Recently it was reported that Roman Totenberg’s Stradivarius was found 35 years after its suspected theft. The Stradivarius disappeared in 1980, believed by most to have been stolen. The violin surfaced this past June when an appraiser identified the Stradivarius as the missing violin. Eventually, Roman Totenberg’s daughters recovered the violin as his heirs. Mr. Totenberg died in 2012.
Generally, it is not a taxable event when a property owner recovers stolen property. However, taxable income will be realized if the taxpayer took an income tax deduction for the theft loss. In such case the value of the recovered property to the extent of the tax deduction previously taken must be reported as income under the so-called “tax benefit rule”.
If the property was insured and the owner was compensated with insurance proceeds and thereafter the owner recovers the property, there is no taxable event since the owner will have to repay the insurance proceeds to the insurer.
According to The New York Times article reporting on the return of the Stradivarius,[1] the family paid back the insurance proceeds that Roman Totenberg collected after the violin was reported stolen.
In addition to the income tax considerations, Roman Totenberg’s death brings into focus potential estate tax consequences. Since not even a glimmer of the existence of the Stradivarius’ existence occurred until June, 2015, more than three years after his death, the violin likely would not have been included as an asset of his estate for estate tax purposes. At that point, the insurance proceeds would have comprised part of the estate, in one form or another. As long as the estate tax return was prepared in good faith, the Stradivarius would not have to have been included as an asset of the estate on the tax return and thus the fair market value of the violin at the time of Mr. Totenberg’s death (believed to be in the many millions) would likely not have been subject to estate tax.
Yet another tax aspect is the income tax basis the Totenberg family has in the Stradivarius. Under the applicable Internal Revenue Code provision, the basis of property acquired from a decedent is generally the fair market value of the property at the date of the decedent’s death, generally referred to as a step-up in basis. If the violin is sold, the Totenbergs will pay capital gain tax on the excess of the selling price over the value of the Stradivarius at the date of Roman Totenberg’s death.
Footnote
[1] The New York Times, Roman Totenberg’s Stolen Stradivarius Is Found After 35 Years, by Michael Cooper, August 6, 2015.