Fifth Circuit Upholds Constructive Receipt of Stock Redemption Proceeds.

(Parker Tax Publishing January 24, 2015)

The Fifth Circuit upheld a district court decision finding that a shareholder constructively received redemption proceeds from the surrender of her stock certificates in the year the company made the redemption funds available to her, and not in the year the stocks were actually surrendered. The income was properly attributed to the year the funds were made available and not when the proceeds were actually received. Santangelo v. U.S., 2014 PTC 609 (5th Cir. 2014).

Background

Natalie Santangelo owned 21,534 shares of common stock in HCA, Inc., divided into two certificates, which she kept rather than turning them over to a broker or bank. In 2006, HCA merged with another company, and as part of the merger agreement, all common stock holders would have their stock canceled and receive $51 per share. Santangelo was eligible to receive over $1 million when HCA deposited the required funds with a paying agent in November.

Although the funds were available in November 2006, to collect the funds, Santangelo was required to surrender the physical stock certificates. She did not take any steps to obtain the proceeds before her death in March 2007. Her estate redeemed the shares from one certificate and received a payment in January 2008. The second certificate was never found, but a second payment was received in October 2009 after the estate followed procedures for lost certificates.

HCA issued a Form 1099 to Santangelo , indicating that she received taxable proceeds in the full amount in 2006. Santangelo's estate filed her 2006 tax return and claimed as income the full amount reflected on the Form 1099. Subsequently, the estate filed suit in the district court for a refund, on the ground that the income should not have been claimed in 2006 since it was not actually received in 2006. The district court held that the stock proceeds were constructively received by Santangelo in 2006 and were properly reported on her 2006 tax return. The estate appealed this decision to the Fifth Circuit, challenging the determination that the stock proceeds were constructively received.

Analysis

Santangelo's estate argued that substantial obstacles prevented her access to the funds and the three-year delay in obtaining the funds negated the constructive receipt theory. The IRS contended that the income was properly claimed on the 2006 return because it was constructively received, and thus no refund was due.

Code Sec. 451 states that generally income is taxable when the funds are received. In addition, Reg. Sec. 1.451-2(a) provides for the reporting of income that is actually or constructively received during the tax year. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

The district court cited Oliver v. U.S., 193 F.Supp. 93 (1961), finding income which is unqualifiedly and without substantial limitation available to the taxpayer is considered to be constructively received even though it is not actually received. It was undisputed that HCA immediately deposited the funds in November 2006 and that the funds were available to Santangelo, a cash basis taxpayer, as of that date. Santangelo also made no attempt to obtain the funds when they were first available. Moreover, the delay in redeeming the shares was a self-imposed event to the extent the stock certificates were lost. The court did not believe the process for a lost certificate was a substantial limitation or restriction on obtaining the funds.

The district court concluded that since the funds were unqualifiedly and without substantial limitation available to Santangelo in 2006, her failure to actually receive the funds was due to her own volition, and the income should be considered as having been constructively received in 2006, and was thus properly included in her 2006 tax return.

The Circuit Court considered the party's briefs, the record on appeal, and all relevant law, and concluded unanimously that the district court's judgment should be affirmed for the reasons articulated by the district court.

For a discussion of constructive receipt of income, see Parker Tax ¶241,515. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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