Natalie Santangelo died March 29, 2007, owning about 21,500 shares of HCA, Inc. She had the stock certificates. But after HCA merged with another corporation in 2006, HCA stockholders were entitled to receive $51 for each share of stock. The merger agreement required HCA to deposit the funds with a paying agent.
Natalie was to receive about $1 million when she surrendered the stock certificates. However, she did not take any action to “cash in” the stock certificates. Her daughter, who held the power of attorney for financial matters authorization from Natalie, did not take any action until after Natalie died.
The tax issue was whether the gain was taxable in 2006, when it became available, or was it taxable later in some other year when it was finally received.
The Fifth Circuit Court of Appeals held it was “constructively received” in 2006 and the gain was taxable in 2006, even though nothing was received in 2006.
The doctrine of constructive receipt is important. You may be taxable on income, even if you don’t physically possess it. The year it is available to you, set aside for you to draw on, is the year the income is taxable.
If there are substantial restrictions or limitations that prevent you from receiving or being able to receive the income, then you don’t have constructive receipt.
So, Natalie was taxable in 2006 since all she had to do was to mail in (surrender) the stock certificates. IRS said she could not choose which year to recognize income since she had “constructive receipt” in 2006.
This is another example of the need to watch and be aware of what is going on with your investments. The case did not disclose if Natalie understood what the merger really meant to her. Maybe she was ill or confused. But the daughter also had the authority to act and mail in the stock certificates. We don’t know if the daughter was informed of the details of the merger or if she intentionally held off collecting the income.
That also helps show why it is important for the family to talk with each other about major investments and transactions. The daughter may not have wanted to bother her mother or give the indication Natalie was not able to make good decisions.
You can’t choose which year to report income if you have constructive receipt. Delaying the deposit to your bank account won’t work if you have the check (i.e. for services or sale of something) that has no substantial restrictions.
Did you hear? “The one thing that does not abide by majority rule is a person’s conscience,” — Harper Lee.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.