Chapter 2: Income Tax Concepts 48.
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Consider the following two situations. Although they are similar, their treatments are exactly opposite. Identify the concept underlying both treatments, and explain why the concept treats the two situations differently.
a. Sam is an employee of Dunbar Company. The company regularly mails salary checks to employees to arrive on or before the last day of each month. Sam's regular paycheck arrives at his house on December 31, 2011, but Sam is away on a ski trip and does not return until January 2, 2012. Sam deposits the check in his bank account the following day. The check is included in Sam's 2011 income. b. Percy is an employee of Daly Company. In November 2011, Percy's position is eliminated in a "streamlining" of company costs. As part of the cost reduction program, Percy is entitled to severance pay; however, his boss tells him that it will be 3 or 4 months before the severance payments are made. The check arrives by mail on December 31, 2011, while Percy is away on a ski trip. He returns on January 2, 2012, and deposits the check in his bank account the following day. The severance pay check is not taxable until 2012. This problem illustrates one of the nuances of the constructive receipt doctrine. In part a, what may be called the general rule for constructive receipt by mail is illustrated. In Rev. Rul. 76-3, 1976-1 CB 114, the service held that an attempted delivery of certified mail constitutes constructive receipt, even in the recipient's absence, as is actual delivery of regular mail. In this case, Sam knew that the check would be arriving on December 31 and could have secured actual physical control of the check if he had so desired. In part b, under similar circumstances, the tax court held, in Dunbar, TC Memo 197812, that the taxpayer was not in constructive receipt of the severance pay. The court stated that a crucial element in having control of the funds is that the taxpayer be aware that the funds are available to control. Because the funds arrived much sooner than the taxpayer was made aware of, the court held there was no constructive receipt until the taxpayer actually knew the check was available.
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