Constructive Receipt
Definition
Constructive receipt is a tax concept stipulating that income, whether actually received or merely has the right to be received, is subject to taxation. This means income is considered received in the tax year it is made available, even if it hasn’t physically been received yet.
Detailed Explanation
Tax Purposes
In the context of tax obligations, it means if someone has full control over the funds and it is credited to their account or made available without restriction, it is constructively received.
Example:
- Dividend Scenario: Charles receives a dividend check on December 20, 2017, but doesn’t deposit it until January 2018. Although Charles didn’t physically receive the funds in 2017, the Internal Revenue Service (IRS) deems the money as part of his taxable income for 2017 because it was available for him to use.
Real Estate Exchanges
In real estate transactions, especially exchanges involving property, money, or other non-like-kind property, the IRS considers income received if certain conditions of control or benefit are met, even if the actual transfer happens later.
Example:
- Delayed-Exchange Transaction: Cohn participates in a delayed-exchange where his relinquished property is swapped for another at a later time. If a sum is deposited in his account to be later used for acquiring the replacement property, the IRS views that money as constructively received by Cohn, thereby affecting the nonrecognition provisions concerning gains from the transaction.
Frequently Asked Questions
1. What is constructively received income?
Constructively received income refers to amounts taxpayers have an unrestricted right to. It’s taxable as soon as it is available, even if not actually in hand.
2. How does constructive receipt affect tax reporting?
Constructive receipt requires individuals and businesses to report taxes for income they have the right to receive within the year, ensuring no taxable earnings slip through due to deferrals.
3. Can constructive receipt be applied to deferred compensation plans?
Yes, if a taxpayer has control over deferred amounts or the ability to use them in an unrestricted manner, the IRS may treat those amounts as constructively received and thus taxable.
Related Terms
Income Recognition
Refers to the process of determining when income is considered earned for tax purposes.
Real Estate Exchange
A tax-deferred exchange allowing individuals to trade properties without immediate tax consequences. The gains are deferred until the new property is sold.
Dividends
Payments made to shareholders from the earnings of a corporation. They are taxable in the year made available.
IRS (Internal Revenue Service)
The U.S. government agency responsible for tax collection and enforcement of tax laws like those surrounding constructive receipt.
Delayed Exchange
A property swap facilitated under different periods, allowing time between the relinquishing and receiving of properties without immediate tax implications on the gains.
Online Resources
- IRS: Constructive Receipt - §1.451-2(a) - Direct link to IRS regulations addressing constructive receipt.
- IRS: Understanding Important Real Estate Exchange Transactions - Official IRS PDF explaining considerations in various real estate exchange transactions.
- Nolo: Real Estate Taxes and Exchanges - An in-depth guide on taxes related to real estate exchanges.
References
- IRS Publication 17 - Your Federal Income Tax: Blueprint for iterating tax rules around constructive receipt.
- Taxation for Dummies: Provides broad overviews and specifics to understand the fine details surrounding constructive receipt.
Suggested Books for Further Studies
- “All About Paying Taxes” by Bernard B. Kamoroff - A user-friendly breakdown of income tax obligations.
- “U.S. Master Tax Guide” by CCH Tax Law Staff - In-depth explanation of U.S. tax policies, including the minutiae of constructive receipt.
- “Real Estate Exchange and Repeats” by Julie Jason - Comprehensive insight into navigating laws surrounding delayed real estate exchange transactions.
