Proceeds of Property Sale

And I believe the agency relationship terminates when the proceeds are turned over to the principal, not when the agent receives the proceeds. Agent holds the proceeds as agent.

I disagree. The agency was terminated after the sale when the agent breached the agency relationship by not turning over the proceeds to the taxpayer.

Under your theory, since the proceeds were not turned over to the principal, the agency relationship continued, even beyond the agent's embezzlement. The taxpayer would have to report the sale, including the net proceeds that were embezzled by the agent. Just doesn't make any sense.

In Rossi a partnership assigned all assets to Houston for the benefits of its creditors.
The opinion says "We do not think, however, that Houston was the agent of the partnership at the time he received the check, cashed it, and spent the money for his own personal use. A reading of the assignment by the partnership to Houston will show that the partnership conveyed all of its then known assets to Houston to be sold and converted into cash, and, after the payment of certain small preferred claims, the balance was to be paid pro rata to two general creditors, with the requirement that "acceptance by the above named creditors under this agreement shall constitute a release of all our indebtedness to them."
That assignment was far different that the OP's case of an agent acting under a POA.
I don't really see an argument that the agent was not acting as the TP's agent when he received the money upon transfer.
The agent held the money for the TP and embezzled/stole from the TP.

Hi, dave829,

It is irrelevant when the agency terminated. The issue is whether the acts committed in the principal's name were ultra vires, and thus not attributable to the principal. The fact that the POA allowed a sale is not determinative, except perhaps for the buyer in establishing the status of an innocent BFP without notice. If the act were not intended to be in furtherance of the principal's interests, then it was ultra vires.

From another perspective, the totality of the circumstances indicates a theft. It's just a question of what was stolen. The TP in good faith can say it was the real estate and the IRS in good faith can say it was the proceeds. That's why I look at this from a return position perspective.

The bottom line is that if theft of the realty is a better reporting position than a taxable sale followed by theft of the proceeds, I'd feel comfortable opining in favor of theft of the realty. But of course, others may feel differently...

If the agent had a general POA it might be arguable that he had acted ultra vires and stole the real property.
But OP says "taxpayer gives a power of attorney to someone else to sell property on their behalf" so it would be hard to argue that the sale was ultra vires and that the agent stole the property.

Hi, Keiser,

I just made that argument. And you, of course, are free to disagree.

Suppose the agent deeded the realty to himself before selling and pocketing the proceeds. Would you still say there was a taxable sale? How about if the agent sold it to himself with a heavy discount? Are you saying that even if the agent planned on keeping the proceeds before delivering the executed deed to the buyer that the sale is nevertheless the act of the principal?

This type of argument arises because we are forced to attach labels to real world events. There is often room for substantial disagreement in the labeling process. (And that's why there are lawyers...)

I think you guys are talking past each other, or at least Dave is misunderstanding what Nilodop is saying.

You can have an agency relationship, yet the agent does something that is outside the scope of that arrangement. That act wouldn’t terminate the agency relationship, it would just be an act that is not pursuant to the relationship. Thus, it would not be imputed to the principal, as Gator says in Post #20.

I’d still like an answer to Post #18.

Gatortaxguy,

"Suppose the agent deeded the realty to himself before selling and pocketing the proceeds. Would you still say there was a taxable sale? How about if the agent sold it to himself with a heavy discount? Are you saying that even if the agent planned on keeping the proceeds before delivering the executed deed to the buyer that the sale is nevertheless the act of the principal?"

I think the first 2 examples are sales, voidable sales, but sales.
The third example is embezzlement as the object was the sales proceeds, not the property itself.
[But I have never practiced criminal law.]

as the object was the sales proceeds

I was wondering about that too, somewhat to Dave’s point about proceeds being “received.”

Might it get to the definition of a “Sale?”

Sure seems to me, a “Sale” is a two-way street, an exchange of one asset (realty in this case) for another (cash in this case). If that cash is never received by (1) the seller or (2) the seller’s agent, while that agent is acting his capacity as such, then has there been a “sale” for tax purposes?

