“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 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 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. 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.
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.
No constructive receipt of income to employees when an employer offers to repurchase compensatory stock options. (Brief Article)
Jan 01, 1995; In a ruling that may have considerable utility in corporate acquisitions, the IRS has held for the first time that an offer to...