662 / When is a cash basis taxpayer deemed to "receive" income? How is the doctrine of constructive receipt applicable?
Generally, the inclusion of gross income (the first step in the computation of taxable income) must be determined pursuant to the taxpayer's regular method of accounting.1 The two commonly accepted methods of accounting are the cash basis method and the accrual basis method.2
Under the cash basis method, all items deemed to be gross income (whether in the form of cash, property or services) are generally includable in the taxable year in which they are actually or constructively received.3 For example, a taxpayer who receives a salary check in December of 2026 but does not cash or deposit it until January of 2027 must include the wage income in 2026. However, this would not be the result if substantial restrictions on the check made it non-negotiable in 2026 or if the issuer was insolvent.4
For cash method taxpayers, the doctrine of constructive receipt of income goes beyond actual receipt of income in determining the timing of the inclusion of items of gross income. Under this doctrine, a cash method taxpayer is deemed to receive (and, thus must report) income that has been credited to the account or set apart in such a way that the taxpayer has free access to it at any time – even though it has not actually been received by the taxpayer.5 For example, a cash method taxpayer must report the interest credited to a bank savings account in the taxable year it is credited without regard to whether the interest is withdrawn or remains in the account (see Q 7915). On the other hand, in a private letter ruling, the IRS ruled that a cash method employee who has the mere right to make an election to cash out future vacation leave under the employer's plan would not be in constructive receipt of the vacation pay if the employee chose not to make such an election.6
Significantly, constructive receipt occurs only if the taxpayer's control or access to the income is unrestricted. Thus, a sum is not constructively received if it is only conditionally credited, or if it is indefinite in amount, or if the payor has no funds, or if it is subject to any other substantial limitation, or subject to a substantial risk of forfeiture. If a taxpayer's access to income is subject to the surrender of a valuable right, such as the surrender of a death benefit in order to be entitled to income generated by the underlying insurance policy, the Tax Court has held that the constructive receipt doctrine does not apply under those circumstances.
The IRS has also privately ruled that the constructive receipt doctrine is not violated if an employer offers employees a choice between receiving employer contributions to defined contribution plans, retiree health reimbursement arrangements (HRAs), health savings accounts (HSAs) and student loan benefits under qualified educational assistance programs. Employers can allow employees to allocate employer contributions among those plans. Pursuant to the PLR, employees would be given a chance to make an irrevocable election during open enrollment. In no event could the employee receive cash or taxable benefits not addressed within the PLR.7
1. IRC § 446(a).
2. IRC § 446(c).
3. IRC § 451(a); Treas. Reg. § 1.451-2(a).
4. Chapman v. Commissioner, TC Memo 1982-307; Baxter v. Commissioner, 816 F.2d 493 (9th Cir. 1987), rev'g in part TC Memo 1985-378.
5. Treas. Reg. § 1.451-2. See, e.g., Visco v. Comm, 281 F.3d 101 (3d Cir. 2002), aff'g, TC Memo 2000-77 (employment-related dispute).
6. Let. Rul. 200130015.
7. Cohen v. Commissioner, 39 TC 1055 (1963); Nesbitt v. Commissioner, 43 TC 629 (1965). Let. Rul. 202434006.