ACCT 612 Week 8 Tax Research Memo 4 Example

A Check at 6 p.m. on December 31 and a Payment Put Off Until January: A Tax Research Memo on Constructive Receipt

Memo Header

To: Reviewing manager, individual tax practice. Prepared by: Research staff. Date: Module/Week 8. Re: Dana Whitfield, timing of a year-end bonus and a consulting fee under the constructive receipt doctrine.

Facts

Dana Whitfield is a cash-method taxpayer who works as a sales director and also consults part time. On Wednesday, December 31, 2025, her employer's courier delivered a $40,000 bonus check to her home at 6:10 p.m., after her bank had closed. She deposited it on January 2, 2026. Separately, on December 18, 2025, a consulting client offered to pay her $12,000 invoice immediately by bank transfer. Ms. Whitfield asked the client to wait until January 5, 2026, so the income would fall in the new year, and the client agreed. She asks whether she may report both amounts in 2026. Her 2025 income is already high, and she expects lower income in 2026 because she plans to reduce her consulting, so moving $52,000 into 2026 would lower her tax by several thousand dollars if it were permitted.

Issues

• 1. Is the bonus check received after banking hours on December 31, 2025, income in 2025?
• 2. Is the $12,000 consulting fee, which was offered in December but deferred at Ms. Whitfield's request, constructively received in 2025?

Conclusions

• 1. Yes, with high confidence. A check received before year-end is income when received, even if it cannot be deposited until the next business day.
• 2. Yes, with high confidence. Because the fee was available to her in December and she chose to delay it, she constructively received it in 2025. Neither amount can be moved to 2026 by the steps she took.

Analysis

The rule

Under the Treasury regulations, a cash-method taxpayer is taxed on income she has not physically received once it has been placed at her disposal, whether by crediting it to her account, setting it aside for her or otherwise making it available for her to take, including when she need only have asked for it; the rule does not apply when her access is subject to substantial limitations or restrictions (Treas. Reg. § 1.451-2, 2025). Sawyers and Gill (2018) note that applying such a rule requires reading the cases for the facts that made the difference. The doctrine exists because the cash method would otherwise let taxpayers choose their tax year simply by declining to collect what is owed to them, and the regulation's examples, such as interest credited to a savings account but not withdrawn, all involve amounts the taxpayer could take at will.

The bonus check

In Kahler v. Commissioner (1952), the taxpayer received a commission check on December 31 after banking hours and argued it was not income until the following year. The Tax Court held that receipt of a check is receipt of income, even if the check cannot be cashed until after the year ends, because the check is a conditional payment the taxpayer controls. By contrast, in Hornung v. Commissioner (1967), a football player won a car announced on Sunday, December 31, but the keys and title were not delivered until January; the Tax Court held the car was income in the later year because it had not been made available to him in December. Kahler controls when the taxpayer holds the payment; Hornung applies when the payer still holds it. Ms. Whitfield held the check on December 31, so Kahler controls, and the $40,000 is 2025 income. The fact that January 1 was a bank holiday does not change the result, since the Kahler court treated the check itself, not its collection, as the receipt. It would be different if the employer had told her not to cash the check until a later date, because that would be a restriction imposed by the payer, but nothing in the facts suggests that.

The deferred consulting fee

The consulting fee raises the regulation's central concern. The client offered to pay in December, and the only obstacle was Ms. Whitfield's own request. The regulation treats income as constructively received when it could have been drawn upon, and a limitation created by the taxpayer's own choice is not the kind of substantial restriction that defers income. The $12,000 is therefore 2025 income even though the transfer arrived in January. Courts have long applied the doctrine to taxpayers who turn their backs on available income, and the IRS would likely find the December 18 offer in the client's records or emails. Reporting the fee in 2026 would understate 2025 income and could expose her to an accuracy-related penalty.

Recommendations

Ms. Whitfield should report both amounts on her 2025 return. For future years, deferral is possible only through arrangements made before the income is earned or made available, for example an agreement with her employer, entered before the bonus year, that fixes a later payment date, or invoicing consulting work so that payment is not due until the new year. Once an amount is available, asking a payer to hold it does not move it to the next year. Any deferred compensation arrangement with her employer should also be reviewed for the separate rules on nonqualified deferred compensation, which impose their own timing requirements.

References

Hornung v. Commissioner, 47 T.C. 428 (1967).

Kahler v. Commissioner, 18 T.C. 31 (1952).

Sawyers, R. B., & Gill, S. L. (2018). Federal tax research (11th ed.). Cengage Learning.

Treas. Reg. § 1.451-2 (2025).