## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 08

- 2173 U NI T ED S TATE SOF A MERI CA, P la intif f-A pp ellee, v. M ICHAEL J. an d C Y NT HI A T. F LET CHER, D ef endants-A ppell ants
.
A pp eal from the United S t ates Di strictC our t fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on. No . 06 C6056

—Ronal d A . G uzmán, Ju dge
.
A RG UE D O CT OB ER 30, 2008

— D ECI DE D A PRI L 10, 2009

Befo re E A S T E RB R OO K, Chi e f Judg e, a nd R IPPLE a nd T INDER, C ircu it Judges . E A S T E RB R O OK, C hief Judg e . Erns t & Young spun o ffi ts i nfo rm ati on- technol ogyco nsul ti ng g ro up i n 2 000. Cap Gem i ni, S
. A
. , a Fr ench co rpor ati on, bo ught thi s business and becam e Cap Gem i ni Ernst & Young, a m u lti nati onal fi r m. To da y i t i s k no wn a s Ca pg e mi ni, a nd we us e that na m e f o r the fi r m a fte r the 2 00 0 ac qui si ti o n.2 N o. 08

- 2173 Consult i ng par tner s o fE rnst& Young r ecei ved shar es i n Ca pg e mi nii n e xc ha ng e f o r the i r p a r tne r s hi p i nt e re sts i n Ernst & Young. Thi s was nota l i ke- ki nd exchange , so i t was a taxabl e e vent f orthe p ar tner s. Because Ernst & Young and i ts partner s expected shar es i n the new bu siness to appreciat e, theywanted al l o fthe i ncom e t o be re cogni zed i n 200 0. That way anyappreci ation w oul d be taxed as a c api talga i n. But Cap G em i ni wanted to en su r e th e par tn er s’ l o y al tyt o the ne w bus i ne ss ; a c o nsul t i ngg r o up de pe nd s o n i t s s t a ff, a nd i fthe y l e ftaf ter taking th e stock the bu siness m ight be crip p led. Tran sferring the shar es i n i nstal l m ents m i ght a dd re ss these subj ects bu t also w ou ld m ake th e tran sfers l ook li ke ord inary i n c o me

— an d, i fthe s ha r es a ppr ec i at ed i n the mean ti m e, the pa r tn er s woul d r eceive fewe r . Er ns t & Youn g an d Ca p Ge m i nide ci ded th ata t r ansfer of a l l o fthe s h a r e s i n 2 0 0 0 , s u b j e c tt o wh a ta mo u nt ed t o a n e s c r o w, w ould pre ser ve the t ax bene fi ts w hi l e s er vi ng busi ness obj ec ti ve s. S o the s ha r es r ec ei ve d i n the t r an sa ct i o n w ere re str i cted f oral m ostfiv e years : i fa partnerqui t, was fi re d fo r cau se, o r w ent into com peti ti on with the new b us i ne s s , s o me o r a l l o fthe s ha r e s c o ul d b e f o r fe i t e d. Ernst & Young, Cap Gem i ni, and the partner s a gr eed by contr act that they w oul d r epor t the tr ansact i on a s a partner sh ip -f or - shar es sw ap i n 200 0, full y t axabl e in that y ea r . T he a g r ee d- o n c ha r ac te r i za ti o n a l l o wed Ca pg emi ni t o t a k e de pr e c i a t i o n de du c t i o ns , s e e 2 6 U. S
. C. §1 97, sta rt i ng i n 200 0, and ensur ed consi ste nt ta x tr eat m ent o f al l pa r ti es . The Co m m is si o ne r o fI nt erna l Re ve nue m i ght ha ve chal l en ge d the parti es’ char acte ri zati on, se e 26 U .S.C . §26 9, b u t d ec id ed to ac c ep t it . A p p r o x im at elyN o. 08

