A person died. Some shares of stock owned by the deceased were never claimed by the beneficiary. The State of Illinois obtained these shares of stock, because it was determined to be “Unclaimed Property”, and after a few years sold the shares. The beneficiary became aware of these funds, contacted the State of Illinois and received the cash held by the State of Illinois. The State of Illinois does not send any tax forms to anyone, neither the IRS nor the beneficiary.
Should the cash received be reported as taxable income? Ordinary income or capital gains? Should an attempt be made to calculate the cost basis and resulting capital gain and dividend income that was received by the State of Illinois over the years?
Glenn Z
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Interesting...this sounds like a tax court case in the making.
Can't answer this for you, but a few considerations:
- The nature of unclaimed property is that it's property that already belongs to you, so as a general rule it wouldn't be taxable income.
- Since this property experienced realized gains, the gain component would seem to fall outside the general rule.
- Tax court has a well-established precedent (Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969)) that when there is income from found property, it's taxable in the year found.
Putting those three items together would reasonably lead to the conclusion that the cash that represents gain would be taxable in the year recovered. Of course the stock shares had a basis of their FMV on the date of death of the decedent, so only the excess of cash over that basis would be gain.
The more interesting question is whether the taxpayer can at least get LT capital gain/qualified dividend treatment on the gain. Cesarini argued that if they had to recognize income, it should at least be LT capital gain income, but they lost this argument. The facts were pretty different from the current situation though. I'm not aware of any case law or regs that would address this question.
Generally, it depends on the character of the property before the state took possession of it as unclaimed property. If a company remitted dividends to the state because the company could not locate the beneficiary, then those dividends would have been taxable income to the beneficiary. When the beneficiary claimed the "income" from the state, it is probably taxable when received.
In a different case, if a bank remitted a dormant checking account balance to the state, then that cash would not have been taxable income to the owner and would not be taxable when the owner claimed the "property" from the state.
In your case, it sounds like the stock would have been "inherited property" if it had passed from the owner to your taxpayer. That would not be taxable income to your client. So absent a state statute that says unclaimed property recovered is income, it doesn't sound like taxable income.
And what makes tax practice fun is to see different points of view 🙂
Any comments on the following fact pattern:
Decedent is a nonresident alien
Beneficiary is a nonresident alien
Stock certificates held by the decedent are all shares of US companies.
Because of the length of time before the inherited unclaimed property was discovered, the shares had been remitted to the State and the State had converted the shares to cash.
Question: is FMV determined upon the decedent's date of death, or following Cesanini, is FMV determined on the date of "undisputed posession." Moreover, since on the date of undisputed posession the beneficiary received cash -- so is the FMV on date of death irrelevant since the value of the cash is absolute (i.e. not subject to mark-to-market).
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