## Facts

- Robert J. Carter, a New York City resident, reported federal income tax on the cash method.
- After being unemployed for most of 1974, Carter began working in October 1974 for the City of New York as a laboratory technician, first in the Office of the Chief Medical Examiner and then, a few weeks later, in the City Health Department.
- After the transfer, the city’s internal record-forwarding and payroll-processing backlog delayed his paychecks.
- Despite repeated protests and demands, Carter did not receive pay for about six weeks.
- On January 3, 1975, the city paid Carter $1,073.01 in gross wages, consisting of four weeks of back pay for 1974 work and two weeks of current pay.
- Carter excluded the $1,073.01 from his 1975 wages after an IRS employee advised him that the amount was attributable to 1974.
- The Commissioner determined a $195 deficiency for 1975 on the ground that the $1,073.01 was taxable in 1975, the year of actual receipt.

## Issues

1. Whether, under I.R.C. § 451 and the constructive-receipt doctrine, Carter constructively received $1,073.01 in wages in 1974 even though the city did not pay him until January 3, 1975.

## Decision

- The Tax Court held that Carter did not constructively receive the wages in 1974.
- The court concluded the wages were includible in gross income in 1975, when paid.
- The Commissioner’s $195 deficiency determination for 1975 was sustained.

## Legal Principles

- A cash-basis taxpayer generally includes income in the year it is actually received unless constructive receipt applies under I.R.C. § 451.
- Income is constructively received only when it is credited, set apart, or otherwise made available so the taxpayer can draw on it, and it is not subject to substantial limitations or restrictions.
- Employer payroll and administrative processing delays that prevent payment can constitute substantial limitations or restrictions, defeating constructive receipt.
- The existence of funds in an employer’s general budget, without the income being made available to the taxpayer, does not establish constructive receipt.
- Informal advice from IRS personnel does not change the proper timing of income inclusion required by the Code and regulations.

## Conclusion

Because the city’s administrative delays prevented Carter from accessing the wages in 1974, the wages were not constructively received that year and were taxable in 1975 upon actual payment.


Carter v. Commissioner, 40 T.C.M. (CCH) 654 (T.C. 1980)