- 2173 3 25% o fthe shar es w er e s ol d i n 200 0 t o genera te cash that th e par tn er s us ed to pa y the i r t ax es ; the r emai nde r o fthe sh ar es wer e he l d b y M er r i l lLy nc h s ubj ec t to i ns tr uct i o ns f ro m Capgem i ni unti l r est ri cti ons l apsed. Each ex- partner had a se parat e a ccount f orthi s purpose . Cyn th ia F l et ch er, o ne o fEr ns t & Youn g ’ s co ns ul ting partner s, vote d fo r the t ra nsacti on, si gned the contr act, m ove d to Capgem i ni, and re cei ved 16, 500 shar es i n that bus i ne ss a s pay m en t f o r he rpa r tn er sh i p i nt er est. The m ar ketvalue o fthes e s hare s on the day the sal e cl ose d w as abou t $2.5 m il li on. On ly 1 2 ,375 share s w ere d ep os ite d in t h e re st ric te d ac c ou n t; th e re st w er e s old f or$6 53, 75 6, w hi ch w as dist ributed to Fl etche r to cove r tax es. I n Feb rua ry 2001 C a p g e m ini sen t Fletche r a Form 10 99 -B refle c tin g t h at s h e h ad rec eiv ed $2 ,47 8,6 55 in s t o c k, t a x a b l e a to r d i n a r y - i n c o me r a t e s ( s a v e f o r s o me $91, 000 att ributabl e to §751 pro perty ) , fro m the sal e o f her partner shi p i nter est
. S he and herhu sband M i chael ( they fi l ed a j oi nt r etur n) re port ed thi s incom e a s r ec eiv ed i n 200 0, j ust a s herco ntra ct with Capgem i ni r equir ed. The co up l e’ s gro ss i ncom e fo r 2000 w as re port ed as $3 , 73 3, 18 0, o n whi chthe y pa i d $ 97 2, 12 1 i n i nc o m e ta x. H ad the m ar ketpri ce o fst ocki n Capgem i ni r i sen, as the par ti es anti ci pated , that would have bee n a g oo d o ut co m e f o r F l et ch era nd the o th ere x- par tn er s. But alt h ou gh C ap ge m in i tra d ed ab ov e € 30 0 a sh ar e e ar ly in 2 0 0 1 , b y2 0 0 3 i twa s b el o w € 5 0 , wh e r e i th a s r e mai ne d. ( S o f ari n 2 00 9 i t ha s tr ade d f o r abo ut€ 25
. ) Thi s m ade the deal l oo k b ad i n re tr ospect; the partner s w ou ld have b e e n b e t t e r o ffh a d d i s t r ib ut i o n o f the s t o c k b e e n de fe r r e d.4 N o. 08

- 2173 Fl etche r quiti n 200 3. A l though s he le ft be f or e the fi ve yea rs r equi re d by the co ntra ct, Capgem i ni waive d i ts r i g ht s an d di r ec te d M er r i l l Ly nc h t o l i ft al l r es tr i ct i o ns on th e st ocki n heracc ount. Fl etche r then fi l ed an am ended tax r etur n f or20 00. S he now too k the posi ti on that onl y the $ 653, 756 dist ributed fro m the acco unt w as i nc o m e i n 2 00 0. On he r ne w vi ew o fmatt er s, the r es t o fthe i ncom e was n ot r ecei ved unti l 20 03, and the am ount was m uch re du ced i n l i ght o fthe l ower m ar ketpri ce o f Capg emi nis ha r es i n 20 03
. Appar en tly wi th o utc he ck i ng how o therta x p ayers affecte d by the 20 00 tr ansact i on h ad be en tre at ed , t h e In te rn al R ev en u e Se rv ice p aid F l et ch era r efund o fabo ut$ 38 7, 00 0 p lus i nt er es t. Co ntendi ng tha t thi s r efund had b een m i sta ken, the U ni ted St ate s fi led thi s s uitto ge t the m oneybac k. S i m i l arl i ti gati on i s pen d ing i n m any o therdi str i ct c ourt s

— som e s uit s bythe Uni te d S ta te s, s o m e bye x- par tn er s w ho wan t re fund s. The I RS ’ s p ri nc i pala r g um en t i s th atF l et ch era nd the other ex- partner s a re bo und bythei r own char acter i zati on o fthe tr ansact i on a s o n e in wh i ch al l shar es w ere received i n 20 00. H av in g ad op ted this ch aract eri z a t i o n wi th the g o a l o fmi ni mi z i ngt a xe s , the y must a dh e r e t o i te v e n tho ugh mar k e tm ov e men t s h a v e ma de i t di sadvantag eous, the U ni ted S tat es i nsi sts. I t r el i es pri nci pal l y o n CIR v. D ani e l s on , 3 78 F.2d 77 1 (3d C ir. 1967), wh i c h h e l d j u s tth i s , a n d o n a D ani e l s on -like rem ar k in C o m disc o , Inc. v. U nited Sta tes , 756 F.2d 569 , 577 (7th C ir. 19 85 ) : “ [ A] ta xpa y erg en er al l y may no t di sa vo w the f or m o fa deal

