I came
across an old case recently. It made me smile, as it reminded me of earlier –
and skinnier – times.
Let’s set
this up.
There are,
broadly speaking, two accounting methods when deciding whether you have reportable
income for a period: the cash method and the accrual method. There are a
variety of sub, sorta- and who-actually-understands-this methods, but cash and
accrual are enough for right now.
The cash
method is easy: if you can deposit it at the bank you have income. Maybe you decide not to deposit at the bank
until next week, but it is still income today. Why? Because you can deposit it.
The definition is “can” not “did.”
Accrual is
trickier. Generally it means that you sent an invoice to someone. The act of
invoicing means you have income, as someone owes you. What if you delay
invoicing for a week or two? Well, then you have a variation on the above cash-basis
reasoning: you could have but didn’t. Again, it is the “could,” not the “did,” that
drives the test.
What if you
are on the cash method and somebody pays you with property instead of cash? You
have income. It makes sense when you remember that cash is a form of property.
We have just gotten so used to it that we don’t think of cash that way. For tax
purposes, though, someone paying you in asiago cheese and gluten-free crackers
still represents income. Granted, we have to translate cheese-and-crackers into
dollars, but income it is.
Let’s say
that you played football. Not just any football, however. You were Vince Lombardi’s
running back. It is December 31, and you and Lombardi and the Green Bay Packers
are playing the New York Giants in the National Football League Championship.
COMMENT: NFL historians will immediately recognize that this was
before the Super Bowl era. There was no game called the Super Bowl until the
two leagues – the National Football League and the American Football League –
merged in 1966. The first two Super Bowls were won tidily by Lombardi and the
Packers. In Super Bowl 3 Joe Namath famously led the New York Jets
over the Baltimore Colts.
So it is the
championship game. You are the running back. It is December 31 and you are
playing outside in Green Bay. I presume you are freezing. You run wild and
score 19 points, establishing a league record. You are selected after the game by
Sport Magazine as the most valuable player, which comes with the prize of a new
Corvette.
Sweet.
By the way,
your Corvette is waiting for you in New York. It is now the evening of December
31, 1961.
Tax issue: Do
you have income (the value of that Corvette) in 1961?
The IRS said
you did.
But you throw
the IRS a loop: the car is not income. No, siree. It was a gift. Alternatively,
it is nontaxable to you as a prize or award.
I give you
kudos, but the concept of a gift requires the presence of detached and
disinterested generosity. While a creative argument, it could not be reasonably
argued that a for-profit magazine was awarding an expensive car to the most
valuable player of a televised sporting event out of a detached and
disinterested generosity. It was much more likely that both Sport Magazine and
General Motors were expecting publicity, advertising and social buzz from the
award.
You still have
your second argument, though.
Problem is,
the prize or award exception requires you to receive it for an educational, artistic,
scientific or civic achievement.
You argue
your point: being a star football player “calls for a degree of artistry”
requiring techniques based on “scientific” principles.
Seriously.
The Court
decides:
We believe that petitioner should be caught behind the line
of scrimmage on this particular offensive maneuver.”
You have
income. And the Court gave us a great quote.
But when do
you have income: 1961 or 1962?
The Court
reasons through the obvious. You are in Green Bay. The car is in New York. You
cannot get to that car - much less title it - unless you had Star
Trek technology. However, it is 1961 and Star Trek is not on television yet.
You have income in 1962, the following day.
Your tax case is seminal in developing the tax doctrine of constructive receipt. Normally constructive receipt accelerates when you
have income, but it did not in your case.You could not have made it to the bank even if you wanted to.
So why did
the IRS push the issue of 1961 versus 1962? They didn’t. Remember that you were
arguing that the Corvette wasn’t taxable. The IRS had to fight back on that
issue. The 1961 thing was a sidebar, albeit that is what the case is remembered
for all these years later.
By the way,
do you know which football player we have been talking about?
