Acct 305 - Tax Research Assignment

Haolan Xu

ACCT 305

Tax Research Assignment

May 11, 2017

Adrian is a salesperson who represents several wholesale companies. On January 2, 2016, she receives by mail a commission check from Ace Distributors in the amount of $10,000 and dated December 30, 2015. Adrian is concerned about the year in which the $10,000 is taxable. Although the check is dated 2015, she contends that it would have been unreasonable for her to drive the 50 miles to the Ace offices on a holiday to collect the check. Further, Adrian maintains that even if she had made the trip to collect the check, by the time she returned home, her bank would have closed and she could not have received credit for the check until after the first of the year. Adrian would like you to determine whether she should include the $10,000 on her 2015 or 2016 tax return.

Adrian received in January 2016 a check for $10,000 from Ace Distributors. The check was for commission earned by Adrian in 2015 and it was dated December 30, 2015. Adrian could have picked up this check in 2015 but she contends that it was inappropriate to collect the check in 2015 and even if she had collected it in 2015, she still can only receive the credit from the bank in 2016. Adrian’s concern is whether this income should be included as taxable income in 2015 or in 2016.

According to U.S. Code Sec.451(a) , the general rule for taxable year of inclusion states 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.”[1] This code therefore indicates that if the income was actually received in 2015, it should be included in gross income for that year.

However, Adrian argues that she did not receive or collect this check due to the inappropriateness or inconvenience of collecting it in 2015. Thus, the doctrine of Constructive Receipt of Income should be introduced to this case. In 26 CFR 1.451-2, Constructively received income is defined as “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.” [2] In this case, the check had been made available so that Adrian could have drawn upon it at any time and the reasons that lead Adrian to not to collect the check in 2015 did not constitute substantial limitations or restrictions that prevent him to do so. As a result, this income of $10,000 is constructively received by Adrian.