Constructive Receipt

[mwarney]

Schedule C taxpayer receives a check for $3500 in mailbox on January 4th 2010. Check is dated December 25th (Christmas Day) 2009. Postmark on envelope is December 29th 2009. Payor includes the amount in a 2009 1099-MISC delivered to taxpayer. Thoughts??

[Bert73]

Schedule C taxpayer receives a check for $3500 in mailbox on January 4th 2010. Check is dated December 25th (Christmas Day) 2009. Postmark on envelope is December 29th 2009. Payor includes the amount in a 2009 1099-MISC delivered to taxpayer. Thoughts??

Sounds right, the check was wrote out before the end of year and postmarked. Eventhough he did not receive payment until January of 2010, in the eyes of the IRS it is constructively received and should be included on the 2009 return.

[mwarney]

Sounds right, the check was wrote out before the end of year and postmarked. Eventhough he did not receive payment until January of 2010, in the eyes of the IRS it is constructively received and should be included on the 2009 return.

That was my first reaction. Until I read this: http://www.irs.gov/pub/irs-wd/06-0005.pdf

"The fact that a check is issued in one year and received in another does not make the check taxable in the year issued."

Does anyone know of a ruling or court case concerning a check that was in the postal system but not yet delivered to the taxpayer/recipient?

[JG EA]

Yes, constructive receipt mean just that. If your client didn't get it until 2010 then that is when a cash basisTaxpayer would count it. However, there are exceptions. For instance, if it could have been picked up (in the possession of an escrow company for instance) then the receipt in on that day. But if it is common business practice to receive the money by mail then the one paying counts at the end of the year and the one receiving counts the next year. It doesn't matter even if there is a 1099 issued. You can just document when it was actually, constructively received.

[jimmcg]

[QUOTE=mwarney;95763]That was my first reaction. Until I read this: http://www.irs.gov/pub/irs-wd/06-0005.pdf

"The fact that a check is issued in one year and received in another does not make the check taxable in the year issued."

Under 451(a) as I recall "control" of the check is the key. This Code section in essence says it is not constructive receipt if their are substantial limitations on control of the check. Several tax court cases have defined control as having the ability to cash or deposit the check................

[JON]

I have never recorded

a check as received because of the date issued. There are December checks issued by cash basis people that do not get to the payee for weeks. It is when they receive (not deposited) the check-it is then available to them. The worse one I had was a check sent certified to a client for $50,000. The mail man attempted to deliver it on December 30, my guys were not back in town until January 5 when they signed for it. That was a tough one, so I included it in the gross Schedule C income and under other expenses listed an expense as check not received until January 5 and put it into income the next year. I do not know for sure on that one if I would have won on audit. I always thought I would get a few "brownie points" for my disclosure if nothing else.

[mwarney]

Yes, constructive receipt mean just that. If your client didn't get it until 2010 then that is when a cash basisTaxpayer would count it. However, there are exceptions. For instance, if it could have been picked up (in the possession of an escrow company for instance) then the receipt in on that day. But if it is common business practice to receive the money by mail then the one paying counts at the end of the year and the one receiving counts the next year. It doesn't matter even if there is a 1099 issued. You can just document when it was actually, constructively received.

My thoughts exactly. The taxpayer had no other options available except to wait for the check to arrive. Of course there is no proof that it was delivered to the mailbox in January. Just the taxpayers word.

[ChEAr$]

My highest income client asked me a similar question earlier this month. The payor had dated the check in 2009, included the amount in the 1099-misc, but client had not received check until January 4th.

so, what to do?

Well, like Candide, you want the best of all possible worlds, and here you have it.
IF you think Obama will raise that highest rate to 39.6...... let it lie and count in 2009.

[thomtax]

Well, like Candide, you want the best of all possible worlds, and here you have it.
IF you think Obama will raise that highest rate to 39.6...... let it lie and count in 2009.

Very good point Harlan.

LT

[JON]

The tax increases happen

in 2011. What are you guys talking about????? The income tax bill will like always probably happen in October > maybe November and will not be retro, but the rates will go in for 2011. If someone thinks 2010 I need to know where you heard that. Bush tax laws are expiring, but good for 2010 - except maybe for estates, but even that may be left on purpose. If they changed the rates in April through December do you retro adjust to get withholdings to catch up???? We had one retro with capital gains, but have we ever had a retro for income tax rates???

I think if you change income recognition based on marginal tax brackets and not constructive receipt you are playing the "audit gamble" it always works as long as you are not audited.

[ChEAr$]

in 2011. What are you guys talking about????? The income tax bill will like always probably happen in October > maybe November and will not be retro, but the rates will go in for 2011. If someone thinks 2010 I need to know where you heard that. Bush tax laws are expiring, but good for 2010 - except maybe for estates, but even that may be left on purpose. If they changed the rates in April through December do you retro adjust to get withholdings to catch up???? We had one retro with capital gains, but have we ever had a retro for income tax rates???

I think if you change income recognition based on marginal tax brackets and not constructive receipt you are playing the "audit gamble" it always works as long as you are not audited.

Of course Jon is right about existing tax law reverting in 2011 to previous rates. However
I was referring to what congress MIGHT do THIS year. After all, it ain't over till the fat lady sings. And this year is not quite two months old. Ever hear of retroactive tax increases?

As to constructive receipt, I don't think IRS would ever quibble even in an audit on small amounts in one year versus another. It would just not be worth their time to do so.
Large amounts might of course affect taxes in either year.

[JON]

As I said before

when has there been a retroactive increase of the ordinary income - income tax rates? Fica may change although that has always been changed for the future. I guess you can say taxes are going up or maybe it will be a tax holiday and no one has to pay in 2010. They seem to want to give all their surpluses back.