Anyway, this is why I was asking the question about how, exactly, the POA holder pocketed the money, thinking that might have some relevance.

I suppose it depends on exactly what the POA says.
In my experience, a title company/escrow on a sale of real property is unlikely to convey titled based on a POA and will demand the owner's notarized signature on the conveyance. The escrow check is made out to the owner.
But the OP's example has the POA being used to convey title to undescribed "property" so maybe not real property or a lax jurisdiction without title and escrow companies or a waiver of such by the parties to the sale.
The POA might be the power to convey and receive proceeds.
But I suppose it could be limited to conveyancing only and require funds be deposited into the owner's account.
Ample possibilities to consider for a law school exam.

I don't think the details of the agent's theft matters much.

I don't think the details of the agent's theft matters much.

I don’t totally disagree. I’m simply thinking that if the agent diverted the funds immediately, and in a way that could be described as clear embezzlement (i.e. the funds went directly into an account that they were not supposed to go into, that is, an unauthorized account), then there was no receipt of funds by the agent that was within the scope of the agency relationship. That would be a clear-cut situation supporting Gator’s position. In other words, if the funds were supposed to go directly into the principal’s bank account, but they didn’t, that’s an embezzlement before there was actual or constructive receipt by the agent in his capacity as such (and hence, nothing would get imputed from agent to principal).

Now if that didn’t happen, and the funds weren’t directly embezzled (by use of an unauthorized bank account, for example), that might crack open the door for an IRS attack. But that doesn’t mean Gator’s argument loses.

Consider this hypothetical: The funds actually do get deposited into the principal’s bank account. “Sometime thereafter,” using the same POA, the agent causes those funds to be moved from the principal’s bank to his own personal bank account. I can see how these details might matter, including how much time elapsed between the money in and the money out of the principal’s bank account. That’s about the only situation I can see where we might possibly have a sale and then a theft.

We're getting into how many angels are on the head of a pin...

We're getting into how many angels are on the head of a pin...

Yes, we are. I still don’t know the specifics of what transpired here. But I agree there are limits to the “if the agent collects, the principal has collected” theory. The concept at play there is actual/constructive receipt (by the principal). That can be a thorny issue when malfeasance is involved. Take this thread, for example:

viewtopic.php?f=8&t=23222

I think we did good to flesh out the applicable issues/law, but not so sure we (or ManVsTax) ever concluded.

And quite frankly, even in non-malfeasance situations, the “if the agent collects, the principal has collected” theory hasn’t been strictly followed by the courts. But it does seem the courts are far more reluctant to invoke the theory, to the taxpayer’s detriment, when malfeasance is involved. Nonetheless, facts matter. We all know what how cases read: Before the opinion is given, all the facts are spelled out, in highly detailed kind of way. I don’t think it’s all that prudent, for us practitioners, to draw a conclusion about something without turning over every rock beforehand.

We're discussing a return position. This is one of those situations where the appropriate question is "What do you want it to be?"

We're discussing a return position. This is one of those situations where the appropriate question is "What do you want it to be?"

If your point, gatortaxguy, is that the client is responsible for positions on his return, of course he is. But preparers have responsibilities as well, and, as Jeff-Ohio points out, we still do not know all the facts we need to know. And once we do, we can present to client the possible reporting positions (if there are more than one), tell him our view, and let him decide. But it does not stop there, either for us as signing preparers, or, for that matter, for tax lawyers who provide advice on significant reporting positions that are taken based on that advice. That tax lawyer would also be a preparer.

I'm quite sure you are familiar not only with Circular 230, but also the penalties for both signing and non-signing preparers, as well as those applicable to taxpayers, and how to avoid those penalties, and maybe even when, as a preparer, to decide not to prepare.

Yes I am. I was responding to a real world question as to what I would do. There presumably is a reasonable argument for either position. The guiding principle in such a situation has nothing to do with Circular 230 or preparer penalties. It has to do with the freedom to choose.

