Federal Circuit addresses when shares are constructively received 

September 10: The U.S. Court of Appeals for the Federal Circuit today affirmed that the taxpayer was not entitled to a refund because he had constructively received all shares in 2000 (pursuant to Reg. section 1.451-2) when they were allocated to him with respect to the sale of a consulting business in 2000 (as originally reported by the taxpayer on his return). Hartman v. United States, 2011-5110 (Fed. Cir. September 10, 2012)

Text of the decision: Hartman [PDF 130 KB]

Summary

The taxpayer in 2000 had received shares in exchange for his interest in a consulting business. Under the agreement, he sold 25% of the shares in 2000 for approximately $2.2 million. The other shares were placed in his restricted account. The total value of his shares was $8.26 million, and he reported this amount on his federal income tax return for 2000.


Subsequently, the value of the shares “dropped drastically.” Eventually, in 2003, the taxpayer filed an amended federal income tax return claiming that he had received only the 25% of shares in 2000, with the remainder being received in 2001 and 2002. The taxpayer claimed an income tax refund of approximately $1.3 million.


The IRS denied the refund claim, and in the taxpayer’s refund suit, the Court of Federal Claims found that the taxpayer had received all shares of the stock in 2000 and thus was not entitled to a refund.


The Federal Circuit today affirmed, finding that the taxpayer had “constructively received” the shares in 2000 under Reg. section 1.451-2. The appeals court found that there were attributes of dominion and control over the shares in 2000—for instance, that the shares were set aside for the taxpayer in a brokerage account, that he received dividends from and was entitled to vote the shares in 2000, and that he exercised control over the shares under the forfeiture provisions of the agreement.




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