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Friday, February 28, 2014

California Couple That Found $10 Million in Gold Coins Faces 47% Tax Rate

GoldSan Francisco Chronicle, Couple's Gold Discovery Will be Taxed at Top Federal Rate:

The Gold Country couple who unearthed at least $10 million worth of 19th century gold coins in their yard last year will probably owe close to half of that sum in federal and state income tax - whether or not they sell the coins.

There is no question that the discovery of the coins is a taxable event. In a famous 1969 decision, a U.S. District Court in Ohio ruled that a "treasure trove" is taxable the year it is discovered. In that case, Cesarini vs. United States, [296 F.Supp. 3 (N.D. OH 1969), aff'd, 428 F.2d 812 (6th Cir. 1970)] a couple bought a used piano in 1957 for about $15. In 1964, they found $4,467 in old currency inside it. The court ruled that the money constituted ordinary income in 1964, the year in which they had "undisputed possession" of the funds. It did not qualify for the lower capital gains tax rate because neither the piano nor the currency were sold or exchanged.

In its 2013 tax guide, the IRS states, "If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession."

The couple, who have not been publicly identified, found the coins in cans buried in their backyard in February 2013. That means they will owe tax on the estimated value of the coins by April 15 to avoid a penalty and interest, says Leo Martinez, a law professor at UC Hastings College of the Law.

Most of the money will be subject to the top federal tax rate of 39.6 percent, which starts at $450,000 in joint taxable income.

In California, the top rate - on joint income over roughly $1 million - is 13.3 percent. Taxpayers generally get a federal deduction for state income tax paid, reducing their effective federal rate.

That puts the total amount going to state and federal tax at about 47 percent.

The couple could try to argue that the find should be taxed as a capital gain on the grounds that "when they bought the property, it was part of the property and part of the acquisition price," says Arthur "Kip" Dellinger, a CPA with Cooper, Moss, Resnick, Klein & Co.

Long-term capital gains are generally taxed at a top rate of 20 percent, but the rate on collectibles - which include gold and coins - is 28 percent. Starting in 2013, high-income taxpayers will owe a 3.8 percent Medicare tax on some or all of their investment income if their modified adjusted gross income exceeds a certain level ($250,000 for joint returns).

Dellinger says the capital gains argument would be tough to win, and "if the government wants to challenge them, the minute they litigate the issue, their names become known." To shield their privacy, he suspects, "They are going to pay the ordinary income tax and be happy with it."

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Comments

This is grossly unfair. Those coins don't have a known value until they're sold. The tax should be on their profit (assuming a cost of near zero) when they're sold. And I imagine that is what would have happened had they found gold, oil or whatever on their land. Why are gold coins different?
That also raises further interesting questions. Having paid this tax, are they exempt from all other taxes when the coins are actually sold? And what if they sell for less than that current tax? Can they declare a loss? What about more? And how does an assessment of the entire hoard apply to individual coins?
In the end, I suspect this is a classic illustration of how the government can get away with screwing small groups. There are not enough people making such fines to lobby Congress for a change in the laws. And ordinary people who occasionally come into such a windfall are one such group.
And that, in the end, is an excellent illustration of why the Government Good--Corporations Bad mantra doesn't hold. A can refuse to do business with a nasty corporation. A nasty government doesn't give me that option.

Posted by: Michael W. Perry | Feb 28, 2014 8:37:09 AM

And what if they donate or sell at low price the entire hoard to a charity? A sale would establish a low value for tax purposes. A gift should give them tax benefits they could use over the next few years.
I'd almost be tempted to do that just the keep money out of the government's hands.
One final note. Remember the old Lovejoy TV series from the UK about an antiquities dealer who wasn't particularly honest? With laws like these, I could see why his ethics were a bit loose.

Posted by: Michael W. Perry | Feb 28, 2014 8:45:02 AM

This strikes me as odd. I know Uncle Sam always get his cut but why is it not the disposition of the property that is taxable.

Suppose I have a very nice old painting that I found at a garage sale for $50 on my wall. Antiques Roadshow tells me it's a genuine Vincent Van PIcasso worth $50mm. Nothing has changed other than the fact that I now know that the market price has increased. Taxable event? Hogwash.

Posted by: Jojo | Feb 28, 2014 10:04:50 AM

We should all have such problems.

Technically, gold coins are different from oil or paintings because they constitute "treasure trove," explicitly made taxable upon being reduced to undisputed possession by Reg. Sec. 1.61-14 and Rev. Rul. 61, 1953-1 C.B. 17. Presumably, treasure trove is singled out for immediate taxation because it is so easily valued.

Oil discovered in the ground is clearly not income until sold. It would be very unusual for someone to "find" a Van Gogh in a manner that gives him possessory rights unless he buys it (e.g., finding it in an antique shop, where the shopowner sells it for a pittance because he doesn't know what he has) or already owns it (e.g., finding it in the attic). Neither are taxable events. Van Goghs tend not to be left by the side of the road for passers-by to pick up.

Posted by: Theodore Seto | Mar 1, 2014 7:47:09 AM