The Implied Receipt Doctrine – Income Tax
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Under the doctrine of implied receipt, a cash taxpayer who has an unlimited right to receive income is treated as if he had actually received the income, even if he had not. Thus, even where a taxpayer has not received possession of the income, the taxpayer is generally subject to tax as if they were in possession of the income when the income is segregated from the taxpayer, credited to the taxpayer’s account or made available to the taxpayer. However, the doctrine is subject to certain limitations, and income is not implicitly received where the taxpayer’s control over its receipt is subject to substantial limitations or restrictions.
What is the doctrine of constructive reception?
The doctrine of implied receipt provides that a taxpayer is subject to tax on an item of income if he has the unlimited right to determine when that item of income will be paid. The principle of income tax was first expressed by the Supreme Court in the 1930 case Corliss vs. Bowers281 US 376 (1930), where Holmes J. stated that “[i]Revenues which are subject to a man’s free command and which he is free to enjoy as he pleases, may be taxed to him as his earnings, whether he sees fit to enjoy them or not.”
The Tax Court clarified, explaining that the doctrine of implied receipt is based on the principle that income is received or realized by taxpayers on a cash basis when subject to the will and to the taxpayer’s control and can be, except for his own action or inaction, reduced to actual possession.
The doctrine of implied receipt is incorporated into Treasury regulations, including section 1.451-2(a)which provides, in part, as follows:
The income, although not actually reduced to the possession of a taxpayer, is implicitly received by him in the taxation year in which it is credited to his account or set aside for him. so that he can draw from it at any time. However, income is not received by implication if the taxpayer’s control over its receipt is subject to substantial limitations or restrictions. Thus, if a company credits its employees with free shares, but those shares are not available to those employees until a later date, the mere crediting of the company’s books does not constitute a receipt.
In other words, an item of income (eg remuneration for services) is included in gross income for the tax year in which it is actually or implicitly received. And the income is implicitly received in the year in which, although not actually received, it was made available so that the taxpayer could actually receive it at any time.
Cash accounting or accrual accounting
The doctrine of implied receipt only applies to taxpayers under the cash method. More specifically, it is already incorporated into the accrual method of accounting.
Under the accrual method, income is included under the “all events” test: in the tax year, when all events have occurred that establish the right to receive the income and that the amount of income can be determined with reasonable accuracy. According to IRS guidelines, the “all events” test is satisfied when (1) the required performance occurs, (2) payment is due, or (3) payment is made, whichever comes first.
Under the cash-in and cash-out method of recognition, revenue is recognized when payment is actually or constructively received. Thus, when income is deemed to have been received under the doctrine of implied receipt, a cash accounting taxpayer is subject to income tax, even if he did not actually receive possession of it. .
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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