                        T.C. Memo. 2005-192



                      UNITED STATES TAX COURT



                ARTHUR F. MILLARD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3713-04.              Filed August 8, 2005.


     Arthur F. Millard, pro se.

     Travis T. Vance III, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   Respondent determined a deficiency of $2,764

in petitioner’s Federal income tax for 2001.    The issue to be

decided is whether petitioner’s 2001 gross income includes the

amount of a check petitioner received but did not cash in 2001.

All section references are to the Internal Revenue Code (Code),
                                - 2 -

as amended, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

                            Background

     The parties submitted the instant case, fully stipulated,

without trial, pursuant to Rule 122.     The parties’ stipulations

of fact are hereby incorporated by this reference and are found

as facts in the instant case.

     At the time of filing the petition, petitioner resided in

Doraville, Georgia.   During 2001, petitioner owned an individual

retirement account (IRA) with SouthTrust Bank.    On May 10, 2001,

SouthTrust Bank issued to petitioner a check in the amount of

$10,841.06 (the original check).    SouthTrust Bank debited

petitioner’s IRA account by $10,841.06 and recorded the

transaction as a premature distribution.    Subsequently,

SouthTrust Bank submitted to respondent a 2001 Form 1099-R,

reporting a taxable distribution of $10,841.06.    The records of

SouthTrust Bank indicated a zero balance in petitioner’s IRA

account as of January 15, 2002.

     On March 21, 2003, petitioner presented the original check

to SouthTrust Bank for payment.    SouthTrust Bank canceled the

original check but issued petitioner a second check in the amount

of $10,841.06 (the replacement check), which reflected the

current date.
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     On December 1, 2003, respondent mailed to petitioner’s last

known address a statutory notice of deficiency with respect to

petitioner’s 2001 tax year.    Respondent determined that a

deficiency resulted from petitioner’s failure to include the

amount of the check in gross income for 2001.    In addition to the

regular tax liability, respondent determined that a 10-percent

additional tax applied to the amount of the check pursuant to

section 72(t).   Petitioner timely filed a petition with this

Court for a redetermination of the deficiency.

                              Discussion

     Respondent contends that the distribution of the original

check by SouthTrust Bank constituted an IRA distribution and,

consequently, the amount of the original check must be included

in petitioner’s gross income in the year of receipt.    Petitioner

concedes that he initiated closure of the IRA account and

received the original check from SouthTrust Bank in 2001.

However, petitioner contends that, because he did not endorse or

negotiate the original check, the account remained open

throughout 2001.   Relying on articles 3 and 4 of the Uniform

Commercial Code as adopted by Georgia and related caselaw,

petitioner contends that the original check and the underlying

funds remained the property of SouthTrust Bank during the year in

issue, and, consequently, the receipt of the original check did

not constitute the receipt of taxable income by petitioner.     The
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statutes petitioner cites include Ga. Code Ann. secs. 11-3-101

and 11-4-101 (1981).        Citing A.G. Edwards & Sons, Inc. v. Paulk,

25 Bankr. 913 (Bankr. M.D. Ga. 1982), petitioner contends that a

check is not a financial statement or money but is evidence of

debt.    Petitioner also cites United States v. Forcellati, 610

F.2d 25 (1st Cir. 1979), as illustrative of the proposition of

negotiable instruments law that the drawer of a check retains

ownership of the check.

     Section 61(a) provides that gross income includes all income

from whatever source derived, subject only to the exclusions

otherwise provided.1        In section 61(a), Congress intended “to

exert ‘the full measure of its taxing power’ and to bring within

the definition of income any ‘accession to wealth.’”          United

States v. Burke, 504 U.S. 229, 233 (1992) (citations omitted).

Consequently, the definition of gross income has a broad scope,

and exclusions are construed narrowly.          Commissioner v. Schleier,

515 U.S. 323, 327-328 (1995); Commissioner v. Jacobson, 336 U.S.

28, 49 (1949).



     1
        SEC. 61.   GROSS INCOME DEFINED.

          (a) General Definition.--Except as otherwise provided
     in this subtitle, gross income means all income from
     whatever source derived, including (but not limited to) the
     following items:

                   *    *      *    *       *   *    *

                   (9) Annuities;
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     Section 408(d)(1) provides that any amount paid or

distributed out of an individual retirement plan must be included

in gross income by the distributee in the manner provided under

section 72,2 except as otherwise provided.   The term “individual

retirement plan” includes an IRA.    Sec. 7701(a)(37).   However,

the amount distributed from an individual retirement plan is not

subject to tax if the amount is rolled over into an individual

retirement account or individual retirement annuity within 60

days of the distribution.    See sec. 408(d)(3).   In the instant

case, petitioner concedes that he made no rollover contribution

after receiving the original check from SouthTrust Bank.

