Constructive receipt
Encyclopedia
For federal income tax
purposes, the doctrine of constructive receipt is used to determine when a cash-basis taxpayer has received gross income
. A taxpayer is subject to tax in the current year if he or she has unfettered control in determining when items of income will or should be paid. Unlike actual receipt, constructive receipt does not require physical possession of the item of income in question.
The United States Tax Court
more concisely articulated the doctrine of constructive receipt in Davis v. Commissioner
. The court stated that for income to be constructively received, the funds must be made available to the taxpayer without substantial limitations. At issue was whether or not a taxpayer faced such substantial limitations when a check was available to her at the post office on the last day of the tax year after the mail carrier attempted to deliver the certified letter containing it to her home earlier the same day. The taxpayer was not at home when the first delivery attempt was made and the carrier left a note that the letter would be at the post office for her. The taxpayer retrieved the check from the post office several days later, just after the new tax year began. Courts had previously held that when a taxpayer makes a decision to be unavailable to take delivery of a check, then he will not satisfy the substantial limitations requirement and he will be deemed to have had constructive receipt at the time of attempted delivery. However in this case, the court noted that the check sender specifically informed the taxpayer on a prior occasion that the check would be arriving approximately two months later than it actually did. The taxpayer had no notice to expect that the check would be delivered; therefore she could not have made a decision to be unavailable to take receipt. The court held that this lack of notice, under the circumstances, meant that she faced substantial limitations on the availability of the funds and that they were not constructively received during the first tax year.
. Paul Hornung
, a football player for the Green Bay Packers
, won a Corvette
as a prize on December 31, 1961, for his performance in the 1961 NFL
Championship Game
. The game was played in Green Bay, Wisconsin
, the car was kept at a dealership in New York City
, and Hornung did not retrieve the car until January 3, 1962. The court decided that Hornung had not constructively received the car (income) in 1961 because, under the circumstances, it would have been unreasonable to expect him to retrieve the car on the day he won it.
The Tax Court also addressed constructive receipt in two cases, both entitled Veit v. Commissioner
. In Veit I, as part of redoing his employment contract, the taxpayer agreed to defer receiving a bonus that he was owed until the next year. The Tax Court upheld the agreement over the IRS's protest because it was the result of an arm's length business transaction, not a sham to evade paying taxes for a year. Indeed, the deferral was requested by the taxpayer's employer. In Veit II, the Tax Court upheld a subsequent agreement by which the taxpayer would receive five equal payments over the course of five years, rather than the one lump-sum payment previously agreed-upon. Again, the IRS objected to the deferral, and again, the Tax Court found for the taxpayer. The deferral was requested by the employer, and the full amount of the bonus was never "unqualifiedly subject to [the taxpayer's] demand or withdrawal."
in order to determine the timing of receipt of income items. A constructive receipt issue arises when the taxpayer has not actually received the income, and the issue is whether the income is substantially available to the taxpayer such that receipt will occur for tax timing purposes. A cash equivalence issue occurs when a taxpayer receives a payment as some sort of promise to pay, and the issue is whether the promise is sufficiently definite as to be considered equivalent to receipt of cash income.
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
purposes, the doctrine of constructive receipt is used to determine when a cash-basis taxpayer has received gross income
Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
. A taxpayer is subject to tax in the current year if he or she has unfettered control in determining when items of income will or should be paid. Unlike actual receipt, constructive receipt does not require physical possession of the item of income in question.
Background
The full text of the IRS regulation defining constructive receipt states as follows:
“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 or restrictions.”
The United States Tax Court
United States Tax Court
The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme Court"...
more concisely articulated the doctrine of constructive receipt in Davis v. Commissioner
Davis v. Commissioner
Davis v. Commissioner, 119 T.C. 1 , was a United States Tax Court decision which closed the door on a potential loophole with regard to annuities and capital gains tax. The case affirmed that annual lottery annuities cannot be assigned and sold as capital assets.-Facts:In 1991, James F. Davis won...
. The court stated that for income to be constructively received, the funds must be made available to the taxpayer without substantial limitations. At issue was whether or not a taxpayer faced such substantial limitations when a check was available to her at the post office on the last day of the tax year after the mail carrier attempted to deliver the certified letter containing it to her home earlier the same day. The taxpayer was not at home when the first delivery attempt was made and the carrier left a note that the letter would be at the post office for her. The taxpayer retrieved the check from the post office several days later, just after the new tax year began. Courts had previously held that when a taxpayer makes a decision to be unavailable to take delivery of a check, then he will not satisfy the substantial limitations requirement and he will be deemed to have had constructive receipt at the time of attempted delivery. However in this case, the court noted that the check sender specifically informed the taxpayer on a prior occasion that the check would be arriving approximately two months later than it actually did. The taxpayer had no notice to expect that the check would be delivered; therefore she could not have made a decision to be unavailable to take receipt. The court held that this lack of notice, under the circumstances, meant that she faced substantial limitations on the availability of the funds and that they were not constructively received during the first tax year.
