July 29, 2010
Tax Consequences of the Mother of All Yard Sale Bargains ($200 Million for $45)New York Daily News, What a Deal! Photographer Ansel Adams' Work Uncovered at a Yard Sale:
Rick Norsigian made one of the best yard sale deals ever. Ten years ago, the California painter bought two boxes of photographic plates for $45, after he bargained the owner down from $75. Today, they are worth an estimated $200 million.
So what was in those boxes? Sixty-five glass negatives made by Ansel Adams, the iconic American nature photographer, CNN reported. Experts thought the negatives were lost in a 1937 darkroom fire that destroyed 5,000 plates.
Treas. Reg. § 1.61-14(a) provides that “[t]reasure 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 leading case is Cesarini v. United States, 296 F.Supp. 3 (D. Ohio 1969), in which a husband and wife who purchased a used piano at a 1957 auction for $15 in 1957 and discovered $4,467 in cash in the piano in 1964 were required to report the $4,467 in income in 1964. But Mr. Norsigian's case is distinguishable and he would not have to report the $200 million of gain (less his $45 basis) until he sells the photographic plates. See Joseph Bankman, Thomas D. Griffith & Katherine Pratt, Federal Income Tax: Examples and Explanations (Aspen, 5th ed. 2008):
[T]he circumstances in Cesarini should be distinguished from situations in which a taxpayer discovers that something that he had bought was worth more than he originally paid for it. In the latter situation the taxpayer would not have an income inclusion until the property was sold or exchanged -- in other words, until the gain was "realized." ...
In year one, Ellie pays $300 for an antique dresser at an estate sale. ... [I]n year three, ... Ellie discovers that the dresser is a rare antique, worth $10,000. Later, in year five, Ellie sells the dresser for $12,000. ...
[Answer: $11,700 of gain in year five.]
- J. Gordon Hylton, The “Who Owns the Baseball” Issue Just Will Not Go Away (Oct. 8, 2009)
- Ball Busters: How the IRS Should Tax Record-Setting Baseballs and Other Found Property Under the Treasure Trove Regulation, 33 Vt. L. Rev. 43 (2008)
- The Tax Ramifications of Catching Home Run Baseballs, 59 Case W. Res. L. Rev. 191 (2008)
- Joseph M. Dodge, Accessions to Wealth, Realization of Gross Income, and Dominion and Control: Applying the “Claim of Right Doctrine” to Found Objects, Including Record-Setting Baseballs, 4 Fla. Tax Rev. 685 (2000)
(Hat Tip: Lee Sussman.)
- CNN, Controversy Over 'Lost' Ansel Adams Photos Turns Negative
- NPR, Ansel Adams Heirs Challenge Garage-Sale Negatives
Update #2: Legal Blog Watch, Tax Professor Casts Ray of Sunshine on Yard Sale Bargain Hunters.
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I always loved Cesarini. The question I always had in regards to that case was simple: how the hell did the IRS find out about the $4,400? Seriously - either these people were 1) really unlucky to get picked for audit for THAT year, or 2) they told someone who ratted them out. No way, nohow does anyone I know or have met through the years report the $4,400.00. Period. Right or wrong, that's just how it goes.
Posted by: TaxHacker | Jul 29, 2010 1:07:53 PM
I've never read Cesarini. However, when my wife and I were married, we received a ridiculous sum of cash in wedding gifts. I was not sure whether taxes needed to be paid on the sum. To be safe, I declared it and paid taxes. Later, I learned that I did not need to pay taxes on it, and filed a 1040X to get some $ back. That might be one way the IRS learned about it.
Posted by: small mod | Jul 30, 2010 8:13:23 AM
Apparently Mr. Norsigian hired an attorney & a team of appraisers to evaluate the negatives & determine their value. Wouldn't he be able to add those costs to his basis?
Maybe not much in the face of $200 million (assuming he can sell for that), but every penny helps.
Posted by: PennyPincher | Jul 30, 2010 12:11:03 PM
I can't believe this even went to court!!! So let me get this straight....The IRS wants this photographer to pay tax on $200 million when he hasn't even SOLD the item yet? Where the heck would he get the money to pay the $30 million in capital gains taxes (especially if he doesn't even want to sell the item)? Not to mention the $20 million in state income tax.
This just shows how important it is for we accountants and tax preparers to be diligent in taking care of our clients against a money hungry IRS.
Posted by: Terry Butler | Jul 30, 2010 3:17:34 PM
Terry, did you even read the article? The guy isn't a photographer as you stated, he is a painter, and the text of the article clearly indicates that "Mr. Norsigian's case is distinguishable and he would not have to report the $200 million of gain (less his $45 basis) until he sells the photographic plates."
Posted by: Chris Cable | Aug 1, 2010 3:43:53 PM