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Taxable Income Ruling: Doctrine of Constructive Receipt

Walter used the cash method to account for income from his cattle ranch. During an audit in the third year, the IRS auditor discovered a document from a customer indicating that two years earlier, Walter sold 115 heads of cattle to the customer for $77,000. The document appeared to be a tear slip, the top half of a document that includes a business check. Walter's bank records for the first year showed no such deposit, and a conversation with the customer revealed that its check for $77,000 had never been cashed. A new check was issued during the third year. Walter included $77,000 as income on his third year tax return. The IRS then issued an audit report contending that the income was taxable in the first year under the doctrine of constructive receipt.

If you were a tax court judge hearing this case, how would you rule? Provide a rationale for your answer.

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The doctrine of constructive receipt is fairly clear that the taxpayer had the right to receive the funds in the earlier year:

The operative Treasury Regulation is ยง 1.451-2(a), which says:

(a) General rule. Income although not actually reduced to a taxpayer's possession is constructively received by him/her in the taxable year during which it is credited to his/her account, set apart for him/her, or otherwise made available so that he or she may draw upon it at any time, or so that he/she could have drawn upon it during that taxable year if notice 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 fact that the check was ...

Solution Summary

The scenario presented is an excellent example of the issues related to the doctrine of constructive receipt. The 528-word solution is cited for both law and examples. The conclusion is based on the information provided in the solution.