Accessions to Wealth, Realization of Gross Income, and Dominion and Control: Applying the “Claim of Right Doctrine” to Found Objects, Including Record-Setting Baseballs

Abstract

This article explores the tax treatment of certain in-kind receipts of property, namely, windfall found objects. The basic and unremarkable thesis is that in-kind property windfalls (commonly referred to as “found objects”) are gross income when received. However, there is more than meets the eye here: the finder of a found object often does not obtain clear legal title, so there exists a possibility that the item might have to be returned to its rightful owner. This possibility of having to return the item raises two issues seriatim. The first is that the income represented by the found object may not be immediately realized due to the forfeiture condition and attendant valuation problems. This approach is explored but rejected. At this point the solution appears to be including the item in gross income upon receipt and claiming a deduction if and when the item is returned. This approach is commonly referred to as the “claim of right doctrine,” although, after James v. United States, its operation no longer is conditioned on the taxpayer’s having a “claim of right.” In any event, the application of this doctrine to in-kind property (as opposed to cash) is somewhat problematic, but I argue in favor of this approach. The conclusion is that the object should be included upon receipt, but that the idea of “receipt” can here be rendered in a flexible fashion so as to allow for a disclaimer or its functional equivalent.The endeavor might be vulnerable to the charge of being “much ado about nothing” were it not for a recent piece by Professors Lawrence Zelenak and Martin McMahon arguing that found objects, such as record-setting home run baseballs, are not “residual” gross income upon acquisition. Zelenak and McMahon justify their thesis by analogy first to imputed income and then to self-created assets, which are not taxed until (and if) they are sold or exchanged. Moreover, Zelenak and McMahon suggest that Regulations section 1.61-14(a), which cites “treasure trove” as being an example of in-kind gross income, is probably invalid or, if it is not, should be withdrawn.