History
The Tax Court had previously addressed this issue in Hornung v. CommissionerHornung v. Commissioner
Hornung v. Commissioner is a case heard by the United States Tax Court in 1967.-Issues:#Whether the value of a 1962 Chevrolet Corvette won by Paul Hornung for his performance in the 1961 National Football League championship game should be included in his gross income for the taxable year...
. Paul Hornung
Paul Hornung
Paul Vernon Hornung is a retired Hall of Fame professional football player who played for the Green Bay Packers from 1957-66...
, a football player for the Green Bay Packers
Green Bay Packers
The Green Bay Packers are an American football team based in Green Bay, Wisconsin. They are members of the North Division of the National Football Conference in the National Football League . The Packers are the current NFL champions...
, won a Corvette
Chevrolet Corvette
The Chevrolet Corvette is a sports car by the Chevrolet division of General Motors that has been produced in six generations. The first model, a convertible, was designed by Harley Earl and introduced at the GM Motorama in 1953 as a concept show car. Myron Scott is credited for naming the car after...
as a prize on December 31, 1961, for his performance in the 1961 NFL
National Football League
The National Football League is the highest level of professional American football in the United States, and is considered the top professional American football league in the world. It was formed by eleven teams in 1920 as the American Professional Football Association, with the league changing...
Championship Game
NFL Championship Game, 1961
The 1961 National Football League championship game was the 29th title game. The game was played at "New" City Stadium, later known as Lambeau Field, in Green Bay, Wisconsin on December 31, 1961...
. The game was played in Green Bay, Wisconsin
Green Bay, Wisconsin
Green Bay is a city in and the county seat of Brown County in the U.S. state of Wisconsin, located at the head of Green Bay, a sub-basin of Lake Michigan, at the mouth of the Fox River. It has an elevation of above sea level and is located north of Milwaukee. As of the 2010 United States Census,...
, the car was kept at a dealership in New York City
New York City
New York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
, and Hornung did not retrieve the car until January 3, 1962. The court decided that Hornung had not constructively received the car (income) in 1961 because, under the circumstances, it would have been unreasonable to expect him to retrieve the car on the day he won it.
The Tax Court also addressed constructive receipt in two cases, both entitled Veit v. Commissioner
Veit v. Commissioner
The United States Tax Court decided two cases, both titled Veit v. Commissioner, in 1947 and 1949. These cases deal with the doctrine of constructive receipt. In both cases, the taxpayer was an executive vice president of a corporation. He was entitled to a fixed salary plus a bonus of 10% of the...
. In Veit I, as part of redoing his employment contract, the taxpayer agreed to defer receiving a bonus that he was owed until the next year. The Tax Court upheld the agreement over the IRS's protest because it was the result of an arm's length business transaction, not a sham to evade paying taxes for a year. Indeed, the deferral was requested by the taxpayer's employer. In Veit II, the Tax Court upheld a subsequent agreement by which the taxpayer would receive five equal payments over the course of five years, rather than the one lump-sum payment previously agreed-upon. Again, the IRS objected to the deferral, and again, the Tax Court found for the taxpayer. The deferral was requested by the employer, and the full amount of the bonus was never "unqualifiedly subject to [the taxpayer's] demand or withdrawal."
Impact
The doctrine of constructive receipt is often used in combination with the doctrine of cash equivalenceDoctrine of Cash Equivalence
The Doctrine of Cash Equivalence states that the U.S. Federal income tax law treats certain non-cash payment transactions like cash payment transactions for federal income tax purposes. The doctrine is used most often for deciding when cash method taxpayers are to include certain non-cash income...
in order to determine the timing of receipt of income items. A constructive receipt issue arises when the taxpayer has not actually received the income, and the issue is whether the income is substantially available to the taxpayer such that receipt will occur for tax timing purposes. A cash equivalence issue occurs when a taxpayer receives a payment as some sort of promise to pay, and the issue is whether the promise is sufficiently definite as to be considered equivalent to receipt of cash income.