Kahler v. Comm'r
18 T.C. 31, 1952 U.S. Tax Ct. LEXIS 229 (1952)
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Rule of Law:
For a cash-basis taxpayer, income is realized upon the receipt of an unrestricted check in a given taxable year, regardless of whether it can be cashed or deposited within that year.
Facts:
- The petitioner was a cash-basis taxpayer.
- On December 31, 1946, a commission check was delivered to the petitioner's home.
- The check was delivered sometime after 5 p.m., which was after the local banks had closed for the day.
- The check was delivered without any restrictions; there was no agreement or condition that the petitioner should hold the check or delay cashing it.
- The drawer of the check had sufficient funds in the bank to cover the payment.
- The petitioner did not cash or deposit the check until 1947.
Procedural Posture:
- The respondent (Commissioner of Internal Revenue) determined a deficiency in the petitioner's 1946 federal income tax.
- The petitioner filed a petition with the United States Tax Court, a court of first instance for this type of dispute, to challenge the respondent's determination.
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Issue:
Does a cash-basis taxpayer realize income in the taxable year a check is delivered, even if the delivery occurs after banking hours on the last day of that year?
Opinions:
Majority - Rice, J.
Yes. A taxpayer realizes income upon receipt of a check in a given taxable year, and it is immaterial that delivery is made too late for the check to be cashed in that same year. The court reasoned that payment by check is a widely accepted commercial practice, treated as a conditional payment that relates back to the date of delivery once honored. Distinguishing prior cases where restrictions were placed on cashing the check, the court held that mere physical inability to convert the check to cash before the year's end does not defer the realization of income. Citing the principle from deduction cases like Estate of Modie J. Spiegel, the court found that for income purposes, as with deductions, the transaction is complete upon delivery of an unrestricted check.
Concurring - Murdock, J.
Yes. The concurring opinion agrees with the result but argues the petitioner's case is even weaker than the majority suggests. The author points out that the petitioner failed to prove he could not have made any use of the check's value in 1946. For example, he might have been able to deposit the check in an after-hours depository, cash it at a non-bank establishment, or endorse it to another party to settle an obligation before the year ended. The absence of proof that the check was completely unusable in 1946 further strengthens the conclusion that income was realized upon receipt.
Analysis:
This decision solidifies the 'cash equivalent' doctrine for checks in tax law, establishing a clear, bright-line rule. It clarifies that for a cash-basis taxpayer, the critical event for income realization is the unrestricted receipt of payment, not the conversion of that payment into cash. This prevents taxpayers from deferring income recognition simply by holding onto checks received at the end of a taxable year. The ruling promotes consistency by aligning the timing of income recognition with the established rules for taking deductions via check payments.
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