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This is a follow up question to Income - Taxed on check date written or date deposited?

I'm going to give a theoretical situation that has the possibly of becoming reality for me at the end of this year (2017)

Preface

This year I've moved some investments for which I'm going to have to pay 15% capital gains on IF I have a taxable income over 37k. I'm able to get below 37k as of now but I'm slated to receive a 13k check at the END of december which will put me over 37k. I'm trying to decide if I can legally get away with marking the income as 2018 income or if I need to have a plan to have my LLC spend that money before 2018. I'm not looking to do anything shady, I merely want to make sure I'm getting the best out of the situation.

Need to know info

  • I live in NY and the LLC's PO Box is in UT 1600 miles away (I moved after the creation of the LLC and business is still done through UT)
  • I have employed someone to retrieve the mail at the beginning of every month and deposit checks to a nearby bank branch.

Question

I plan to talk to the company in question to see if they can cut the check in 2018. Let's theorize that they cannot for whatever reason: What are my limitations for being able to claim the income in 2018?

Current Thoughts

  • I assume if there were any flag by the IRS I would have to prove my case. - If I could show a post-marked receipt of Jan 2nd for a check cut on December 30th I can see this issue being resolved rather simply.
  • If I receive the check on the 15th and my employee won't pick it up until the 1st I can see the IRS taking issue with this as I could have had them pick the check up earlier. This is murky, I'd err on the safe side
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    This does have more detail, but what sets it apart from your previous question? What's different, and why don't the other answers apply here? – JPhi1618 Nov 30 '17 at 19:51
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    The IRS might also question why you couldn't simply ask that the check be mailed to you, rather than the LLC's address. It seems like you're trying to use this as a scheme to delay receipt of the check. – Barmar Nov 30 '17 at 20:16
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    I'll write you a new answer later tonight, but I'll warn you now: it's going to be pretty similar to my other answer. :) – Ben Miller Nov 30 '17 at 20:17
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    The 0% capital gains rate isn't all or none. You get 0% on the capital gains up until you've filled the 15% tax bracket. Amounts above that get taxed at the 15% rate. – stannius Nov 30 '17 at 23:06
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    @Jacksonkr the only one I found that addressed this issue was kitces.com/blog/… – stannius Dec 1 '17 at 1:02
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As I wrote in my answer to your other question, your cash basis business needs to record income in the year that you take constructive receipt of the income. To address your specific concerns:

  • The fact that you live 1600 miles away from your PO Box does not change the fact that you have already taken receipt when it hits the box. Your customer sent the payment to the address you told him to send it to. You could have changed your address when you moved, but you chose to do something else instead.

  • Commissioner of Revenue v. Adams (1931) says that if the check is sent out on Dec 31 and not delivered to you until Jan 2, the income belongs to the later year. But your scenario has the customer sending you the check 2 weeks before the end of the year.

  • You can ask your customer to wait until after Jan 1 to send the check, but remember that this is a tax deductible business expense for him, so it is probably most advantageous to him to get it done this year. As @mhoran_psprep mentioned, this can be done by delaying your invoice/bill to him.

If your customer decides to send you the payment he owes this year, I don't see any way that you could legally justify not counting that income in 2017.

From IRS Pub 538 on Constructive Receipt (emphasis mine):

You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. You must report the income in the year the property is received or made available to you without restriction.

I would say that telling the customer to send payment to a remote PO Box and then waiting to get it until the following year is a clear case of postponing taking possession.

IRS Pub 538:

If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it.

In a sense, because you have told your customer to send payment to the PO Box, the PO Box is your agent.

In Romine v. Commissioner (1956), the court noted:

However, the strongest reason for holding constructive receipt of income to be within the statute is that for taxation purposes income is received or realized when it is made subject to the will and control of the taxpayer and can be, except for his own action or inaction, reduced to actual possession. So viewed, it makes no difference why the taxpayer did not reduce to actual possession. The matter is in no wise dependent upon what he does or upon what he fails to do. It depends solely upon the existence of a situation where the income is fully available to him. Here the circumstances are peculiar and perhaps harsh in their consequences, but "that it was not convenient and was perhaps physically impossible for him to appear at the offices of the various corporations before the year closed and demand the cash did not destroy his legal right to do so."

  • I'm curious if you have any specific sources for definitions of constructive receipt in cases like this. Is it legally true that the mere placement of a check in a place where the payee told you to place it constitutes constructive receipt by the payee? – BrenBarn Dec 1 '17 at 6:10
  • @BrenBarn Added quote from IRS Pub 538 and explanation. – Ben Miller Dec 1 '17 at 11:32
  • @BrenBarn Also read through the Wikipedia article on constructive receipt. It addresses situations like this regarding mail delivery. I'm out of time at the moment, but I'll try to add more support with court cases to my answer in a day or two. – Ben Miller Dec 1 '17 at 11:40
  • @BenMiller I'm erring on the side of "... you have already taken receipt when [the check] hits the box ..." Double thanks – Jacksonkr Dec 1 '17 at 18:07
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    @BrenBarn Good question. It may have something to do with the fact that, although Sport Magazine said that he won the car at the Dec 31 game in Green Bay, the mag officials did not bring the keys or the title to Green Bay, and they did not give Hornung those things until Jan 3. Dec 31 was a Sunday, and the dealership wasn't even open that day. – Ben Miller Dec 4 '17 at 2:27
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Another way to delay receipt is to delay billing. To be safe you will have to wait until the new year to send the bill, because if you do it in late December they could be super efficient and send it to you with just a few days turn around. They may being trying to spend money before the end of the year.

Long ago there was a year where there were tax cuts starting January 1st. I new of companies who allowed their employees to defer receiving their December paychecks until January. For families with two income this made a difference because they moved a month worth of one of their incomes into the cheaper year. If they weren't living month to month they could easily absorb the delay.

Of course if you already sent the invoice....

  • I invoiced them in mid december and they are on a net 45. They get to make the decision on the year at this point. – Jacksonkr Nov 30 '17 at 23:11
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    @Jacksonkr mid december hasn't happened yet... – stannius Dec 1 '17 at 0:58
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    @stannius Slammed with work lately, it's showing. Mid *November (16th) – Jacksonkr Dec 1 '17 at 18:03

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