CGT on escheated shares

CGT on escheated shares

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A client forgot that he owned some shares in a US company and didn't tell the company when he moved house. After a period of time, when dividend cheques had been returned, the shares were escheated to the State of incorporation of the company. (Delaware, in this case.) The State then sold the shares and my client became entitled to the value of the shares (in US$, of course) at the date of escheatment. No interest is payable by the State on that sum.

A couple of years ago, the client remembered he owned the shares and we eventually found out what had happened to them. The client has just received a cheque for the value of the shares at the date they were escheated.

I now have to work out the tax consequences. The shares were escheated on 1 January 1997. The client obtained a claim form from Delaware in 2011. The cheque has just been received.

What has my client disposed of and when? If I assume that he disposed of the shares on 1 January 1997, the interest bill exceeds the CGT. (Delaware hasn't paid him any interest, although the exchange rate has moved a bit in his favour.)  Besides that, it doesn't seem right as he "diposed of" the shares without knowing about it.

Did he dispose of shares in 1997 and acquire a right to compensation? If that right was worth the value of the shares at that point, the result if the same as if he'd simply sold the shares then. Was the right arguably worht very little because he didn't know he had it? So he made a loss/small gain perhaps on the shares in 1997 and acquired a right which he's only just disposed of.  I don't think s22 TCGA 1992 applies because that envisages a disposal by one party with no acquisition by the other - but Delaware acquired my client's shares, albeit by operation of law. S268B (compensation for deprivation of foreign assets) doesn't apply either (and, morally, shouldn't in any case).

what's left of my brain is obviously completely befuddled by the detective work involved in establishing the history of the shares. Does anyone have any bright ideas about the correct tax treatment? 

EDIT: I should make clear that the State was not holding the sale proceeds on behalf of my client. The funds belonged to the State. He simply had a claim against the State.

Replies (10)

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By pawncob
01st Oct 2013 20:41

Not Guilty

He can't dispose of anything "unknowingly", so any disposal only arose for tax purposes when he became aware of the disposal. Delaware in effect held them in trust on his behalf until such time as he made a claim for compensation or became aware of the disposal. The fact that Delaware had already disposed of the shares is irrelevant.

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By MJShone
03rd Oct 2013 09:52

Thansk Pawncob but...

Delaware definitely did not hold the shares in trust until he made a claim for compensation. (I[d like that to be the case.)

The legal position is that, on escheatment, the shares ceased to belong to my client and belonged to Delaware. Had Delaware not sold them, it would have been entitled to dividends etc paid after escheatment. Also, my client was not entitled to the sum for which Delaware sold the shares - just to the value at escheatment.

Because he didn't get any interest between 1997 and 2013, I'd really like the answer to be that he has made only one disposal, in 2013, but I don't think that's the case.  

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By pawncob
03rd Oct 2013 10:40

But.........

Delaware compulsorily acquired the shares in 1997, under statute and without the ability to inform the owner. No disposal took place until such time as the owner traced the shares and became entitled to compensation. He couldn't report it until he became aware of it, so it should go on the current return.

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By MJShone
03rd Oct 2013 15:01

Help!

What I'm missing is rationale for the statement that no disposal took place until the owner traced the shares - please say if I'm just being stupid! (He became entitled to the compensation as soon as the shares were escheated - he just didn't know about it until recently.) 

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By flurrymc
03rd Oct 2013 15:27

date of contract

If I remember my contract law a contract requires offer and acceptance.  And until your client knew what had happened he would not have been able to accept it.  Therefore the date of the contract, within the meaning of s.28, would be when he accepted the payment.

Or at least that is what I would argue if any HMRC officer said otherwise.

 

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By MJShone
03rd Oct 2013 15:57

Date of contract

Thanks flurrymc.

I think the disposal was by operation of law, rather than by contract. (A bit like property being confiscated.) I do see though, how the same sort of thought process might mean (as pawncob has already said) that the disposal wasn't on the date of escheatment but on some later date (eg when he found out about the escheatment or whan he put the claim in or when he was paid.)

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By Steve Kesby
03rd Oct 2013 16:48

Aren't there two transactions?

1) A disposal (otherwise than by a contract for sale) when the shares passed to the state of Delaware, for which there were no proceeds. See CG13139.

2) A payment of compensation, which had to be claimed in 2011, but which was calculated by reference to the amount that the state of Delaware had (itself) been able to realise for the shares. See CG12940+ onwards, particularly CG12952 and CG12960.

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By MJShone
04th Oct 2013 09:23

Thanks Steve

That looks like potentially fruitful stuff (which I should have looked at myself but that's where Aweb is very useful in people pointing out what others have missed!). Bedtime reading for the weekend...

Thanks again Steve

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By gbuckell
04th Oct 2013 13:03

Out of time?

I agree there is a disposal in 1997 but I am not so sure the consideration was nil. Surely a right to compensation arose at that date even if he was not ware of it and even if he had to make a formal claim at a later date? It would have been necessary to value the right at the date it was received at market value on that date, i.e. at full value. One cannot use hindsight to say that the compensation was of limited value because it would not be claimed for many years. After all if he had remembered one day after the sale had taken place he would have received full value at that time.

When compensation is received there is no gain apart from currency movement

As the client has not acted fraudulently (careless perhaps), the time limit to assess is only 6 years and so it is too late to assess the original gain.

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By MJShone
04th Oct 2013 13:47

Thanks gbuckell

The 1997 disposal was my original thought. And just because he didn't know about the right to claim, didn't make it worth less - so the dollar value then was the same as the dollar value now.  Hence looking for an alternative/correction.

I hadn't thought about the time limits though. Good point. I'll look into that one.

Steve Kesby's given me something to think about too.

accountingWEB scores again!

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