In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 16‐2987
RAYMOND S. MCGAUGH,
Petitioner‐Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent‐Appellant.
____________________
Appeal from the United States Tax Court.
No. 13665‐14 — David Gustafson, Judge.
____________________
ARGUED FEBRUARY 22, 2017 — DECIDED JUNE 26, 2017
____________________
Before BAUER and WILLIAMS, Circuit Judges, and DEGUILIO,
District Judge.
DEGUILIO, District Judge. This 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
Of the Northern District of Indiana, sitting by designation.
2 No. 16‐2987
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.
I.
Petitioner 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 7, 2011.
On November 28, 2011, FPFC issued a stock certificate
titled “Raymond McGaugh IRA FBO Raymond McGaugh”,
which it mailed to Merrill Lynch.1 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
1 While the IRS argued in briefing that the certificate was incorrectly titled,
since McGaugh’s IRA is actually named “MLPF&S Cust FPO Raymond
McGaugh IRA FBO Raymond McGaugh”, it conceded at oral argument
that this is irrelevant.
No. 16‐2987 3
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.
Following 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 $2,708.
McGaugh 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.
II.
The 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
4 No. 16‐2987
v. United Bhd. of Carpenters Pension Fund, 832 F.3d 750, 753 (7th
Cir. 2016).
The 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.
Under 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 if the taxpayer’s control of its
receipt is subject to substantial limitations or restrictions.” 26
C.F.R. § 1.451‐2(a).
A review of the record reveals no evidence that McGaugh
was in constructive receipt of assets from his IRA. First, as the
IRS essentially conceded at oral argument, it is clear
McGaugh did not constructively receive stock. The FPFC
share certificate was never in his physical possession during
the 2011 tax year. There is also no evidence that he had any
control over those shares or the rights associated with them
that could give rise to a finding of constructive receipt. See
Ancira v. Commissioner, 119 T.C. 135, 138–39 (2002); United
No. 16‐2987 5
States v. Fort, 638 F.3d 1334, 1340–41 (11th Cir. 2011). Indeed,
the share certificate was issued in the name of “Raymond
McGaugh IRA FBO Raymond McGaugh” rather than
McGaugh’s own name. And when McGaugh requested a
replacement share certificate, FPFC refused to issue one
without first receiving indemnification from Merrill Lynch.
Thus, this case is similar to Ancira, in which the Tax Court
found no constructive receipt where the petitioner was not a
holder of, and accordingly could not negotiate the check at
issue.2
The IRS’ primary argument is that McGaugh
constructively received funds from his IRA when he directed
Merrill Lynch to wire them at his discretion to FPFC. It notes
that a party cannot circumvent the rules on taxable income
simply by directing a distribution to a third party. We have
recognized this commonsense proposition before. Fletcher,
562 F.3d at 843 (“a person who earns income canʹt avoid tax
by telling his employer to send a paycheck to his college, or
his son, rather than to his bank”); see also Old Colony Trust Co.
2 Relatedly, we reject the IRS’ reliance on Estate of Brooks v. Commissioner,
50 T.C. 585 (1968). That case found that an individual did not
constructively receive retirement funds where the distribution of those
funds was subject to restrictions imposed by retirement plan trustees. In
contrast, the IRS contends that McGaugh’s decision to title the stock
certificate in the name of his IRA amounts to a self‐imposed restriction
insufficient to avoid constructive receipt. But we do not believe holding
securities in a tax shelter is the sort of end‐run around possession the
constructive receipt doctrine is intended to address. Moreover, we note
that even though McGaugh may have made the initial decision to
purchase FPFC stock, once he did so he had no control over that stock, as
evidenced by FPFC’s refusal to issue a replacement share certificate
without first receiving indemnification from Merrill Lynch.
6 No. 16‐2987
v. Commissioner, 279 U.S. 716, 729 (1929) (finding that an
employee received taxable income where his employer paid
tax liability on his behalf).
It is not, however, implicated in this case. McGaugh didn’t
direct a distribution to a third party; he bought stock. That is
a prototypical, permissible IRA transaction. See Ancira, 119
T.C. at 137 (noting that there is unquestionably no distribution
where a beneficiary merely directs his IRA custodian to
purchase stock); Hampshire Grp., Ltd. v. Kuttner, No. 3607, 2010
WL 2739995, at *27 (Del. Ch. July 12, 2010) (noting that
constructive receipt concerns not whether a deferred
compensation plan participant “can participate in the plan’s
choice of investments” but whether “the funds were made
currently available to the plan participant to meet immediate
financial needs.”). Further, there is no indication that
McGaugh orchestrated this purchase for the benefit of FPFC
or for any reason other than because he wished to obtain stock
to be held in his IRA. Thus, there is no evidence that he
constructively received funds, either in ordering Merrill
Lynch to wire funds to FPFC, or in any other respect.
As such, we conclude that McGaugh did not have actual
or constructive receipt of any assets from his IRA during the
2011 tax year and so did not take a distribution from his IRA
during that time. The judgment of the Tax Court is therefore
AFFIRMED.