. ” S om e co urts have al l owed t ax payer s t o disr ega rd thei r own f or m s when “str ong proo f ” s how s thatN o. 08

- 2173 5 th e e c on om ic re alit y w as so m et h in g e lse . See , e.g., Le s l i eS. R a y In sura nc e A gen cy, Inc
. v. U nited Sta tes , 46 3 F
. 2d 210, 21 2 (1st C ir. 1972); U ll m an v. C IR , 264 F.2d 305 , 308 (2d Cir. 19 59 ). W e u se d th e “ st ro n g p ro of” form u lat ion inK reider v. C IR , 7 6 2 F
. 2 d 5 8 0 , 5 8 6

– 8 7( 7 th C i r . 1 9 8 5 ) , th o u g h wi thout m enti oni ng eitherCo m disc o o r D ani e l s on . The di str i ct cour t co ncl ud ed that i t was unnecess ar y t o choos e between thes e a pp ro aches ( orthei r var ian ts) , bec ause on an y sta n d ar d th e pa rt ies se t ou t to en su r e t h a t all i nc o me wa s r e c o g ni z e d i n 2000

— a n d a l th o u g h th e C o mm i ss i o ne r ha s so m e po wert o r ec ha r ac te r i ze t r an sa ct i o ns so tha t th eymatc h e co no m i c su bs ta nc e, t ax pay er s ca n’t l oo k thro ugh the f or m s they c hose them sel ves in o rder t o i mpr o v e the i r t a x t r e a t men twi th the b e ne f i t ofh i nd

si ght. S ee Gr egory v . He l ve r i ng, 29 3 U.S. 46 5 (1 935)
. S ee al so J o se ph Ba nk m an, TheE co no m i c Sub s t anc eD oc t r i ne, 74 S. Cal

. L. Rev. 5 ( 2000); Sa u l Levm or e, Re ch arac t e r izat i ons and t heNat ure o

f Theory i n Corporat eTax L aw , 1 3 6 U. P a . L. Re v. 1 01 9 ( 19 88 ) ; Da vi d A. W ei sb ac h, Fo r m al i s m i n theTax Law , 66 U . C h i. L
. Rev
. 860 (1999). So the d istri ct cou rt en te r ed su m m ar y j udg m en t f o r the U nite d S ta te s an d or d er ed Flet c h er to rep ay th e refu n d . 200 8 U .S. D ist . L EXIS 3555 ( N
. D
. I ll

. J an . 15, 2008 ). F l et ch era r g ue s th ats he di dn’ t “r ea l l y ” agree to th e str ucture that Ernst & Young and Cap Gem i ni ( and m osto f he r pa r tn er s) want ed i n 2 00 0. I fs he h ad v oted no a nd re fused to si gn, she m ai ntai ns, she w oul d have be en excl ud ed fro m the eco nom i c be nefi ts an d m i ght ha ve beenfi r e d. I fthi s i s s o , the n s he h a d adi ffi c ul tc ho i c e to m ake ; i t doe s no t r el i eve her ofthe choi ce’ s co nsequences. H ar d choi ces m ay be gut- w re nching, but they ar e cho i ces6 N o. 08

- 2173

no ne th el es s. Ev ennaïve pe o pl e ba ffl ed by the fi ne pr i nt in co n tr ac ts are h e ld to th eir te rm s; a s op h ist ica te d bu siness consul tant w ho agr ees to a m ult i

- m i l l i on- dol l ar tr ansact i on i s no t e nti tl ed to d em and the deal ’ s be nefi ts w hi l e a voi ding i ts detri m ents. T he ar gum ent that Fl etche r can av oi d the t er m s a s a m att ero fco ntra ct l aw i s fri vol ous. A l l thatm att er s now are the t ax co nsequences o fthe c o nt r a c t s s he s i g ne d. That a tr an sa c tio n’s f or m deter m i nes t axati on i s ( orat lea st sh ou ld be ) co m m on gro u n d am on g t h e p ar tie s. If pri vate part i es str ucture thei r tr ansact i on a s a sa l e o f a s s e t s , t h ey ca n ’t la te r tr ea t itfor t ax p u rp os es as if it ha d been a m erger. CIR v. Nat i onal Al f al f a Dehyd r at i ng & M i l l i n g Co ., 417 U
. S. 134 (1974). C f. La ndre t h Ti m b e rCo. v. Land re th , 471 U .S. 68 1 (1 98 5) (s am e p rin c ip le in secur i ti es l aw )
. Par ti es w ho s tr ucture thei r tr ansact i on a s a s al e a nd l eas ebackcan’ t t re at i t a s a m or tga ge l oan f or tax purpose s

