### In the



# United States Court of Appeals

For the Seventh Circuit

____________________

No. 16

‐ 2987

R AYMOND S. M C G AUGH

,

Petitioner

‐ Appellee

,

v.

C OMMISSIONER OF I NTERNAL R EVENUE

, Respondent

‐ Appellant

.

____________________

Appeal from the United States Tax Court.

No. 13665

‐ 14

— David Gustafson

, Judge

.

____________________

A RGUED F EBRUARY 22, 2017

— D ECIDED J UNE 26, 2017

____________________

Before B AUER and W ILLIAMS

, Circuit Judges

, and D E G UILIO

,

District Judge

. 

D E G UILIO

, 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 Rabinak4 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); UnitedNo. 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 can ʹ t 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.