     Cash method taxpayers must include all items of gross income

in the taxable year of actual or constructive receipt.3    Section

1.451-2(a), Income Tax Regs., sets forth the general rule for

constructive receipt of income as follows:



     2
      Sec. 72(a) provides:

          SEC. 72(a).   General Rule for Annuities.-- Except
     as otherwise provided in this chapter, gross income
     includes any amount received as an annuity (whether for
     a period certain or during one or more lives) under an
     annuity, endowment, or life insurance contract.
     3
      Sec. 1.446-1(c)(1)(i), Income Tax Regs., provides:

          (i) Cash receipts and disbursements method. Generally,
     under the cash receipts and disbursements method in the
     computation of taxable income, all items which constitute
     gross income (whether in the form of cash, property, or
     services) are to be included for the taxable year in which
     actually or constructively received. * * *.
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          (a) General rule. Income although not actually reduced
     to a taxpayer’s possession is constructively received by him
     in the taxable year during which it is credited to his
     account, set apart for him, or otherwise made available so
     that he may draw upon it at any time, or so that he could
     have drawn upon it during the taxable year if notice of
     intention to withdraw had been given. However, income is
     not constructively received if the taxpayer’s control of its
     receipt is subject to substantial limitations. * * *

Consequently, a cash method taxpayer constructively receives

income as of the date that a check is received absent a

substantial limitation.     Furstenberg v. Commissioner, 83 T.C.

755, 791 n.28 (1984); Kahler v. Commissioner, 18 T.C. 31, 34-35

(1952); Roberts v. Commissioner, T.C. Memo. 2002-281.     In the

instant case, the record reflects that the original check was not

subject to substantial limitations, and petitioner makes no

contention otherwise.     Consequently, we find that petitioner

constructively received $10,841.06 of income upon his receipt of

the original check in 2001.4    Accordingly, petitioner’s 2001

gross income includes the IRA distribution of $10,841.06.

     Petitioner’s reliance on Georgia commercial statutes and

related caselaw is misplaced.     While State law creates legal

interests and rights, it does not override the Federal doctrine


     4
      Petitioner was also in actual receipt of the check, which
we have held to constitute a cash equivalent. In Martin v.
Commissioner, T.C. Memo. 1992-331 (citing Lavery v. Commissioner,
158 F.2d 859, 860 (7th Cir. 1946), affg. 5 T.C. 1283 (1945)),
affd. 987 F.2d 770 (5th Cir. 1993), we stated: “The receipt of a
check is tantamount to the receipt of cash, even if the check is
not deposited or otherwise negotiated, provided that its receipt
is not subject to <substantial limitations’ and there is no
reason to suppose that it will be dishonored,”
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of constructive receipt as set forth in the Code and the

regulations, since it is Federal law that designates which of

those interests and rights is taxed.   See Walter v. United

States, 148 F.3d 1027, 1029 (8th Cir. 1998) (“We agree that the

law of negotiable instruments provides a useful backdrop, but it

cannot trump the doctrine of constructive receipt as developed in

the Internal Revenue Code and its implementing Treasury

Regulations.”).

     Section 72(t)(1) provides that a 10-percent additional tax

applies to any amount received from a qualified retirement plan,

subject to exceptions enumerated in section 72(t)(2).5    In the


     5
      Sec. 72(t) provides:

          SEC. 72(t). 10-Percent Additional Tax on Early
     Distributions From Qualified Retirement Plans.--

               (1) Imposition of additional tax.--If any taxpayer
          receives any amount from a qualified retirement plan
          (as defined in section 4974(c)), the taxpayer’s tax
          under this chapter for the taxable year in which such
          amount is received shall be increased by an amount
          equal to 10 percent of the portion of such amount which
          is includible in gross income.

               (2) Subsection not to apply to certain
          distributions.--Except as provided in paragraphs (3)
          and (4), paragraph (1) shall not apply to any of the
          following distributions:

                    (A) In general.--Distributions which are--

                         (i) made on or after the date on which
                    the employee attains age 59 1/2,

                         (ii) made to a beneficiary (or to the
                    estate of the employee) on or after the death
                                                   (continued...)
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instant case, the record reveals that no exception to the 10-

percent additional tax applies with respect to the distribution

of $10,841.06, and petitioner does not contend otherwise.

Consequently, we find that the 10-percent additional tax applies

to the distribution in issue.

     To reflect the foregoing,


                                         Decision will be entered for

                                 respondent.




     5
      (...continued)
                       of the employee,

                            (iii) attributable to the employee’s
                       being disabled within the meaning of
                       subsection (m)(7),

                            (iv) part of a series of substantially
                       equal periodic payments (not less frequently
                       than annually) made for the life (or life
                       expectancy) of the employee or the joint
                       lives (or joint life expectancies) of such
                       employee and his designated beneficiary,

                            (v) made to an employee after separation
                       from service after attainment of age 55,

                            (vi) dividends paid with respect to
                       stock of a corporation which are described in
                       section 404(k), or

                             (vii) made on account of a levy under
                       section 6331 on the qualified retirement
                       plan.