— th ou gh th e C om m iss ion er m ay be ab le to r e c ha r a c t e r i z e i t s o tha t the t a x t r e a t men t mat c he s i ts eco nom i c subs tance. S ee F r a nkLy o n C o . v. U nited Sta tes , 435 U
. S. 561 ( 1978 )
. I f Cap Gem i ni tr ansfer s stock in 2 000, ca sh

-ba si s ta xpa y er s su cha s F l et ch er c an ’ t tr ea t th e in c om e a s re c eiv ed i n 20 01 or 2 00 3, ev en th ou gh it w ou ld ha ve b ee n c hi l d’ s pl ay to d o the de als o tha t th e i ncom e was r ecei ved i n thos e y ear s. The United S ta te s tr ea ts F l et ch era s i fs he wer e tr y i ng to re portan a sse t s al e a s a m er ger, o r i ncom e r ecei ved i n 200 0 a s i fi t had be en r ecei ved i n 200 3. T h is is not, how eve r, the sor t o far gum ent tha t Fle tcheradvances

. S he do es no t want to pr o ce ed as i fthe de alha d di ffer en tN o. 08

- 2173 7 term s. She argue s instead that the d eal’s ac t ual t e r ms have t ax co nsequences differ ent fro m tho se that her contr acts with Erns t & Y ou ng and Cap G em i ni r equi re d he r t o r e po r ti n 2 0 0 0
. An e xa mpl e m ak e s thi s c l e a r . S up p ose thatCap Gem i ni had deposi ted st ocki n the M er rill Lynch accounts i n annual i nstal l m ents f ro m 20 00 th roug h 20 04, and that the p arties h a d a g r eed to report that a l l i nc o me f r o m t he p a r tne r s hi p- f o r - s t o c ks a l e h ad been re cei ved i n 2000 be cause the c l osing o ccurr ed that yea r. That a gr eem ent woul d not a ffect ta xati on. Pri vate parti es can co ntra ct a b ou t when i ncom e i s r ecei ved, to b e s u re , bu t t h e t ax ru les ab ou t re aliz a t ion an d rec og n iti o n a r e e xt r i ns i c . Pe o pl e de t e r mi ne wha t t r a ns a c t i o ns to en ga ge in ; fed er al la w th en sp ec ifies h ow m u c h ta x is d u e . B e c a u s e F l e t c h e r d o e s n o t t r y t o r e c h a r a c t e r i ze t he tr ansact i on, doctr i nes that l i m i t o r f or eclo se taxpayer s’ abi l i ty to tak e s uch a s tep ar e be si de the poi nt. W hat, then, ar e the ta x conse quences o fthe parti es’ chose n f or m ? Cap Gem i ni deposi ted al l o fthe shar es i nto i ndi vi duala cc o unt s i n 2 00 0; fr o m i ts pe r specti ve , the con side ration ha d been p aid in full. B ut th e acc ou nt s w ere restricted

. Ex -partn ers received 25% i n cash that year, wh i l e th e r e s to fth e s t o c k co ul d b e r e a c h e d o n l y a s t i me p assed

. From th e m om en t of th e d ep osit i n 20 00, how ever, the ex- pa r tne r s b o r e the e c o no mi c r i s k : I fthe s t o c kr o se in th e m a r k et, th e e x -p ar tn er s s to od to rea p th e w h ole g ain, a nd i fthe s to ckfel l the e x- partn er s woul d b ea r the w hol e l oss . Thi s m ake s them the benefi ci alo w ners as of2000, the I RS co ntends. Fo r her part, Fl etche r str ess es the r est ri cti ons and m ai ntai ns that unti l she coul d do w i th the s toc k a s s he pl eas ed

