The California Gold Rush got underway long before the U.S. Constitution was amended to allow for a federal income tax.
Indeed, the two events are separated by nearly three quarters of a century. The celebrated rush for gold in 1849 lives on in many ways, not least in the name of San Francisco’s pro football team. It was not until 1913, however, that the Sixteenth Amendment granted Congress the authority to impose an income tax.
The text of the amendment refers to incomes “from whatever source derived.” But is it really true that the power to tax applies even to lost or abandoned property that is discovered by a taxpayer?
A recent California case raises the issue. A couple in Northern California found about $10 million in rare gold coins that had been buried on their land.
A windfall, right?
Well, not so fast. California wants a share of the new-found wealth and so does the IRS.
The revenue agencies’ case is based on the legal principle that the discovery of a “treasure trove” triggers a taxable event. In a leading case on the subject, a couple found several thousand dollars of cash hidden in a piano they had purchased second hand.
A federal court in Ohio ruled in the case in 1969. The court held that when someone finds and keeps a “treasure trove,” it is taxable in the first year in which the newly gained possession is undisputed.
The IRS continues to assert this position today.
And so the couple from California’s one-time Gold Country is looking at a hefty tax bite out of their new-found coin cache. Indeed, the combined state-and-federal cut could come to nearly half.
The applicable tax rate, however, is by no means clear. If the coins were to be taxed at the capital-gains rate, the tax bite would not be quite so severe.
In any case, it still leaves the taxpayers in a peculiar position. They may have to sell some of the rare coins they found in order to pay the taxes on their treasure trove and avoid tax penalties and interest.
Source: SFGate, “Couple’s gold discovery will be taxed at top federal rate,” Kathleen Pender, Feb. 28, 2014