Facts
- Beatrice Davis, a cash-method taxpayer, became entitled to severance pay after a corporate merger terminated her employment.
- In late 1974, the employer told Davis her severance check would be mailed sometime early in 1975.
- The employer mailed the severance check by certified mail on December 30, 1974, without additional notice to Davis.
- A postal carrier attempted delivery on December 31, 1974, but Davis was not at home.
- The carrier left a notice stating the certified letter would be available for pickup at the post office after 3:00 p.m. on December 31, 1974.
- Davis returned home after 5:00 p.m. on December 31, discovered the notice, and could not retrieve the letter because the post office was closed.
- Davis picked up the certified letter and received the check on January 2, 1975.
- Davis did not include the severance amount in her 1974 gross income; the IRS determined a 1974 deficiency based on constructive receipt.
Issues
- Whether Davis constructively received the severance payment in 1974 when delivery was attempted and a pickup notice was left, even though she obtained the check in 1975.
Decision
- The Tax Court held that Davis did not constructively receive the severance payment in 1974.
- The court concluded the amount was includible in income in 1975, when Davis actually obtained the check and could control the funds.
- The court emphasized that constructive receipt requires notice of an attempt to transfer funds to the taxpayer.
Legal Principles
- Under the constructive receipt doctrine for cash-method taxpayers, income is taxable 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 or restrictions.
- Constructive receipt turns on the taxpayer’s practical ability, with timely notice, to obtain and use the funds within the tax year.
- Attempted delivery may support constructive receipt when the taxpayer’s unavailability is a deliberate choice; it does not apply where the taxpayer did not knowingly avoid receipt and lacked a realistic opportunity to obtain the payment before year-end.
- Lack of timely notice and inability to access the payment during business hours can constitute a substantial limitation defeating constructive receipt.
Conclusion
The Tax Court rejected the IRS’s 1974 constructive-receipt theory because Davis lacked timely notice and practical access to retrieve the certified-mail check before the end of 1974; the severance payment was taxable in 1975 when she actually obtained and could control the funds.