— i n othe r w or ds sel l i t, notj ust8 N o. 08

- 2173

w at c h n er vo u sly as it ros e o r fell

— i t di d not co unt as i ncom e. The Com m i ssi onerhas the bet tero fthi s a rgum ent, as can be se en byco nsi deri ng the ta x conse quences o fdeposi ti ng ca sh i nto a bl ock ed acco unt. S up pose that an in ve n to r se lls h is p at en t in 20 00 for $ 2.5 m illion, al l p aid im m ed iat ely

—but b y contr act the inventorag re es that $2 m i l l i on wil l be pu t into a t rustthatwil l notbe dist ribu te d u n til 2 0 0 5. Fr om th e b u ye r’s p er sp ec tiv e, th e fu ll co ns i der at i o n i s pai d i n 20 00
. And f r o m the i nv en to r ’ s, the fullco nsi d er at i on i s r ecei ved i n 200 0. The i nventor agr ees to deferco nsum pti on f orfi ve yea rs , per haps as a spendthri ft pr ecauti on, but a t ax p aye r’ s wil l i ngness to d eferco nsum pti on does notdeferta xati on

— f orthe tax f a l l s o n i nc o me r a the r tha n c o ns umpt i o n. S e e 26 U
. S
. C. §451 ( a) ( any i tem o fgr oss i ncom e i s t axed i n the yea r re c eiv ed ). In c om e is “re c eiv ed ” n oton ly w h en p aid in ha nd b uta l so whenthe econ om i c va l ue i s wi th i n the taxpayer ’ s contr ol ; thi s i s known as const ructi ve recei pt. 2 6 C. F
. R
. § 1
. 4 5 1

– 2
. I ti s w h y a p e r s o n w h o e a r n s i n c o me can’ t a void tax by tel l i ng hi s e m plo yerto se nd a paycheck to hi s co l l ege , o r hi s son, r atherthan to hi s ba nk. A uthor i ty to dir ect the di sposi ti on o fi n com e i s co nstr ucti ve re cei pt. In our e x am ple , the i nventorco uld have ch o se n t o r ec ei ve the $ 2. 5 m i l l i o n i n c as h. Agr ee m en t w i th the buye r th at $2 m i l l i on would be se nt to a tr ustee an d he l d f o r fi ve y ea r s d o es no t av o i d the f ac t th atthe i nv en to r ha d the po wert o di r ec t whatbecam e o fthe m oney ; that ’ s w h at the c ontr act w as about. A nd m uch the s a me c a n b e s a i d f o r F l e t c he r : S he a g re ed by c on tr ac t t h at 75 % of th e c on sid er at ion w ou ld be h eld inN o. 08

- 2173 9

a r estric te d account f orup to fi ve yea rs , but her w i l l i ngness to accept re str i cti ons and defer consum pt ion d oes not el i m i nate const ructi ve re cei pt i n 200 0. I m agi ne that, inst ead of prov i ding f orp aym ent i n sto ck, th e co nt r ac t amongEr ns t & Youn g, Ca p Ge m i ni, a nd the partner s had cal l ed f orso m e ca sh i n 200 0 pl us a zer ocoup on b ond , handed overto the ex- partneri n 200 0 and m atur i ng i n 200 5. That bo nd i s incom e in 200 0, eve n to a cash-basi s taxpayer, because i t i s proper ty that can be s o l d in the ma r k e t
. S up po s e tha tthe p a r tne r s a l s o ma de s i de a g r e e men t s w i th Ca pg e mi nin o tt o s e l l the i r b o nd s f orfi ve yea rs . ( Eq uiv al entl y, th e ex- partner s m i ght ha ve ac ce pte d unr eg i st er ed se cur i ti es, w i tha s i de ag r ee m en t that Cap gem i ni would r egis te r them and thus f aci l i tat e s a l e i n 2 0 0 5 i fthe e x - p a r tn e r we r e s t i l l e mpl o y e d

. ) An ag r eem entno t to s el l woul d no t ch an g e th e na tu r e o fthe bonds as pro perty, and thus i ncom e, re cei ved i n 2000
. S ee R acine v. C IR , 49 3 F
. 3d 777 ( 7th Ci r. 2007) ( a t ra nsacti on involving stock op tions, bu t th at’s not a m ateria l d if feren ce )
. Butde fer r alo fthe r i g htt o s ell w o ul d r edu ce the val ue o fthe bonds, and hence the am ount o fi ncom e, because an i l l i quid as seti s w or th l ess than a l i quid one

