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Is There a Tax Liability for Money Not Yet in Your Hands?

Maybe.  Most of us don’t expect to pay tax on income until we  [Money in hand shutterstock_191668478] have the money in our hands; however this is not always the case.  As set out in the “constructive receipt” doctrine, income may be taxable 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 (even if you don’t physically have possession of it).   Note that income is not constructively received if your control of the money is subject to substantial restrictions or limitations.

Legal Case: A taxpayer, who was deceased when the case went to trial, owned more than 21,500 shares of common stock in Company A and maintained physical possession of the certificates.  Company A merged with another corporation in 2006; its stockholders were entitled to receive $51 for each share of stock.  The merger agreement required Company A to immediately deposit the funds with a paying agent; at which time the taxpayer was entitled to receive about $1 million on November 20, 2006.  All she had to do to collect the funds was surrender the stock certificates.  Company A issued a Form 1099 showing receipt of the proceeds in 2006.

Neither the taxpayer nor her daughter (with power-of-attorney) took any action until after the taxpayer died in March of 2007.  Although the estate paid the tax, it sued to recover, claiming the amount wasn’t actually received that year.  The U.S. Court of Appeals affirmed the decision made by the district court that the taxpayer had constructively received the proceeds in 2006 without any substantial restriction or limitation and the tax was owed.
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