In international tax planning, one of the issues that frequently comes up is whether certain income that is not technically received by a taxpayer is nonetheless taxable to them because they “turned their back” on receiving the income. The rule that makes such income currently taxable to the taxpayer is known as the “constructive receipt doctrine.”
The constructive receipt doctrine is defined in Treas. Reg. §1.451-2(a) as the following:
General rule. Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account or set apart for him so that he may draw upon it at any time. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. Thus, if a corporation credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.
Many cases have dealt with the constructive receipt doctrine or doctrines of a similar nature. For example, in Lucas v. Earl,(FN 1) it was held that the taxpayer was liable for income tax upon the whole of his salary and attorney’s fees even though he had made a valid prior assignment of one half of those amounts to his wife, and the Supreme Court, speaking through Mr. Justice Holmes, said:
[T]he tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. * * * [N]o distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.(FN 2)
In Corliss v. Bowers,(FN 3) the Supreme Court, considering a revocable trust created by a husband in favor of his wife, established the principle that the power to revoke the trust and regain control of the income producing property makes the holder of that power liable for taxes on the income from that source. Mr. Justice Holmes, again speaking for the Court, said:
But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed--the actual benefit for which the tax is paid. * * * The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.(FN 4)
These principles were applied in Helvering v. Horst.(FN 5) In that case the owner of certain coupon bonds detached certain coupons which fell due during the year and gave them to his son. In due course the coupons were paid to the son but it was held that the donor realized income in the year equal to the face amount of the coupons. The Supreme Court explained its reasoning:
The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it.(FN 6)
The constructive receipt doctrine is an important principle to keep in mind when doing any type of tax planning.
1 281 U. S. 111 (1930).
2 281 U. S. at 115.
3 281 U. S. 376 (1930).
4 281 U. S. at 378.
5 311 U. S. 112 (1940).
6 311 U. S. at 118.