There is a case where an attorney received settlement proceeds. Paid all to client except $2,500. Court found that attorney had no legitimate reason to retain the proceeds. Those proceeds were not taxable to the client because the attorney/agent did not have to authority to withhold the money. Thus, the client was not in constructive receipt of the proceeds.

Lehmuth v. Commissioner, No. 12325-00S, T.C. Summary Opinion 2001-190

The relevant legal portion of the opinion states:

The determination whether a taxpayer has constructively received income is essentially a question of fact. Childs v. Commissioner, supra at 654 . We have long held that the doctrine of constructive receipt is to be applied sparingly. The doctrine is only to be invoked when the taxpayer has an unrestricted right to receive payment of money that is available to him. Furstenberg v. Commissioner, 83 T.C. 755 , 792-793 (1984); Basila v. Commissioner, 36 T.C. 111 , 115-116 (1961) (citing Gullett v. Commissioner, 31 B.T.A. 1067 , 1069 (1935)).

Generally, receipt of payment by an agent is constructive receipt by the principal. Md. Cas. Co. v. United States, 251 U.S. 342 , 346-347 (1920); Burkes v. Commissioner, T.C. Memo. 1998-61 . An exception to the general rule exists if there is an unauthorized use of funds from which the principal derives no benefit. Alsop v. Commissioner, 290 F.2d 726 , 728 (2d Cir. 1961), affg. 34 T.C. 606 (1960); Grant v. Commissioner, T.C. Memo. 1995-29 , affd. on another issue 103 F.3d 948 (11th Cir. 1996). However, if the principal derives an economic benefit from the agent's actions, the principal constructively receives the income even though the agent took unauthorized action to the detriment of the principal. Sowell v. Commissioner, 302 F.2d 177 , 179-180 (5th Cir. 1962), revg. T.C. Memo. 1961-115 ; Wells v. Commissioner, T.C. Memo. 1967-154 .

Mr. Davis, as petitioner's attorney, was acting as petitioner's agent when he properly received the settlement proceeds from Kits. See Estate of Kamm v. Commissioner, 349 F.2d 953 , 956 (3d Cir. 1965), affg. T.C. Memo. 1963-344 . Therefore, in the absence of an exception to the general rule, the money received by Mr. Davis was constructively received by petitioner.

Pitch78, your summary of the court's decision is correct, but the portion you quoted did not include the reasons WHY the court ruled that the taxpayer did not constructively receive the $2,500. Here's the portion that DOES show this:

We conclude that petitioner did not constructively receive the $2,500 that Mr. Davis retained and never sent to petitioner. Petitioner did not authorize Mr. Davis to retain the $2,500. Petitioner’s attempts to obtain the money were unsuccessful. The money simply was not available to him. Moreover, petitioner received no economic benefit from Mr. Davis’s unilateral decision to retain the money. There was no possibility that petitioner could benefit from participating in the store manager case because the settlement agreement with respect to the lab manager case and the general release included in that settlement barred petitioner from participating in the store manager case. Consequently, authorities such as Sowell v. Commissioner, supra, and Wells v. Commissioner, supra, finding constructive receipt where the principal enjoyed an economic benefit notwithstanding the absence of authorization by the principal, are not applicable.

Pitch78, your summary of the court's decision is correct, but the portion you quoted did not include the reasons WHY the court ruled that the taxpayer did not constructively receive the $2,500. Here's the portion that DOES show this:

the post was more about the law than the facts. Having said that, the post leads in with a short summary of the facts. I figured if you want more details you can go read the case yourself.

Pitch78, I wasn't being critical. In fact, I applaud you for finding this case and the quote in it regarding how constructive receipt works when an agent takes the principal's funds when not authorized to do so.

As for reading the case, it's difficult to find on the Internet, primarily because it's a TC Summary case that can't be cited as precedent. You can find the opinion on the Tax Court's website by using the docket number: https://dawson.ustaxcourt.gov/case-detail/12325-00