Taxation & Estate Planning

SALE BY STATE OF UNCLAIMED STOCK TREATED AS A SECTION 1033 DISPOSITION

By Charles Rubin

Many states have unclaimed property laws, which allow institutions and others that hold property on behalf of people that cannot be located to turn that money over to the state. After a given period, the state will typically then sell the property and add the funds to its general funds (if the property is already cash or bank account proceeds, no sale is needed).

A partnership had an interest in an escrow account that owned shares of stock of a publicly traded company. A successor escrow agent, out of lack of knowledge, did not know how to return such stock to the rightful owner (the partnership) and turned it over to a state under its unclaimed property law. The state later sold the stock. At a later date, the partnership found about the stock and was able to be paid the sales proceeds from the stock.

The sale of the stock generated gains for the partnership (even though that sale occurred without its knowledge or consent). The partnership requested the IRS to advise whether it could make use of Code §1033. Code §1033 always a taxpayer to defer gain in regard to property that is compulsorily or involuntarily converted by reason of its destruction, theft, seizure, requisition or condemnation, into similar property (either directly or by conversion into money and then acquisition of replacement property within 2 years).

In a favorable ruling, the IRS reached the following interest conclusions:

a. The transfer of the funds into the state?s control was considered a ?seizure? by the government, within the meaning of the statute;

b. The conversion of the stock into money was determined to compulsory or involuntary ? i.e., beyond the taxpayer?s control ? because the taxpayer did not intentional fail to exercise its ownership rights;

c. The two year replacement period did not start when the state sold the stock, but at the later date when the state made the funds from the sale available to the taxpayer (thus giving more time to the taxpayer to acquire related property); and

d. Allowing the taxpayer to replace the stock with stock of another publicly traded corporation ? equating the risks and activities of one publicly traded stock held for investment with other publicly traded common and preferred stock and stock in publicly traded mutual funds (but not debt instruments).

PLR 200946006

Full post as published by Rubin on Tax on December 17, 2009 (boomark / email).