- The issue:
- Summary of authorities.
Code 61(a) attempts to define gross income, for the purposes of taxation, as all incomes derived from sources such as: compensation for services e.g. fees, commissions and fringe benefits, interest, rent, dividends, royalties, annuities, pensions, gross income derived from business. It also states that the definition for gross income includes all the above types of incomes but it is not limited to those sources. Reg-1-61-2 summarizes gross income to mean all incomes earned as compensation for services, including fees, commissions and other similar items.
According to Sec. 451(a), items of gross income are included in gross income in the taxable year of receipt, unless otherwise indicated by the taxpayers accounting method. According to the above definitions of gross income, It is so evident that Adrian should actually include the $10,000 in her tax returns for 2012, being the actual year of such a receipt.
Code 441 highlights the period for computation of taxable income. In 441(a) the code states that the taxable income will always be computed on the basis of the taxpayer’s taxable year.
Code 441(b) defines the taxpayer’s taxable year as follows: the taxpayers accounting period, either the calendar or fiscal year, or the calendar if subsection (g) applies, the period for which the return is made in case it is made in less than twelve months.
Code 441(d) defines a calendar year as a period of twelve months ending on 31st December. 441(e) defines a fiscal year as a twelve month period ending on the last day of any month other than December. Code 441(g) states that the taxable year where the taxpayer has not kept any books or does not have a financial year as the calendar.
According to Reg. Sec. 1.451-,1 the general principle in law for year of inclusion is the tax year in which the item is actually or constructively received by the taxpayer. This defines the point in time when such an income was declared to belong to a certain taxpayer. Reg. Sec. 1.451-2(a) adds that an item is constructively received when credited to an account, set apart, or otherwise made available so that it may be drawn upon at any time. However, such a constructive receipt is subject to the absence of substantial limitations or restrictions.
- Relevant Rev. Rul
In the ruling, there were facts similar to Adrian’s case: Kahler, 18 T.C. 31 (1942), the Tax Court held that even if a check is delivered after banking hours on the last day of the year, it is still constructively received in the year ending.
In another ruling, McEuen, 196 F.2d. 127 (5th Cir. 1952), a check that could have been received the previous year before it was actually delivered by appearing in person and claiming it, was held to have been constructively received in the year prior to actual receipt.
These cases are similar to the Adrians case, and because the rulings were based on the constructive receipt of the money, Adrian should include the money in her returns for 2012..However, Baxter, 816 F.2d 493 (9th Cir. 1987) was a situation more similar to Adrian’s. However, Baxter held that a payment similar to Adrian’s was not deemed to have been constructively received in the year in which the payment was made available to the bearer.
United states VsConner(1990)
Between 1982-1986, Connor did not file his tax returns on his wages, salary and other receipts from the teamstars Union. Eventually the court held that wages and those incomes fall under the description of income and are subject to federal tax.
In regard to the case of Adrian, the question of taxation can be clarified by justifying her position as regards taxation. Adrian will be deemed to have constructively received the check in 2012. As such, she should include the amount stated therein in her tax returns for the year of receipt, 2012.