What if you found a treasure trove of cash buried in your basement? Is that taxable income?

Federal tax law, specifically IRS code section 61, states, “Gross income means all income from whatever source derived.” That’s a pretty broad umbrella.

This rule is intentionally all-inclusive to allow Congress to use its taxing power in whatever way it sees fit under the 16th Amendment.

There are some exceptions to this rule that are scattered throughout the tax code and outlined in IRC Code section 101. For example, life insurance proceeds, certain employee fringe benefits, inherited cash and property (but not inherited retirement accounts), are among transactions that are free from taxation.

Gross income also includes worldwide income, which is also taxable. As a side note, if you pay taxes in a foreign country, you will likely receive the foreign tax credit on your U.S. income tax return.

So the treasure trove (or any unexpected cash flows) are taxable income and must be reported on your income tax return in the year in which it was found. There’s really no escaping it, the tax has been tested through the courts.  

The case of Cesarini v. United States tells the full story.

Back in 1957, a couple purchased a used piano at auction. Seven years later, while cleaning it, they found the tidy sum of $4,467 stashed inside. So, like good citizens, they declared the income on their 1964 individual income tax return. But a year later, they changed their minds, deciding that this couldn’t possibly be taxable income. So they filed an amended return requesting a refund of $836.51. The IRS turned them down.

So they sued.

They asserted that according to IRS code Section 61, the money was not includable in gross income, and that even if it were, the statute of limitations had run out as the piano was purchased in 1957. Their final claim was that if the court determined the find was taxable, it should receive capital gains treatment. After all, cash is a capital asset.

The court found otherwise on all three counts. There is no code section that excludes found currency from gross income. And so the court reverted to the broad based declaration at the outset of code section 61: “Gross income means all income from whatever source derived.”

The couple’s attorney then stated that they interpret the treasure trove to be a gift and should be excluded from taxable income. He based this claim on IRC Code section 102, which states that gifts are not considered taxable income. The court didn’t buy it. The piano apparently could not be counted as a giver.

Another side note: There is a gift tax but that’s on the giver, not the recipient. As the recipient of a gift, you are not required to declare it on your income tax return.

The court proclaimed that the statute of limitations would begin running from the date of discovery not from the date of the purchase of the piano. The court argued that if the couple had sold the piano prior to the discovery of the currency, they would never have taken possession of the money. The court shot down that argument by determining that the statute runs from the date of possession.

The final argument promulgated was that the currency should be taxed at the more beneficial capital gains rate rather than the ordinary income tax rates. The court again disagreed. Capital gains apply only to capital assets (and the court agreed that the piano and the money were capital assets) that are sold or exchanged. No such transaction took place. Therefore, the found money was taxable at the higher ordinary income tax rate.

The lesson to be learned here is that almost every dime that comes into your possession is likely to be taxable income. But there are exceptions to the rule. If you stumble into an extraordinary transaction, do your research or check with a tax professional to find out about the potential tax consequences.

Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.