14.5 Constructive Receipt
Key Takeaways
- Constructive receipt: income is taxable when made available without substantial restriction.
- Year-end check = income in year received (even if not cashed).
- Agent receipt = taxpayer receipt.
- Accrual taxpayers: §451(c) one-year deferral for advance payments (unchanged by OBBBA).
- Deferral: Year 1 per AFS, entire remainder in Year 2.
- Cannot "turn your back" on available income.
Why This Matters for the Exam
Constructive receipt prevents timing manipulation. The exam tests year-end checks, agent receipt, and the §451(c) advance-payment deferral. OBBBA did not change §451, so the one-year deferral remains available for accrual taxpayers in 2025.
Expect at least 3-4 questions on constructive receipt.
The Constructive Receipt Doctrine (Reg. §1.451-2)
| Rule | Description |
|---|---|
| Income taxable | When credited, set apart, or available |
| No substantial restriction | If you can draw on it, it's income |
| Cannot delay | Cannot "turn your back" on income |
Key Applications
| Scenario | Treatment |
|---|---|
| Check delivered Dec 31 | Income in current year |
| Check mailed Dec 28, received Jan 2 | Income in year received |
| Agent receives funds | Taxpayer received |
Substantial Restrictions
| Scenario | Constructively Received? |
|---|---|
| Check available, banks open | Yes |
| Check available, requires manager signature (manager unavailable) | No |
| Agent holds funds pending instructions | Possibly no |
Advance Payments (§451(c)) — Unchanged by OBBBA
| Method | Treatment |
|---|---|
| Full Inclusion | All income in year received |
| One-Year Deferral | Recognize per AFS in Year 1, ENTIRE remainder in Year 2 |
Deferral Method Requirements
| Eligible Payments | Examples |
|---|---|
| Services | Maintenance contracts |
| Sale of goods | Pre-orders |
| Use of IP | License fees |
| Gift cards | Redeemable for services/goods |
Deferral Limitation
| Rule | Description |
|---|---|
| Maximum deferral | One year only |
| Year 2 | ENTIRE remaining balance |
| Not matching | Cannot spread over service period |
Deferral Example (Tax Year 2025 start)
| Item | 2025 | 2026 | 2027 |
|---|---|---|---|
| Received | $12,000 | ||
| AFS recognition | $1,000 | $6,000 | $5,000 |
| Tax recognition (deferral) | $1,000 | $11,000 | $0 |
Real-World Scenario (2025)
Scenario: Gym receives $1,200 on Nov 1, 2025 for a 12-month membership.
- Cash basis: $1,200 in 2025.
- Accrual (full inclusion): $1,200 in 2025.
- Accrual (§451(c) deferral): $200 in 2025 (2 months AFS) + $1,000 in 2026.
On the Exam
Expect 3-4 questions on constructive receipt, typically:
- Check Questions: "Check delivered Dec 30 — when taxable?"
- Agent Questions: "Agent receives funds — when taxable?"
- Deferral Questions: "24-month contract — recognition in each year?"
The key is to remember: Available income = taxable now. Year-end check = current year. Agent = taxpayer. §451(c) deferral = 1 year max, remainder in Year 2.
Cash-basis attorney receives check Dec 30, 2025, deposits Jan 5, 2026. When taxable?
Accrual taxpayer in 2025: receives $12,000 for a 24-month contract. AFS: $1,000 Y1, $6,000 Y2, $5,000 Y3. Tax under §451(c) deferral?
Agent receives payment Dec 28, 2025, remits to cash-basis taxpayer Jan 3, 2026. When taxable?