United States v. Fort
2011 U.S. App. LEXIS 7958
| 11th Cir. | 2011Background
- Ernst & Young sold its information-technology consulting unit to Cap Gemini; Fort, a partner, received Cap Gemini stock via a master agreement.
- 25% of Fort's shares were sold at closing to cover taxes; 75% (Restricted Shares) were placed in a Merrill Lynch escrow-like account.
- Restricted Shares could not be withdrawn for four years and 300 days, then could be released; forfeiture could occur for certain terminations.
- Restricted Shares carried dividends and voting rights; shares were valued for tax purposes at 95% of closing price.
- Partners, including Fort, voted 95% in favor of the transaction; Fort signed the Partner Agreement.
- Fort claimed 2000 proceeds were not income; the IRS initially accepted an amended return but later determined the refund erroneous, leading to this suit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is Danielson applicable to Fort's case? | Fort challenges form vs. tax outcome; Danielson limits such challenges. | Danielson is inapplicable; tax consequences depend on form but not recharacterization here. | Danielson rule inapplicable; proceed to constructive receipt analysis. |
| Did Fort constructively receive income in 2000? | Fort did not actually receive; escrowed assets negate receipt. | Fort had control: account in his name, dividends, voting, and risk of forfeiture. | Fort constructively received income in 2000. |
| Did the forfeiture provision defeat constructive receipt? | Forfeiture potential undermines recognition of receipt. | Fort retained sufficient control; 'poor performance' limits do not negate receipt. | Forfeiture provisions did not prevent constructive receipt; Fort realized income in 2000. |
Key Cases Cited
- United States v. Fletcher, 562 F.3d 839 (7th Cir. 2009) (income constructively received when form deferral does not delay income)
- Chaplin v. Commissioner, 136 F.2d 298 (9th Cir. 1943) (escrow with control indicators can realize income earlier)
- Bonham v. Commissioner, 89 F.2d 725 (8th Cir. 1937) (escrow as guarantee of performance can trigger current income)
- United States v. Bergbauer, 602 F.3d 569 (4th Cir. 2010) (constructive receipt principles applied to similar CGE&Y transaction)
- Comm'r v. Danielson, 378 F.2d 771 (3d Cir. 1967) (Danielson rule limits recharacterization arguments; form vs. tax outcome)