Is Found Money Taxable?

Say that you found a money clip with several hundred dollars. There is no identification, so there is no way to return it.

Question: Do you have taxable income?

Let’s look at a famous tax case.

In 1957 the Cesarinis purchased a used piano at an auction for $15. Their daughter took lessons using this piano.

In 1964, while cleaning the piano, they discovered $4,467 in old currency bills. They exchanged the old currency for new at the bank. They also reported the $4,467 as income on their tax return.

By October 1965 they were having second thoughts. They amended their 1964 tax return, reversing the $4,467 from income and asking for a tax refund of $836.

The IRS rejected the refund claim.

Off to Court they went.

The Cesarinis had three arguments:

(1)  The $4,467 was not income under the tax Code.

(2)  If it was, then it was income in 1957, when they purchased the piano. Since 1957 was a closed tax year, there was no further tax consequence.

(3) Even if it was taxable in 1964, it should be taxable as capital gains and not as ordinary income.

The Court was methodical:

·      Code section 61(a) stated “except as otherwise provided in this subtitle, gross income means all income from whatever source derived….” 

Granted, there are other sections that may keep a source from being taxed – or delaying its taxation – but the general rule is to consider all accessions to wealth as taxable. The language was intentional, and it was deliberately used by Congress to assert the full measure of its taxing power under the 16^th amendment.

·      The IRS did not, but the Court did, point to the following Regulation:

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.”

The Cesarinis, seeing an opening, pressed on the year they obtained undisputed possession.

That is not a tax question per se, so the Court looked at state law. Say the Cesarinis had sold the piano in 1958, not knowing about the cash. Would they have an action against a purchaser who later found the cash? In Ohio (their state of residence) they would not. Extrapolating, the Court determined that “undisputed possession” occurred in 1964, when the cash was found.

·      The Court acknowledged that both the piano and the cash could be construed as capital assets, and that capital gains derive from the sale or exchange of capital assets. 

And this is where word selection is critical: neither the piano or the currency had been sold or exchanged. No sale or exchange = no capital gain.

The Cesarini case cemented that found money – sometimes called “treasure trove” – is taxable just like any other type of income.

You are not really surprised at the answer, are you?

Our case this time was Cesarini v United States 296 F Supp 3 (N.D. Ohio 1969).