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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, December 3, 2011

Tax Exam Question: $500,000 Found in Purchased Storage Unit

Public StorageA California man discovered $500,000 in gold coins after paying $1,100 for the contents of an abandoned storage unit. See here, here, and here.

Question: Discuss the income tax consequences of these events.

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Case 1: TP was just looking to gamble on a storage locker. Follow Cesarini and put the FMV of the gold pieces on Line 21.

Case 2: TP is in the trade or business of buying abandoned lockers and flipping the contents. This fact pattern is a little more interesting. The conservative choice would be to put the entire FMV on Schedule C right away, but if you wanted to get a little more aggressive, I think you could make a case for treating the transaction as a $1100 inventory purchase and recognizing the gain piecemeal as the items are sold.

Posted by: James Nye | Dec 3, 2011 12:25:38 PM

I'd use the broad definition of income under section 61 of the IRC and cite Cesarini v. United Sates in which a piano was purchased and later found to include thousands of dollars of old currency in the piano. The district court held that the money in the piano was properly includible in gross income as ordinary income. I believe there is a Revenue Ruling on this as well.

Many fond memories of briefing cases and being questioned extensively in the theory of taxation course in my masters program.

Posted by: mbt11 | Dec 3, 2011 4:24:39 PM

If he was in the business of buying and selling the contents of abandoned storage units then this is ordinary business income. His inventory is valued at cost and when he sells the coins he has a $498,900 profit which is reported with respect to whatever business entity he has chosen.

If he is not in this business, but purchased the contents as an investment then he has a long term or short term capital gain, depending upon the length of his holding period, when he sells the coins.

That's my story and I am sticking to it.

Posted by: David R | Dec 3, 2011 5:19:42 PM

Great question. Seems like we have the law of treasure trove (taxable income), on the one hand, and a bargain purchase between parties dealing at arm's length (not taxable until recognized in a subsequent disposition), on the other. If buyer thought he was purchasing a basket of goods, not knowing the specific identification of each item, then it looks like a bargain purchase. If buyer performed a specific identification of each asset and did not identify the coins, then it looks like treasure trove; however, it could argued that even if the coins were not specifically identified, there was a reasonable expectation that when a bulk purchase of goods like the one described is made, part of the purchaser's benefit is that there may be some valuable goods inadvertently in the basket (e.g., old comic books, antiques, baseball cards), in which event bargain purchase should prevail.

Posted by: Alan Solarz | Dec 4, 2011 10:43:10 AM

The decedent lost assets with a FMV of $500,000 (unknown basis, but probably much lower given the recent rise in gold) over a storage bill probably less than $500. If you were doing the decedent's final tax return and assuming that there already existed taxable income, would this get treated as a capital loss, casualty loss, ordinary loss, no gain or loss, ignored, become an estate tax issue (with no consequence this year except for the poor heirs), or what? I'm guessing, without a lot of thought, that the decendent and her heirs have no tax issues and are out of luck.

Posted by: Woody | Dec 5, 2011 8:21:31 AM

From the point of view of a non-lawyer (I'm an economist), this discussion is fascinating. It seems that there are several debatable issues: the timing of recognition of income, and assuming that recognition doesn't occur until the coins are sold, whether it is capital gain or ordinary income. If David R is right, what determines whether the lucky Golden Stater is an investor or engaged in trade or business? It seems that he would always want to assert investor status (assuming he was expecting gains on average).

Prof, are you going to tell us the definitive answer to your exam question? Or is the answer unclear?

Posted by: Len Burman | Dec 5, 2011 9:45:47 AM

A more interesting question is why was TP so *stupid* as to broadcast that he had found *anything* of value in that locker....

Posted by: Dyspeptic Curmudgeon | Dec 6, 2011 7:48:57 AM

Not having read Cesarini, the taxpayer in that case presumably was buying a piano not expecting to find anything inside it but piano innards. He or she just wanted a piano to play. Finding cash inside it was just like finding cash on the street. The taxpayer who buys the storage locker is NOT buying some place to store his or her stuff. Nor are they buying it because they figure whatever is in there will be personally useful to them -- socks? Hair dryers? They are buying it because of the potential value of the contents. Which they presumably will then sell on ebay. That is an important distinction I think.

Posted by: bklynatty | Dec 7, 2011 5:50:11 PM