Raymond S. McGaugh, Petitioner-Appellee,
Commissioner of Internal Revenue, Respondent-Appellant.
February 22, 2017
from the United States Tax Court. No. 13665-14 - David Gustaf
Bauer and Williams, Circuit Judges, and DeGuilio, District
DeGuilio, District Judge.
appeal from the Tax Court addresses whether a taxable
distribution occurs where an individual directs his IRA
custodian to wire funds directly from his IRA to purchase
securities, but his custodian does not accept the resulting
share certificate. For the reasons that follow, we conclude
that the petitioner was never in actual or constructive
receipt of funds from his IRA. Accordingly, we affirm the
judgment of the Tax Court.
Raymond McGaugh has had an Individual Retirement Account
(IRA) with Merrill Lynch, Pierce, Fenner & Smith, Inc.
(Merrill Lynch) since 2002. In summer 2011, he requested that
Merrill Lynch use money from that IRA to purchase 7, 500
shares of stock issued by First Personal Financial
Corporation (FPFC), a privately held company. For reasons
that are not clear from the record, Merrill Lynch would not
purchase those shares on McGaugh's behalf. So, McGaugh
called Merrill Lynch and initiated a wire transfer of $50,
000 from his IRA directly to FPFC, which occurred on October
November 28, 2011, FPFC issued a stock certificate titled
"Raymond McGaugh IRA FBO Raymond McGaugh", which it
mailed to Merrill Lynch. Merrill Lynch says it then received
this certificate in early 2012 (though FPFC claims to have
sent it earlier). After receiving the certificate, Merrill
Lynch did not retain it, believing McGaugh's transaction
to have impermissibly exceeded the 60-day window applicable
to rollovers of IRA assets under 26 U.S.C. § 408(d)(3).
Rather, Merrill Lynch attempted to send the certificate to
McGaugh twice in February 2012, but the United States Postal
Service returned it both times (McGaugh says this is because
the certificate was mailed to an incorrect address). On the
second occasion, it was marked as "refused."
Merrill Lynch then sent the certificate to McGaugh a third
time via FedEx and it was not returned. The shares were never
deposited into McGaugh's IRA. The location of the share
certificate is currently unknown. The IRS contends that
McGaugh possesses it, though McGaugh denies that allegation.
these events, Merrill Lynch characterized the wire transfer
as a taxable distribution and issued a Form 1099-R. McGaugh
claims he never received that form. On March 17, 2014 the IRS
issued a notice of deficiency, which indicated that McGaugh
had failed to report a $50, 000 distribution for the tax year
2011. It accordingly assessed McGaugh tax due in the amount
of $13, 538 and a substantial-tax-understatement penalty of
then filed suit, contending that this was an error. The Tax
Court agreed, holding on summary judgment that McGaugh did
not take a taxable distribution from his IRA in 2011. The IRS
now appeals that decision.
Court of Appeals reviews decisions of the Tax Court "in
the same manner and to the same extent as decisions of the
district courts in civil actions tried without a jury."
26 U.S.C. § 7482(a)(1). Accordingly, we review the Tax
Court's grant of summary judgment de novo. Musa v.
Commissioner, 854 F.3d 934, 938 (7th Cir. 2017). As the
nonmoving party, we take the facts in the light most
favorable to the IRS. See Rabinak v. United Bhd.
of Carpenters Pension Fund, 832 F.3d 750, 753 (7th Cir.
core issue in this case is whether McGaugh made a taxable
withdrawal from his retirement account. See 26
U.S.C. § 408(d)(1) (providing that IRA distributions are
generally subject to income tax). Though McGaugh never
physically received any cash or other assets from his IRA
during the 2011 tax year, the IRS nevertheless asserts that
McGaugh took such a distribution because he constructively
received IRA proceeds.
the doctrine of constructive receipt, a person receives
income "not only when paid in hand but also when the
economic value is within the taxpayer's control."
United States v. Fletcher,562 F.3d 839, 843 (7th
Cir. 2009). Constructive receipt thus occurs where income
"is credited to [an individual's] account, set apart
for him, or otherwise made available so that he may draw upon
it at any time, or so that he could have drawn upon it during
the taxable year if notice of intention to withdraw had been
given. However, income is not constructively received ...