. W he the r the s e c ur i t y i s h a nd e d o v e r t o the e x- pa r tner w ith a l ege nd re fl ecting the l i m i ts on sal e, or i nstea d is hand ed to an inter m edi ar y s uch as M er ri l l Lynch w i th i ns tr uc ti o ns t o e nf o r ce c o nt r ac tu alr es tr i ct i o ns o n the sal e o fan un- l ege nd ed sec uri ty, sho uld notm att erf or tax purpose s. The actual st ructur e o fthe 2000 tr an sa cti on i s m uch l i ke our hypotheti calze ro - coupon bo nd , tho ugh because the re strict ion s o n sal e were l i fted ye arbyye ar10 N o. 08

- 2173 i t i s m or e l i ke one bond m atur i ng i n one yea r, ano ther bond m atur i ng i n two yea rs , and so on thro ugh fi ve yea rs . T hree a s p ects of th e con tracts that Fl etch er signed are i m port ant t o thi s underst an ding. Fi rs t, i t m att er s that F l et ch era nd the o th ere x- par tn er s st o o d t o rec ei ve the e n t i r e ma r k e tg a i n, a n d t o b e a r a l l l o s s , fr o m th e mo m en t the t ra nsacti on cl ose d i n 200 0. That feature ofthe deal shows that the s toc k was i n herco nstructi ve po ss essi on i n 200 0. S eco nd , i t m att er s that F l et c h er ag re ed to p os tp on e h er u n re st ric te d ac c es s t o t h e s to c k. T h i s is whythe de a l l o o k s l i k e o uri nv e nt o r h y po the t i c a l

. T hi r d, i t m att er s that F l etche r agr eed to the am ount o fthe disc ou n t. T h e c on tr ac ts am on g E rn st & Y ou n g, C ap G em in i, and t he par tner s s peci fi ed that the r est ri cti ons w oul d be tr eat ed as re du ci ng the value o fthe sto ck to 9 5% o fi ts m ar ke t p ric e o n th e c los in g d at e. ( T h i s re flec ts n oton ly i l l i quidi ty but al so the r i sk that Cap gem i ni would use i ts pow ero verthe acco unt i n an unauthor ize d w ay, o r th at M er rill L yn c h m igh t fail in its d u ty as a c u s t o d i a n .) A n ex -p ar tn er w ou ld be h ar d p re ss ed in ligh t o f th is agreem ent t o ar gue that the di sco unt shoul d be 1 0% o r 20% ; Fl etche r does not tr y. S he i nsi sts i nstea d thatno t hi ng c ou nts a s incom e in 200 0 o therthan w hat was actually p u ti n h e r h a n d s i n c a s h. A n d th a tp o s i t i o n i s i n c o mpat ibl e wi ththe e xa m pl es we ha ve g i ve n. One m or e com pli cati on. T he co nsul ti ng par tner s a gr eed to g i ve b ac ks o m e o fthe s to ck ifthe y qui t ea r l y a nd wen t i nto com peti ti on with Capgem i ni
. I fthe part i es’ go alo f en co ur ag i ngthe e x- par tn er s to r emai n wi thCap gemi ni h ad be en ac c om p lis h ed by giv in g t h e p ar tn er s im m ed i-N o. 08

- 2173 11 at e ac ce ss t o the s to ckbu t requi r i ngthe m t o g r an t Cap gem i ni a secur i ty i nter esti n thei r hom es, s o that r e p a y me n tw o u l d b e a s s u r e d , th e n a l l o fth e i n c o me woul d be t r ea te d as r ec ei ve d i n 20 00
. I fi ns te ad Capg emi ni h ad d ole d ou t t h e s t o c k i n ins ta llm en ts (sa y, 50 % in 20 00 a n d 50 % if th e e x -p ar tn er rem ain ed on its p ay ro ll in 20 05), the n o nl y 5 0% woul d b e ta xabl e i n 2 00 0. The ac tu alt r an sa ct i o n was so m ewhe r e i n be twe en : 1 00 % o fthe st o ckwas t r an sfer r ed to M er r i ll L yn chi n 2 00 0 an d the cus t o di a n wa s t o h o l d i tu nt i l c o nd i t i o ns ( s uc h a s not com peti ng) had bee n s ati sfi ed. Fo r re aso ns we have cove re d

