## Facts

- Howard Veit was an executive vice president of M. Lowenstein & Sons, Inc., a New York corporation.
- A January 2, 1939 employment contract provided Veit a $25,000 annual salary and a profit participation tied to corporate profits (with payment terms extending into 1941).
- Veit’s profit participation for 1940 was fixed at $87,076.40 and, by a June 18, 1941 agreement, was deferred from payment in 1941 to four equal installments payable in 1942 and later years.
- In 1941, Veit actually received $55,000 as profit participation for 1939, plus compensation for services performed in 1941.
- Veit was domiciled in New York when the 1939 contract was made and when the 1939 and 1940 services were performed, but he later moved with his wife to California.
- Veit reported the $55,000 received in 1941 as community income; the Commissioner treated it as Veit’s separate property.
- The Commissioner determined a 1941 income tax deficiency by including the deferred $87,076.40 in 1941 income under a constructive receipt theory and by characterizing the $55,000 as separate income.

## Issues

1. Whether Veit constructively received in 1941 the $87,076.40 profit participation for 1940 that was deferred by agreement to 1942 and later years.
2. Whether the $55,000 received in 1941 for 1939 services performed while domiciled in New York was community property after Veit’s move to California or Veit’s separate property.

## Decision

- The Tax Court held Veit did not constructively receive the $87,076.40 in 1941 because the deferral agreement was a bona fide, arm’s-length business transaction and the amount was not unconditionally available to him in 1941.
- The Tax Court held the $55,000 received in 1941 for 1939 services was Veit’s separate property because the right to the income arose under a contract made and performed while he was domiciled in New York.
- The court rejected the Commissioner’s constructive-receipt adjustment but sustained the Commissioner’s separate-property characterization of the $55,000.

## Legal Principles

- Cash-method income is constructively received only when it is unqualifiedly subject to the taxpayer’s demand or withdrawal.
- A compensation deferral agreed to in a bona fide, arm’s-length business transaction, before the taxpayer has an unconditional right to immediate payment, generally does not cause constructive receipt in the earlier year.
- For federal tax purposes, the separate-or-community character of compensation may turn on when and where the enforceable right to the income arose; later receipt in a community-property state does not necessarily change that character.

## Conclusion

The Tax Court ruled that an arm’s-length deferral of an executive bonus prevented constructive receipt in 1941, but it treated a profit-share payment received after a move to California as separate property because the contractual right to the payment arose and was earned while the taxpayer was domiciled in New York.


Veit v. Commissioner, 8 T.C. 809 (1947)