Question

Scenario

Mike and Sharon, a married couple from Texas, purchased a used cabinet at an auction for $200. After getting home, they discovered $1,000 cash tucked in the cabinet. Being unable to determine who put the money there and after consulting the local authorities, Mike and Sharon kept the $1,000.

Question:

1. What are as many possible tax research issues as can be determined in whether Mike and Sharon are liable for any tax on the money they found?

2. And what keywords would you might use to construct a search using RIA Checkpoint?

Answer 1

1. The money that you accidentally stumble across, is known as found property. The IRS treats found property as taxable income. This rule has originated from a 1957 case law in which Ermenegildo and Mary Cesarini purchased a used piano, brought it home, and spent the next seven years enjoying its music. At some point in 1964, they opened it up and discovered $4,467 inside.

The Cesarinis argued to the IRS that the money wasn’t income, and so it should not be taxed as such. The IRS wasn’t swayed by the couple’s argument. The case went to federal court, and the IRS won. “Found” property and money has been considered taxable income ever since.

If you find cash, the IRS states that taxpayers must report “all income from any source," even income earned in another country, unless it is explicitly exempt under the U.S. Tax Code. This covers a wide range of miscellaneous income, including gambling winnings. According to the Cesarini decision, money you find isn’t explicitly exempt.

Miscellaneous income is taxable as ordinary income. This means it’s not subject to any special tax rate even if it doesn’t seem “ordinary” in the normal sense.

Example: You earn $70,000 in a year in your job. You stumble across $12,000 buried in a tin can. Your annual income is now $82,000 before you take any deductions or credits you're entitled to.You’ll pay income taxes on this overall income, less deductions and credits, according to whatever tax bracket you fall into.

In the given case, Mike and Sharon discovered $1,000 cash tucked in the cabinet and thus it will form part of their taxable income.

2. Keywords you might use to construct a search using RIA Checkpoint

RIA Checkpoint is a full-text database of federal, state, and some internation tax materials. It contains full text laws and regulations as well as a number of important secondary tax research sources. Use of RIA Checkpoint is limited to the University of Michigan Network.

(a) Found property

(b) Cesarini decision

(c) Ermenegildo and Mary Cesarini