Josh exchanges property that qualifies for like-kind exchange treatment in two unrelated transactions. In the first exchange, Josh gives up land purchased in May 2020 (adjusted basis of $20,000; fair market value of $17,000) in exchange for a different parcel of land (fair market value of $15,000) and $2,000 cash. In the second exchange, Josh receives a parking garage (to be used in his business) with a fair market value of $50,000 in exchange for a plot of land he had held for investment. The land was purchased in April 2014 for $12,000 and has a current fair market value of $48,000. In addition to transferring the land, Josh pays an additional $2,000 to the other party.

What is Joshs adjusted basis for the new parcel of land?

When does the holding period begin?

What is Joshs adjusted basis for the parking garage?

When does the holding period begin?

How could Josh structure the transactions differently to produce better tax consequences?

Prepare a single tax file memo in response to the above scenarios using the format of Form 3.3 with embedded permalinks to Checkpoint Edge.

Form 3.3

TAX FILE MEMORANDUM

FROM: John J. Jones SUBJECT: Fred and Meban Martel Income from Coin Discovery

Today I met with Fred and Megan Martel about a request for tax assistance. In 2017, the Martels purchased 40 acres of land for $195,000; they built their current residence on the property in 2018. In March 2022, they spotted something shiny on the ground while walking on a remote part of their property. They started digging and eventually unearthed eight metal cans containing more than 1,400 rare gold coins in $5, $10, and $20 denominations dated from 1846 to 1895. The face value of the gold coins is about $28,000, and the coins are in mint condition. As required by state law, the Martels turned over the coins to the state for disposition. The state publicized the find for six months and asked if anyone could prove ownership. When no one came forward, Martels received the coins in October 2022.

ISSUE: What are the tax implications of the Martels coin discovery?

FINDINGS: IRC Sec 61 defines gross income as all income from whatever source derived. Further, Reg Sec 1.6114(a) indicates a treasure trove is gross income in the tax year in which the taxpayers have unquestionable custody. The fact that the state returned the coins to the Martels in October 2022 indicates undisputed possession as required by Reg Sec 1.6114(a). As a result, their gross income will include the value of the coins. The question of value is key to the Martels situation.

Since the Martels found the gold coins on their property, the taxpayers could argue that they purchased the coins when they purchased the land. This argument is similar to an individual discovering oil or natural gas on her property. There must be a realization event (e.g., a sale or exchange) with natural resources before income recognition.

Given the findings in Cesarini v. United States, 428 F.2d 812 (6th Cir. 1970), this notion would not appear to work for the Martels. In Cesarini, the taxpayer purchased a piano that happened to conceal cash. The court allocated the entire purchase price to the piano, so the windfall currency was wholly taxable in the year of discovery. As a result, this decision by the Sixth Circuit Court of Appeals would indicate that the entire value of the couples discovery is gross income in the year of discovery.

Although the Martels may want to argue that there is no income until the coins are sold, Reg Sec 1.6114(a) and Cesarini indicate that the treasure troves value is gross income as soon as the couple has absolute control.

Finally, the value is not the $28,000 face value of the coins. Instead, it is the fair market value of the coins. The Martels should engage a qualified appraiser (or appraiser) to value the coins appropriately. The Martels 2022 gross includes the appraised value of the coins.