Lessons from the Courts: Tax liability without the income — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Lessons from the Courts: Tax liability without the income

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Usually, you don’t have to pay tax on income until you actually have the money in your hands. But that’s not always true.

Caution: Under the “constructive receipt” doctrine, income may be taxable, even if you do not physically possess it, in the year in which it is credited to your account, set apart for you on your behalf or made available for you to draw on during the tax year. (IRC Reg. Sec. 1.451-2) However, income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.

The constructive receipt doctrine is frequently relied on by the IRS in matters ending up in the courts.

New case: A taxpayer, who was deceased when the case went to trial, owned more than 21,500 shares of common stock in HCA, Inc. and maintained physical possession of the certificates. After HCA merged with another corporation in 2006, its stockholders were entitled to receive $51 for each share of stock. The merger agreement required HCA to immediately deposit the funds with a paying agent.

As a result, the taxpayer was in line to receive about $1 million on Nov. 20, 2006.  She only had to physically surrender the stock certificates to collect. But neither the taxpayer nor her daughter, who had power-of-attorney, took any action until after the taxpayer died on March 29, 2007.

HCA issued a Form 1099 showing receipt of the proceeds in 2006. Although the estate paid the tax, it sued to recover, claiming the amount wasn’t actually received that year. But a district court determined that the taxpayer had constructively received the proceeds in 2006. Key point: The proceeds were made available in 2006 without any substantial restriction or limitation. Now the 5th Circuit Court of Appeals has affirmed the decision. (Santangelo, Jr., Case No. 14-60355, CA-5, 12/29/14)

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