However, that's not the case here. As a (newly) published author (for one publisher), my wife gets quarterly royalty checks. Virtually all her income is from that publisher. The publisher mails checks out very late in the quarter. For example, she got a check dated 30 March that was postmarked
30 March but did not arrive out here until 4 April. Every quarter so far has been like this, so I fully expect the same thing will happen with the December check -- they'll mail it late in December, it'll arrive here in January, and they'll include it in the 2006 1099-MISC.
If they do this, the 2006 1099-MISC numbers will be quite a bit higher than actual 2006 income.
Yeah -- we definitely plan to hold on to the envelope.
As an aside, because this may well apply to me, what is the "mailbox rule" when one is away and has placed a vacation hold on their mail with the Post Office. Is the "delivery date" when I return from my trip 30 days later and pick up the held mail from the PO, or some time earlier?
It's like a check - it's considered money even when the banks are closed. In theory you could find someone to buy it at any time, so it has value.
Probably. If he voluntarily put it out of his ability to receive the money, it will probably be treated as constructively received. He may get an offsetting deduction if it goes back to a governmental entity. Reminds me of a case several years ago when the IRS had a large underpayment case but let the statute of limitations lapse. So not wanting to screw it up completely, the IRS charged him with constructive receipt of the taxes he should have paid in the year the statute lapsed. And the Service was upheld in court!
Just today when a client came in and picked up her monthly envelope, I had a bill in it, but she didn't open it up however she said "I'll bring you some money tomorrow." And I said: "Oh, uh... well... (and knowing she's in financial difficulty) you can wait till next year if you wish." Holiday ChEAr$, Harlan Lunsford, EA n LA
Well, it's like this: My mail "box" is merely a slot in my front door, through which the USPS drops mail and clients can drop stuff off. And I'm never away from home over New Years. And yes, I sometimes drop by office to check mail on a Sunday, or a Saturday, since my personal mail comes there, too. Holiday ChEAr$, Harlan Lunsford, EA n LA
I frequently have that situation with regard to some rental property that I own in an informal partnership with one other person. A year or two ago I received an IRS notice which had to do, in part, with constructive receipt issues. The problem was resolved following a telephone conversation with an IRS agent somewhere on Long Island (NY). With regard to the constructive receipt issue, he had no problem at all with the portion of the income on the 1099, but not received by me until after January 1, not being declared for the year in question. He suggested, for the future, filing my Schedule E such that the rentals agreed with the 1099's, and making adjustments in the other income or other expense lines, as appropriate.
I would never check my mailbox that close to the end of the year! That may be easier to me as we only use a PO Box.
That raises another question in my mind. In California you can elect to take lottery winnings in 20 annual installments, or the present value as a lump sum immediately. Is that constructive receipt? Apparently it's treated as if it's not.
And if that's not constructive receipt, why would it be if actual receipt were delayed until the next calendar year?
I have not had occasion to research this point. But my guess is that the choice to take a vacation and put your mail on hold was yours. As a result you are treated as having received money that would have been delivered if you'd been home.
Ability to sell is irrelevant; I have a book that I paid $20 for which is now worth about $200. In theory I could find someone to buy it at any time, but there's no tax due until I actually sell it.
What about this year's last drawing on Saturday night, December 30? The winner can't get paid until January 2nd.
(Or a special lottery drawn on December 31, with the same issue, and the drawing at 11 PM.)
Unfortunately the IRS has established rules about lottery winnings (I do not have a cite). These rules state that annuity lotteries are costructively received on the date of the drawing. I seriously doubt the Tax Court will agree with the IRS if someone challanged it.
There's a big difference in the treatment of capital assets as opposed to cash equivalents. As I have said elsewhere I don't know how the lottery people treat this - they may well not treat it as constructively received when the drawing is done. But they could and it wouldn't be legally inconsistent.
You're making a distinction that courts don't like to draw. They prefer when possible (though don't always make) clear rules that are easy to follow, as opposed to those that rely on fine factual distinctions. Stu
The regulations talk about this issue in 26 C.F.R. §
31.3402(q)-1, saying (in an example) that there is constructive receipt when the drawing is done. But they don't discuss the issue of constructive receipt in more detail there. This regulation also answers my other question about taking a lump sum as opposed to the annuity. They want tax withheld based on the actuarial value of the annuity right away, as opposed to taxing each payment as it is made. Stu
Respectfully disagree. The lump sum payment is about half the total winning amount. For example, a $30 million win would yield about a $!5 million lump sum -- about $10 million after taxes. Invested at 5%, this yields $500,000 taxable dollars per annum. On the other hand, a 30 payment annuity yields $1 million taxable dollars per annum. In addition -- I'll let the experts opine -- would the annuity arrangement eliminate estate tax liability for the uncollected portions of a deceased beneficiary's payments, which are thence paid to other trust beneficiaries?
Perhaps I did not make this clear. The _state_ withholds
25% against federal taxes. The trust does not have said funds. The question is: How does the individual trust beneficiary -- whose identity is unknown to the state -- get credit for his/her portion of the withheld taxes. portion of said withheld taxes.
First, as to constructive receipt of a 20-year payout on a lottery - provided that the lottery permits the winner to elect between lump sum and 20-year payout no later than 60 days after the date of the drawing, then the option to elect the lump sum does not result in constructive receipt thereof if the winner instead elects to take the 20-year payout. See Code Section 451(h). Thus, if you take the 20-year option, you will not have to report the full amount of the winnings as income in the year you won, but only report each payment as received. Second, as to the hypothetical trust arrangement and credit for withheld federal taxes. If the trust is a simple trust (i.e., all fiduciary income must be distributed annually, and no other amounts are distributed), then each beneficiary must report his/her respective share of the trust's tax income (in proportion to the amount of fiduciary income distributed to that beneficiary). See Code Section 652. The trust gets an offsetting deduction, Code Section 651, with the result that, typically, the trust has no taxable income. However, to the extent that the fiduciary income is less than the taxable income of the trust the trust may have some residual income tax liability. The beneficiary is then permitted to claim a proportionate share of the credit for the taxes withheld by the State of Florida from out of the winnings. See Section 31. Section
3402(q) extends wage withholding to lottery winnings, so the amount would be withheld under Chapter 24, and would therefore be permitted as a credit to the "income recipient" who, in this case, would be the beneficiary to whom such income is taxable under Section 652. In the case of a complex trust (i.e., a trust that has discretion to distribute income and/or corpus) the Code sections are more complicated, but they basically get you to the same end result. If the trust itself owes income tax for a particular year, any credit that relates to the income taxed to the trust is claimed by the trust, generally speaking.
speaking of which, I never could understand how someone who bought a ticket from just his funds, and won the million, could after the fact go to a lawyer and "arrange his affairs" (a quote!) to even out taxes among family members. I always thought that what's done is done.
Hmmm, the so called "mailbox rule" applies only in the law of contracts, best example being the acceptance of an offer. According to Wikipedia, "The mailbox rule applies only to acceptance; other letters do not take effect until the letter is delivered, as in Stevenson v McLean (1880) 5 QBD
Technically you're right. But if someone comes in and says that six people contributed to the ticket or had an enforceable agreement to share the winnings, the lottery folks can't prove it one way or another, so I suppose they don't even bother to try. Stu
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