Quatloos!

It is certainly taxable since the article states they are going to sell the cards. But whether it will be subject to income tax or estate tax or both, I will leave up to our estate experts to muse on.

Regarding the estate tax, and assuming the aunt was the owner of the cards, the value of the cards (as of the date of death or possibly six months thereafter) would be includable in her gross estate for estate tax purposes. However, her estate would be entitled to a $5 million exemption equivalent, so unless she had over $2 million in other assets and assuming she had made no taxable gifts during her lifetime, her estate would owe no federal estate tax.

Regarding the income tax, the gain on the sale of the cards will be the difference between the amount realized and the fair market value of the cards as of the date of death. Assuming the sale occurs fairly soon after the date of death, it's unlikely that the value would change significantly between the date of death and the date of sale. Accordingly, the gross amount realized would be a good indicator of the date-of-death value, so that there would be no taxable gain.

I'm not sure how the "treasure trove" rules apply; significant income tax may fall on someone; whether it's the deceased, her estate, or the beneficiaries is unclear.

This was not "found" in the treasure trove sense. They can clearly trace ownership from the original holder. Even if he received the cards for free (as a promotional item to go with something he was selling), the FMV at the time he received him is measureable. They passed as a part of his estate to his children, and now to his grandchildren or great-grandchildren. It is unlikely that, at the time of his (the original owner's) death, the value was in excess of the gross estate exemption. A treasire trove is when you are digging in your garden and unearth a hoard of 16th centurary coins that no one has any idea as to when it was placed there or by whom.

In the unlikely alternative that this is actually the most clever counterfeiting operation ever, the entire amount received would be taxable income (since illegal activities generally are not allowed the usual deductions for cost of goods sold).
I have no idea, but my guess is that there are not any watermarks or other security devices on baseball cards produced in 1910. It was stated that the cards are in pristine condition.

Just the musings of an overly imaginative devious mind (that is thankful for being honest), perhaps.

jg wrote:In the unlikely alternative that this is actually the most clever counterfeiting operation ever, the entire amount received would be taxable income (since illegal activities generally are not allowed the usual deductions for cost of goods sold).
I have no idea, but my guess is that there are not any watermarks or other security devices on baseball cards produced in 1910. It was stated that the cards are in pristine condition.

Just the musings of an overly imaginative devious mind (that is thankful for being honest), perhaps.

While there were some "public policy" cases in the 1950s and 1960s, modern cases do not disallow the COGS with respect to an illegal business, even under section 280E (which explicitly disallows most deductions relating to an illegal drug business).

For an example of an IRS concession on this issue in a 280E case see:
http://www.ustaxcourt.gov/InOpHistoric/champ.TC.WPD.pdf

Thank you for the update.

Footnote 4 of the case cited:

In other words, respondent concedes that the disallowance
of sec. 280E does not apply to costs of goods sold, a concession
that is consistent with the caselaw on that subject and the
legislative history underlying sec. 280E. See Peyton v.
Commissioner, T.C. Memo. 2003-146; Franklin v. Commissioner, T.C.
Memo. 1993-184; Vasta v. Commissioner, T.C. Memo. 1989-531; see
also S. Rept. 97-494 (Vol. 1), at 309 (1982).