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In the cases at hand, petitioner had taxable receipt of the
settlement proceeds, even though he did not physically receive
them. The funds were paid at petitioner’s direction (under the
terms of the settlement agreement signed by petitioner) to
petitioner’s attorney, to be deposited into an attorney/client
trust account. Petitioner’s attorney was acting as petitioner’s
agent or petitioner’s creditor in receiving the settlement
proceeds and depositing them into a trust account pending
resolution of an attorney’s-fee dispute between petitioner and
his counsel unrelated to United Ready Mixed’s liability to
petitioner. There is no need to consider the doctrine of
constructive receipt because petitioner did not delay United
Ready Mixed’s payment.12 As between petitioner and United Ready
Mixed, the settlement amount was fully paid in 1992. United
Ready Mixed retained no interest in the funds after they were
paid, at petitioner’s direction pursuant to the terms of the
settlement agreement, to petitioner’s attorney. Any restriction
12“Constructive receipt” as defined in sec. 1.451-2(a),
Income Tax Regs., is a legal term of art that applies when
payment has not been effected because of the payee’s postponing
payment. The term “constructive receipt” could also be used in
its vernacular sense for any payment not physically received by
the taxpayer. A taxpayer has “constructive receipt”, in its
vernacular sense, of funds paid directly to the taxpayer’s agents
or creditors. The legal doctrine of constructive receipt defined
in sec. 1.451-2(a), Income Tax Regs., however, does not apply to
completed payments received by a payee’s agents or creditors. We
have used the term “taxable receipt” to distinguish between
physical receipt and nonphysical receipt that the law treats as
received for tax purposes.
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