— p rincipa ll y the f act th at the ex -partn ers re cei ved the enti re eco nom i c g ai n and lo ss f ro m change s in the price of the secu riti es from 2 000 forw ard

— th e tr a ns a c t i o n l o o k s mor e l i k e i nc o me i n 2 0 0 0 tha n l i ke a st re am of p ay m en t s o ve r tim e. Se ve ra l co u rt s h av e h eld th at, wher e st o cki s tr an sf err ed unde r a s al es a g r ee m en t and hel d i n esc ro w to guar antee a party ’ s p er for m ance und erthe agr eem ent, the party “r ecei ves” the sto ck w hen i ti s p l a c e d in e s c r o w r a the r tha n whe n i ti s r e l e a s e d. Se e Ch a p li n v. CIR , 136 F.2d 298 , 299–3 02 (9th C ir. 1943 ); Bo nham v. CIR , 89 F. 2d 725, 726– 2 8 (8th Cir. 1937); see al so W

hitney C orp. v. CIR , 1 05 F
. 2d 43 8, 4 41 ( 8th Cir. 1939 )
. That princi ple appli es here

. Th e m or e l i kel y i t i s that the co nd i ti ons w i l l be sa tis fied , a n d a l l res tr ict ion s lifte d , th e m or e s en sib le it is to tr eatal l o fthe sto ck as constructi vel y r ecei ved w hen depo si te d i n th e ac co unt
. To se e th i s, su ppo se th at th e p a r t i e s h a d w a n t e d t o d e fe r th e r e c o g ni t i o n o fi n c o me and had p ut $2

. 5 m i l l i on in each par tner ’ s a ccount, with the c ondit i on that the wh ol e a m ount would be f or fei ted12 N o. 08

- 2173 i fthe tem perature i n Barr ow, A l ask a, exce eded 80 

### / F on Jan u ar y 1, 20 05
. W ou ld th e rem ot e p os sib ility of an A rc tic heat w ave enabl e the p ar tn er s t o defe r payi ng ta xes? Sur el y no t. S ee C em co Inv estors, LL C v . U n i ted S ta tes , 51 5 F
. 3d 74 9 ( 7th Ci r . 2 008 )
. I f, o n the o th erha nd, the parti es agr eed thatthe ex- partner s would r ece ive $2

. 5 m i l l i o n o nl y i fthe t emper ature i n Ba r r o w onJ an uar y 1 , 20 05, e xceeded 80 

### / F, then non e of th e pa rtne rs woul d c o ns tr uct i vel y r ec ei ve i nc o m e i n 2 00 0; e ve r y th i ng w oul d dep end on ev ents i n 200 5. The sor t o fco nti ngenci es that cou ld l ead to f or fei ture s w er e w ith in th e ex -p ar tn er s’ con tr ol. T h at im p lies ta x ab ili ty i n 200 0, f orco ntro l i s a f or m o fco nstructi ve posse ssi on. A nd the agr eem ent to disc ount the sto ck by onl y 5 % tel l s us that the par ti es deem ed f or fei ture s un likel y. Fl etche r’ s a cknowle dgm ent that the r i sk off or fei ture was sm all sh ow s t h at th e c o n d i t i o n s o f co n st ru c tiv e re c eip t in 2 0 0 0 h a v e b e e n s a t i s fi e d. Thu s a l though we agre e w i th Fl etche r that the e x-par tners ar e e nti tl ed to co ntestthe tax t re atm ent c al l ed f or b y t h e 2 0 0 0 c o n tr ac ts , w e h old th at th e s h ar es are ta x ab le i n 2 00 0 atthe i r v al ue o n th e da te o fde po si t to the ac c ounts at M er ri l l Lynch. I ncom e was co nstr ucti vely re cei ved i n that yea r not b ecause the contr act sai d that ev er y o ne woul d r epo r t i t so t o the I R S, b ut b ec au se the p arties w ere r ightto thi nk tha t thi s t ra nsacti on’ s a ctual provi si ons m ade the i ncom e a ttr ibutabl e t o 2000
. That the pri ce of Cap gem i ni sto ck dropped i n 2001 and later does no te nt i t l e the p a r t i e s t o de fe r the r e c o g ni t i o n of i ncom e. Fl etche r m ust r epay the r efund ( and am end herN o. 08

- 2173 13

re tu rn s f o r lat er ye ar s t o re flec t re c eip t o f th e in c om e in 2000 ). A FFI RMED

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