Amend v. Commissioner
1949 U.S. Tax Ct. LEXIS 113, 13 T.C. 178 (1949)
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Rule of Law:
For a cash-basis taxpayer, income is not constructively received in the year of a sale if a bona fide, arm's-length contract legitimately defers payment to a subsequent taxable year. The ability to have potentially negotiated a contract for immediate payment does not trigger constructive receipt when the actual contract unambiguously defers the right to payment.
Facts:
- Petitioner was a farmer who reported his income on a cash basis.
- In August 1944, after a bumper wheat crop, petitioner entered into an oral contract with Burrus Panhandle Elevator to sell approximately 30,000 bushels of wheat.
- The contract stipulated that petitioner would deliver the wheat immediately in 1944, but Burrus would pay for it in January 1945.
- Petitioner delivered the wheat to Burrus in August 1944.
- Burrus paid petitioner for the 1944 crop by check dated January 17, 1945, in accordance with the contract.
- Although Burrus's usual custom was to pay cash upon delivery, this specific deferred payment term was authorized by a manager and agreed to by both parties.
- Petitioner had followed this practice of deferring income from crop sales since 1942 to make his income more uniform across years.
- A similar transaction for petitioner's 1946 wheat crop was made with Coffee-Davis Grain Co., with delivery in 1946 and payment deferred to and made in January 1947.
Procedural Posture:
- The Commissioner of Internal Revenue determined deficiencies in the petitioners' income taxes for the years 1944 and 1946.
- The Commissioner adjusted the petitioners' income, asserting that proceeds from wheat sales delivered in 1944 and 1946 were constructively received in those years, despite payment being made in the following years.
- The petitioners contested the Commissioner's determination of deficiency and filed a petition with the Tax Court of the United States for a redetermination.
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Issue:
Does the doctrine of constructive receipt require a cash-basis taxpayer to include income from the sale of goods in the year of the sale if a bona fide, arm's-length contract with the buyer explicitly defers payment until the following year?
Opinions:
Majority - Black, Judge
No. The doctrine of constructive receipt does not apply where a bona fide, arm's-length contract defers the right to payment into a subsequent year. Income is constructively received only when it is made subject to the will and control of the taxpayer without substantial limitation. Here, the petitioner had no legal right to demand payment for his wheat until January of the year following the sale, as stipulated in the contract. The Commissioner’s argument that the petitioner could have negotiated different terms for immediate payment is irrelevant; the terms of the actual, binding contract control. Since the agreement was a bona fide, arm's-length transaction, petitioner did not have an unqualified right to the money in the year of the sale, and therefore the income was properly reported in the year it was actually received.
Analysis:
This case is significant for establishing a clear boundary for the doctrine of constructive receipt for cash-basis taxpayers. It confirms that taxpayers can proactively manage the timing of their income recognition through bona fide, arm's-length deferred payment contracts. The decision distinguishes between merely turning one's back on income that is already available (which triggers constructive receipt) and contractually deferring the right to income before it becomes due. This precedent provides a crucial tax planning tool, particularly for farmers and other business owners with fluctuating annual incomes, allowing them to legally smooth income across taxable years.
