## Facts

- E. T. Sproull was a substantial shareholder and president of Brainard Steel Corporation and used the cash method of accounting for income tax purposes.
- Over prior years, Sproull voluntarily reduced his salary during the Depression; no formal claim for the reductions was made.
- In 1945, the corporation had a profitable year and sought to provide additional compensation for Sproull’s past services and alleged prior undercompensation.
- On December 26, 1945, the corporation’s board authorized an agreement creating a trust with Union Savings and Trust Company of Warren, Ohio, as trustee.
- On December 31, 1945, the corporation paid $10,500 to the trustee for Sproull’s benefit, described as consideration for prior services and inadequate salary.
- The trustee was directed to pay Sproull $5,250 on December 26, 1946, and to pay the remaining principal and income on December 26, 1947.
- If Sproull died before payment dates, the trustee was to pay the amounts to Sproull’s administrator, executor, or heirs.
- Sproull received $5,250 in 1946 and $5,250 in 1947 and reported those amounts as income in the respective years; he reported none of the $10,500 in 1945.
- The Commissioner determined a 1945 deficiency by including the full $10,500 in Sproull’s 1945 gross income as compensation, asserting constructive receipt or, alternatively, an immediate economic benefit from the trust funding.

## Issues

1. Whether a cash-basis employee must include in 1945 gross income amounts an employer paid in 1945 into an irrevocable trust for the employee, where the trust required payment in 1946 and 1947 and the employee lacked any right to accelerate payment.
2. Whether the employer’s 1945 transfer to the trust created an immediately taxable economic benefit or cash equivalent to the employee under § 22(a) of the Internal Revenue Code of 1939, even absent constructive receipt.

## Decision

- The Tax Court held for Sproull.
- The $10,500 paid into the trust in 1945 was not includible in Sproull’s 1945 gross income.
- The amounts were includible in the years Sproull actually received them (1946 and 1947), consistent with cash-basis reporting.
- The asserted 1945 deficiency attributable to including the $10,500 was rejected.

## Legal Principles

- Under the constructive receipt doctrine, cash-basis income is includible when it is credited, set apart, or otherwise made available so the taxpayer may draw upon it at any time, and the taxpayer’s control over receipt is not subject to substantial limitations or restrictions.
- No constructive receipt occurs where an employee lacks any present right to demand or obtain payment and the governing arrangement imposes binding timing restrictions on distribution.
- An employer’s funding of an irrevocable trust for an employee does not necessarily create current income under an economic-benefit or cash-equivalence theory when the employee receives only a right to future payments and lacks present dominion or control over the funds.
- The fact that deferred amounts are payable to the employee’s estate if the employee dies before scheduled distribution does not, by itself, establish present receipt or a cash-equivalent benefit in the funding year.

## Conclusion

The Tax Court concluded that because the trust terms barred Sproull from accessing or accelerating the funds in 1945, the employer’s contribution did not result in constructive receipt or an immediately taxable cash-equivalent benefit; the deferred compensation was taxable only when actually distributed in 1946 and 1947.


Sproull v. Comm’r, 16 T.C. 244 (1951)