Tax Research Case

Tax Research Memo

FACTS:

Sarah as a salesperson receives by mail a commission check on January 2, 2014. The check drawn by Ace Distributors is in the amount of $10,000 and dated December 30, 2013. She is concerned about whether she should include that $10,000 amount of income on her 2013 or 2014 return. Sarah maintains that she could not receive the credit for the check until 2014 since it is unreasonable for her to drive the 50 miles to the Ace office to pick up the check. In addition, she claims that she could not obtain cash for the check in 2013 even if she had made the trip to get the check, since her bank would have closed by the time she returned home.

ISSUES:

Should Sarah include the $10,000 commission on her 2013 or 2014 tax return?

CONCLUSIONS:

The $10,000 check as the constructive receipt is the income in 2013, and not in 2014.

AUTHORITY AND REASONING:

The general rule of Sec.451 holds that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period. [Sec. 451] Sarah’s situation could not be applied to any of the special rules. The general rule of Reg §1.451-2 holds that 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. [Reg §1.451-2] In Sarah’s situation, her sales work for Ace Distributors is occurred in 2013 and she knows the commission associated with it would be given...