## Facts

- Elizabeth R. Cornell created a trust for her benefit; it was treated as a grantor trust, so the trust’s income and gains were taxable to Cornell.
- Cornell and the trust were calendar-year, cash-basis taxpayers.
- The trust owned 188,848 shares of Southland Royalty Company stock and agreed in early December 1985 to sell the shares in a merger transaction for $3,210,416.
- The trustee made no agreement with the buyer or banks to delay payment.
- On Friday, December 27, 1985, Cornell’s employee received the buyer’s check at Cornell’s office.
- The check was fully negotiable; neither the maker nor the payor bank imposed restrictions on negotiability.
- The employee endorsed and mailed the check for deposit the same day; the depository bank posted the deposit on Monday, December 30, 1985.
- When instructed on December 30 to purchase government securities with the proceeds, the bank stated it would restrict availability of the funds until collection; it completed the purchase on January 3, 1986.
- Cornell initially reported the gain as 1985 income, then filed an amended return treating it as 1986 income; after Cornell’s death, her estate sought a refund based on shifting the gain to 1986.

## Issues

1. Whether a cash-basis grantor-trust taxpayer must include gain in 1985 when an unrestricted, fully negotiable check is received on December 27, 1985, despite the bank’s hold on funds and completion of an intended investment in January 1986.
2. Whether the December 1985 delivery of the check constituted receipt of cash (or a cash equivalent) or constructive receipt of income in 1985.

## Decision

- The Fifth Circuit affirmed summary judgment for the United States.
- Receipt of the unrestricted, fully negotiable check on December 27, 1985 constituted receipt of cash or a cash equivalent by Cornell in 1985.
- Any restriction caused by the depository bank’s collection practices did not defer income recognition to 1986.
- The gain from the stock sale was includible in Cornell’s 1985 taxable year; the estate was not entitled to a refund.

## Legal Principles

- For cash-basis taxpayers, an unrestricted, negotiable check is generally treated as a cash equivalent when received, making the amount includible in income in the year of receipt.
- Income is constructively received when it is credited, set apart, or otherwise made available so the taxpayer may draw upon it, unless the taxpayer’s control is subject to substantial limitations.
- Routine banking delays or internal bank collection holds after delivery of a fully negotiable check do not, by themselves, constitute substantial limitations that postpone income recognition.
- In a grantor trust, income and gain are attributed to the grantor for federal income tax purposes, so the receipt and timing analysis is applied to the grantor.

## Conclusion

Because the taxpayer (through the grantor trust) received an unrestricted, fully negotiable check in late December 1985 and had no payment-deferral arrangement, the gain was taxable in 1985 notwithstanding the bank’s temporary hold and the January 1986 completion of a planned investment.


Bright v. United States, 926 F.2d 383 (5th Cir. 1991)