Constructive receipt issue

I own mineral rights to a piece of land in Texas. In November 2009, I agreed to lease these rights to an oil and gas producer in Texas, in exchange for a one-time payment for the lease and a fixed royalty rate if the company finds oil or gas.

The company/lessee sent me a lease agreement and a "collection item" payable to the order of me/lessor in the agreed amount. This was not an ordinary check; I don't think it met the definition of a negotiable instrument but am not sure about that. In any event, it was not something I could simply deposit into my account directly. This item was only payable AFTER the lessee received the signed lease from me and then told his bank to make the actual payment to my bank.

I took this collection iten to my bank, they forwarded it to their foreign collection department, and told me just to wait. Nothing was credited to my account.

On December 21, 2009 the lessee's bank issued a check made out to my bank for the agreed amount. My name does not appear on this check.

My bank's collection department processed the check on January 4, 2010 and made the deposit into my account on that date.

The funds were made available to me on January 4, 2010 but not prior to that.

The oil & gas company told me they are going to report it on a 1099 as other income paid to me in 2009. That I cannot change.

zHowever, my argument is that under the IRS' "constructive receipt rule", because I did not have any control of or access to the money prior to January 4, 2009, I did not receive it until then.

It makes a difference to me because the tax liability will be several thousand dollars and I would prefer not to pay it with my return for 2009.

Questions:

  1. Anyone familiar with this "collection item" situation and how the IRS will apply the constructive receipt rule to it?

  1. What is the most straightforward way to raise and resolve the issue with the IRS? I am planning to omit it from my income tax return and include a note explaining the above circumstances.

Thank you for your assistance.

HN

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HN Drocnoc
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My interpretation is that the check only became active on 1/4/2010, and therefore it is constructively received in 2010 only.

See

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think the phrase "However, income is not constructively received ifthe taxpayer's control of its receipt is subject to substantiallimitations or restrictions." in part (a) applies. In your case thecheck does not even exist, which is the biggest restriction of all!None of the exceptions (1) to (4) apply. BTW, all this assumes you're a cash basis taxpayer.

Sec. 1.451-2 Constructive receipt of income

(a) General rule. 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. Thus, if a corporation credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt. In the case of interest, dividends, or other earnings (whether or not credited) payable in respect of any deposit or account in a bank, building and loan association, savings and loan association, or similar institution, the following are not substantial limitations or restrictions on the taxpayer's control over the receipt of such earnings:

(1) A requirement that the deposit or account, and the earnings thereon, must be withdrawn in multiples of even amounts;

(2) The fact that the taxpayer would, by withdrawing the earnings during the taxable year, receive earnings that are not substantially less in comparison with the earnings for the corresponding period to which the taxpayer would be entitled had he left the account on deposit until a later date (for example, if an amount equal to three months' interest must be forfeited upon withdrawal or redemption before maturity of a one year or less certificate of deposit, time deposit, bonus plan, or other deposit arrangement then the earnings payable on premature withdrawal or redemption would be substantially less when compared with the earnings available at maturity);

(3) A requirement that the earnings may be withdrawn only upon a withdrawal of all or part of the deposit or account. However, the mere fact that such institutions may pay earnings on withdrawals, total or partial, made during the last three business days of any calendar month ending a regular quarterly or semiannual earnings period at the applicable rate calculated to the end of such calendar month shall not constitute constructive receipt of income by any depositor or account holder in any such institution who has not made a withdrawal during such period;

(4) A requirement that a notice of intention to withdraw must be given in advance of the withdrawal. In any case when the rate of earnings payable in respect of such a deposit or account depends on the amount of notice of intention to withdraw that is given, earnings at the maximum rate are constructively received during the taxable year regardless of how long the deposit or account was held during the year or whether, in fact, any notice of intention to withdraw is given during the year. However, if in the taxable year of withdrawal the depositor or account holder receives a lower rate of earnings because he failed to give the required notice of intention to withdraw, he shall be allowed an ordinary loss in such taxable year in an amount equal to the difference between the amount of earnings previously included in gross income and the amount of earnings actually received. See section 165 and the regulations thereunder.

(b) Examples of constructive receipt. Amounts payable with respect to interest coupons which have matured and are payable but which have not been cashed are constructively received in the taxable year during which the coupons mature, unless it can be shown that there are no funds available for payment of the interest during such year. Dividends on corporate stock are constructively received when unqualifiedly made subject to the demand of the shareholder. However, if a dividend is declared payable on December 31 and the corporation followed its usual practice of paying the dividends by checks mailed so that the shareholders would not receive them until January of the following year, such dividends are not considered to have been constructively received in December. Generally, the amount of dividends or interest credited on savings bank deposits or to shareholders of organizations such as building and loan associations or cooperative banks is income to the depositors or shareholders for the taxable year when credited. However, if any portion of such dividends or interest is not subject to withdrawal at the time credited, such portion is not constructively received and does not constitute income to the depositor or shareholder until the taxable year in which the portion first may be withdrawn. Accordingly, if, under a bonus or forfeiture plan, a portion of the dividends or interest is accumulated and may not be withdrawn until the maturity of the plan, the crediting of such portion to the account of the shareholder or depositor does not constitute constructive receipt. In this case, such credited portion is income to the depositor or shareholder in the year in which the plan matures. However, in the case of certain deposits made after December 31, 1970, in banks, domestic building and loan associations, and similar financial institutions, the ratable inclusion rules of section 1232(a)(3) apply. See §1.1232?3A. Accrued interest on unwithdrawn insurance policy dividends is gross income to the taxpayer for the first taxable year during which such interest may be withdrawn by him.

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