Constructive Receipt

I think the IRS's position is that a lottery ticket is, in theory, NOT a bearer instrument. The process of cashing it involves verification that the person is over the relevant age, and the the decision of whether to take immediate cash or installment payments has been ruled (almost certainly, in direct contradiction to the statutes) to make the value not determinable until it's redeemed.

Hence there's constructive receipt of a lottery ticket in the previous year, but not a WINNING lottery ticket.

But I could easily be wrong.

year?

I must disagree. Constructive receipt is when one CAN cash the check but doesn't. It has to be made available. Receiving the check after a time where it couldn't be tendered (deposited or cashed) violates the concept.

(In today's world, with ATM's and check-cashing places available and about 90 minutes left, it would be constructively received, but back in 1982, many banks didn't have ATMs yet and we didn't have check-cashing only businesses yet.)

Today, if one gets handed a check at 11:59pm on 12/31, it's not constructive receipt unless one is standing in front of an idle ATM! ;-)

On reflection I have to agree with that. The courts appear to find constructive receipt when the recipient has the actual ability to get cash before the end of the year rather than theoretical ability.

Stu

There is some merit to Seth's argument. But what is the difference between getting a check at 3pm or at 10:30pm. It's not going to be credited to your bank account until the next business day.

If you got a check for $10 million from a lottery at 3pm on 12/31, do you think the IRS is going to buy the argument that you couldn't get the cash until two or three days later?

After reading some IRS info, I'm going to change my position to "I had actual receipt". If I had asked the person writing the check to mail it to me, then I would have had constructive receipt.

To add some humor to this, the 12/31/82 check was for $12 grand and change. The client was a large bank who had previously paid my invoices within 15 days. So I was surprised that this bank officer even had a checkbook from which to write a check. However, I had paid all outstanding business debts a few days earlier so they would be 1982 expenses.

Dick

I could cash the check at a liquor store before mignight in either case.

Steve

Gee, you had me convinced otherwise. I was so sure it was unreasonable to be handed a check after business hours on December 31 and have it treated as that year's income I did some research, and came upon a number of cases which cite Kahler approvingly:

A check normally is constructively received when it is delivered to the taxpayer or his agent.(15) In Kahler v. Commissioner,(16) the Tax Court held that a check was delivered to the taxpayer even though it was received after banking hours on the last day of the year.

here is a good article on a wide variety of aspects of the Doctrine of Constructive Receipt.

Why not? If you were handed the check at a New Year's Eve party there were quite possibly many people you could have endorsed the check over to for cash. Checks are negotiable instruments. You're not limited to cashing it at a bank.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Since banks tend not to like third party checks, checks are much less negotiable than they used to be.

Seth

My turn to pop in on this discussion. This reply is based upon my reading of Revenue Ruling 73-99 (differentiates situation when employees are allowed to pick up checks personally from when this option is not available and check is mailed) & 76-3 (severance check delivered by post office on 12/31 and employee was not home), Info Letter 2006-0005, Treas. Reg. 1.451-2 (Income that is set aside for the taxpayer, credited to an account, or otherwise made available is treated as being constructively received by the taxpayer and thus must be recognized as long as no substantial limitations or restrictions hinder the taxpayer's right of access to income.), 8th Circuit Walter vs USA (1998) (Constructive Receipt trumps law of negotiable instruments), Kahler vs Commr 18 TC 31 (check delivered after banking hours on 12/31 is constructively received),

Basic rule when dealing with payment by check: You declare income in the year you receive the check (assumes that the payer is capable of honoring the check for payment and that the amount is not in dispute) unless you were in constructive receipt in an earlier year.

You would be in constructive receipt in an earlier year under the following conditions:

1. You were offered payment in cash but said mail me a check.
2. You were offered direct deposit but said mail me a check.
3. You were offered special handling such that the check could have arrived earlier, but you said mail me a check.
4. You were offered no options other than the mailing of a check and the check arrived at the address you provided to the payer in the earlier year or would have arrived in the earlier year had you not changed the delivery address.

Lastly, there is no requirement that I can discern that delays actual income recognition because banks may be closed or the nearest ATM is 1000 miles away or the local supermarket doesn't cash checks, etc. Once you have the check or could have had the check.. you have income.

Further to the subject. My favorite story is the client whom I "suggested" to mail me his check before 12/31 so that he would have the tax deduction that year, but I wouldn't have the income until the next year. What did he do? He brought me the check 12/31! while I was still at the office!

Now, if he had called me that afternoon to tell me he was bringing me the check, and I told him to wait and bring it next year, or even mail it as per above, that would be constructive receipt. Unless, of course, the check were not good. Say I got the check at a new year's eve party before midnight, since a check is a negotiable instrument, it's income. But, of course banks are closed 1/1, and maybe 1/2 is a Sunday, so Monday the 3rd I hie to the bank and deposit the check. So far, so good. Friday, there's the envelope from my bank returning his check due to insufficient funds. Constructive receipt does not now apply to that check which I had received at the party.

Interesting, no?

ChEAr$, Harlan Lunsford, EA n LA

See my most recent post on this subject that has citations. Your interpretation of the situation is correct. But, as we all seem to be having fun with this subject....

What if at the time of payment (New Years Eve) the payer writes a check and presents it to our client for services rendered. At the time the check is written, the payer believes that sufficient funds are present, there is full intent to pay and in actuality sufficient funds are present on 12/31. However, the payer's partner writes a check on Jan. 1 and that check clears the bank first, and there is insufficient funds to cover the check to our client. The check bounces. The payer deposits funds into the account and asks our client to resubmit the check for payment and it clears on Jan. 4th. Was there constructive receipt on 12/31 (sufficient funds and intent were present)?

I don't know. But, this sounds similar to the lost check scenario (see my earlier post) and I would think that intent and sufficient funds being available on 12/31 is enough to trigger income on 12/31.

In a rare moment of generousity, I too will agree that Harlan is correct.

This is one of several reasons Susan does not allow me to write checks. ;)

Regardless of intent, one of those two checks did not have sufficient funds. Since the check written to your client lost the race to payment window, it also loses its constuctive receipt label.

Let's assume this was a business check for an accounts payable. The bank statement will show the NSF on January 3rd and the clearing on January 4th. I can tell you with certainty that an both a financial statements auditor and an IRS auditor will disallow the transaction as a 12/31 payment.

Dick

Are you assuming you have a liquor store that will cash a 5-figure check, or were you planning to buy a lot of expensive booze?

Seth

I live in an urban area where the corner liquor stores can handle almost any transction. :-)

Steve

What if that cost extra? E.g. on Dec. 30, client said "I'll send the check overnight mail for $20 (deducted from the check) or regular mail at no charge"?

Are you in contructive receipt because you could have chartered a plane and flown out to the customer to get a check?

Seth

I have no idea. Is $20 a substantial limitation or restriction hindering the taxpayer's right of access to income? Chartering a plane certainly is.

What if the payer suggested a discount for prompt payment. You would not have to accept that to avoid constructive receipt. I would treat the extra payment for overnight delivery the same.

...In addition to the appropriate filing copies with the IRS, which must meet some strict requirements.

-Mark Bole

The forms I used were the one's supplied by the IRS. I never received any notification that they were inadequate, or had to be refiled.

--ron