506. When does a cash basis taxpayer “receive” income? What is the doctrine of constructive receipt?Nuco Employeercline202014-07-24T15:02:00Z2014-07-24T15:02:00Z35693246UMKC277380814Site Map/General Income Taxation/Individuals/Accounting-TimingTaxFactsDefaultArticle2007-01-30T00:00:00Z123771405-00-tf2.xml1405.00;#1718;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2When does a cash basis taxpayer “receive” income? What is the doctrine of constructive receipt?45600.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:01:59Z506. When does a cash basis taxpayer “receive” income? What is the doctrine of constructive receipt?As a general rule, taxable income must be computed under the method of accounting regularly used by the taxpayer.IRC Sec. 446(a). There are two commonly accepted methods for recognizing income and expense: (1) the cash basis and (2) the accrual basis.IRC Sec. 446(c).Under the cash basis method, the general rule is that all items that constitute gross income (whether in the form of cash, property or services) are includable for the taxable year in which they are actually or constructively received.IRC Sec. 451(a); Treas. Reg. §1.451-2(a). Salary checks received in one year but not cashed until a later year are income when received unless substantial restrictions are placed on current negotiation or the issuer is insolvent.Chapman v. Comm., TC Memo 1982-307; Baxter v. Comm., 816 F.2d 493 (9th Cir. 1987), rev’g in part TC Memo 1985-378. A taxpayer who refused to cash a check in which his entire qualified plan balance was erroneously distributed was unsuccessful in deferring the date on which it was deemed received.See Let. Rul. 9826036.As a general rule, expenses are deductible by a cash basis taxpayer for the taxable year in which they are paid.IRC Sec. 461(a).The doctrine of constructive receipt of income affects only cash basis taxpayers. Under this doctrine, a cash basis taxpayer is required to report income that has been credited to his account or set apart for him in such a way that he may draw on it freely at any time – even though he has not actually received it.Treas. Reg. §1.451-2. See, e.g., Visco v. Comm, 281 F.3d 101 (3rd Cir. 2002), aff’g, TC Memo 2000-77 (employment-related dispute). Thus, a cash basis taxpayer must report the interest credited to his bank savings account in the year it is credited regardless of whether he withdraws the interest or leaves it on deposit (see Q 7841).However, the doctrine applies only where the taxpayer’s control of the income is unrestricted. Thus, a sum is not constructively received if it is only conditionally credited, or if it is indefinite in amount, or if the payor has no funds, or if it is subject to any other substantial limitation. However, the courts say, generally, that there can be no constructive receipt of an amount that is available only through surrender of a valuable right.See Cohen v. Comm., 39 TC 1055 (1963).Under the accrual method, income is includable for the taxable year in which the right to receive the income becomes fixed and the amounts receivable become determinable with reasonable accuracy.Treas. Reg. §1.451-1(a). Expenses are deductible for the taxable year in which the liability for payment becomes definite and the amounts payable become reasonably certain, but only to the extent that economic performance with respect to the item has occurred.IRC Sec. 461(h).For the revised comprehensive procedures by which taxpayers may obtain automatic consent to change their method of accounting, see Rev. Proc. 2011-14.Rev. Proc. 2011-14, IRB 2011-4, as modified by Rev. Proc. 2014-16, 2014 IRB LEXIS 59. The Tax Court held that a contract for a deed resulted in a completed sale of real property for tax purposes in the year that the contract was executed; therefore, income attributable to that disposition was required to be recognized and reported in the taxable year in which the contract was executed.Keith v. Comm., 115 TC 605 (2000). Controlling shareholders of a privately held company that sold derivative instruments through flow-through entities were required to recognize their pro rata share of the gain in the year that the shares were sold.FSA 200111011. An investor who experienced losses on foreign currency contracts that required repayment on a future maturity date, but who was unable to post adequate collateral in the year the losses were sustained, was entitled to deduct the losses in the year in which the debt was repaid.FSA 200106005. Under the constructive receipt doctrine, the mere right of an employee to make an election to cash out future vacation leave under the employer’s plan would not result in taxable income for the employee under the cash method of accounting if the employee chose not to make such an election.Let. Rul. 200130015.