Constructive receipt of income

[cientax]

Client received check this month on 01-07-2008 in the mail. The check is dated Dec 26, 2007. The check was received in the mail here in Texas and it came from California. The income IS taxable to him. Any opinions as to which year to include as income. He is cash basis taxpayer. The money comes from a production company that pays him royalties for a song he wrote. The checks are distributed quarterly and the money is not available to him prior to the distribution.

[PapaJoe]

I think technically, the money is income in 2008 because that was when it was received. However, I bet that, because the check was written in 2007, it will be included on the 2007 1099 form. Your problem will be convincing the IRS that the 1099 is wrong and the payment belongs in 2008.

Client received check this month on 01-07-2008 in the mail. The check is dated Dec 26, 2007.

[jainen]

>>the money is income in 2008 because that was when it was received<<

It is income in 2007 because that was when it was issued. The investor could have picked it up at that time; it was his own choice to have it mailed out of state.

[Medlin Software, Dennis]

Date on check is constructive receipt for payroll purposes (for example). First date recipient could have had access to the funds.

On the other hand, I know of a company that holds checks for a month or more to delay reporting income at the end of their accounting year. Was audited and there were no problems - and it "was" noticed there was zero income in late November and early December and a huge spike in January. From the recipient's end, how the heck was the auditor going to get hold of the checks from the sender? All they could use were the deposit records...

My personal choice is if getting a 1099, you pretty much use what is on the 1099 or fight to have the 1099 changed or to explain the 1099 is incorrect. Consider cost of battling a 1099 to any savings by defering income. If not getting a 1099, the choice is yours, 2007 or 2008, whichever suits the needs of the recipient.

[Tom Phelan]

If the payee did not control the funds at the end of the tax year, he would not include it in income during that period. If the payor normally sends payments in the manner that they sent the 12/26 payment, then it should be considered income to the payee in the year it was received.

Alternatively, if the facts were that the payee instructed the payor to send the check in such a way to delay receipt until after the end of the year, then the payee had effective control over the funds before the end of the year, and would need to include it as 2007 income.

Reg 1.451-2 (b ) describes a situation where a company routinely declares dividends on 12/31, but doesn't deliver the funds until January. These dividends would not be considered income to the shareholders iuntil the year they received the funds.

[joanmcq]

I have sucessfully fought a 1099 on constructive receipt; however, the taxpayer did get a letter from the issuer of the 1099 that although the check was prepared in December, because their offices were closed the last two weeks of the month, the taxpayer could not pick it up before January. Of course, then the income is higher the next year...

[cientax]

>>the money is income in 2008 because that was when it was received<<

It is income in 2007 because that was when it was issued. The investor could have picked it up at that time; it was his own choice to have it mailed out of state.

My client called the company to ask in which year they were going to report the income. They have no idea and weren't sure if it would be reported in 07 or 08 since he received it in 08. Below is the results of a court case a few years ago. It is also possible that the company is on a fiscal year or is accrual basis and could possibly report it in 08. There were two other courts cases that I also read. One case where a baseball player won a vehicle after playing in a game in WI but the vehicle was in NY. He won the vehicle in one year but didn't pick it up until after the beginning of the new year. It was considered constructively received in the new year.

"The United States Tax Court more concisely articulated the doctrine of constructive receipt in Davis v. Commissioner.4 The court stated that for income to be constructively received, the funds must be made available to the taxpayer without substantial limitations.5 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 they will not satisfy the substantial limitations requirement and they 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.6 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.7"

[chadw]

If client was in Texas and the check was in California, I don't think it was unreasonable that he didn't go and pick up this check. Check the postmark date on the envelope it came in (if that is still possible). It may not have been mailed until 2008 based on when your client received it. I would say it is 2008 income, but if a 1099 does say 2007, it may not be worth fighting over.

[jainen]

>>I don't think it was unreasonable that he didn't go and pick up this check.<<

Oh, absolutely! Nobody would expect it. But the fact that he was in Texas had nothing to do with issuing the check. It was purely his own decision to be there. If the money was available in December, that's constructive receipt.

This thread makes some good points about whether the money was truly available on the date of the check. Apparently there are court rulings to support either side. I hope you can come up with something better than a postmark, which isn't much proof of anything. Lacking any contrary evidence, the issue generally should be resolved by the 1099. The company is not going to re-issue it on just your opinion. If you decide that the 1099 is wrong, I recommend you file Form 8275 to disclose that position.

[cientax]

>>I don't think it was unreasonable that he didn't go and pick up this check.<<

Oh, absolutely! Nobody would expect it. But the fact that he was in Texas had nothing to do with issuing the check. It was purely his own decision to be there. If the money was available in December, that's constructive receipt.

This thread makes some good points about whether the money was truly available on the date of the check. Apparently there are court rulings to support either side. I hope you can come up with something better than a postmark, which isn't much proof of anything. Lacking any contrary evidence, the issue generally should be resolved by the 1099. The company is not going to re-issue it on just your opinion. If you decide that the 1099 is wrong, I recommend you file Form 8275 to disclose that position.

"But the fact that he was in Texas had nothing to do with issuing the check. It was purely his own decision to be there."

The client LIVES in Texas and so is his recording studio but the production company is based in California. And he does not have control over the funds as to when they are to be mailed.

[chadw]

>>I don't think it was unreasonable that he didn't go and pick up this check.<<

Oh, absolutely! Nobody would expect it. But the fact that he was in Texas had nothing to do with issuing the check. It was purely his own decision to be there. If the money was available in December, that's constructive receipt.

This thread makes some good points about whether the money was truly available on the date of the check. Apparently there are court rulings to support either side. I hope you can come up with something better than a postmark, which isn't much proof of anything. Lacking any contrary evidence, the issue generally should be resolved by the 1099. The company is not going to re-issue it on just your opinion. If you decide that the 1099 is wrong, I recommend you file Form 8275 to disclose that position.

So you are saying that if someone lives in Texas and there was a check cut in California that the person had no control over the funds, it is constructive receipt because the check is available. That would surprise me coming from you. You seem to be an aggressive and very knowledgeable preparer (from what I remember on the old atxers board) and I would think that this would be one area that you could definitely argue your side successfully.

I also didn't say to rely on the postmark. Just to look at it and see when it was actually mailed. It may shed some light on when the company actually sent the check.

[RoyDaleOne]

"Ordinarily a check constitutes income to a cash basis

taxpayer when he receives it. See Walter v. United States, 148

F.3d 1027, 1029 (8th Cir. 1998); Estate of Kamm v. Commissioner,

349 F.2d 953, 955 (3d Cir. 1965), affg. T.C. Memo. 1963-344;

Kahler v. Commissioner, 18 T.C. 31 (1952)."

Taxpayer did not receive check in 2007, and took no steps to

avoid receipt of the check, therefore, under the taxpayer's

cash method of accounting the cheeck is not included.

Say a check is written on 12-31-xxxx and mailed to payee,

is that income to a cash basis taxpayer. I think not.

Assuming, the taxpayer had no control over the mailing of the check.

However, if the taxpayer picks up the check, then the taxpayer has

control of the check and it is reported as income it the same year.

Hope this helps.