument, the income to the California couple is ordinary income. It is hard to debate this result. The California couple reportedly had an increase in wealth by $10 million. Good fortune found them!