Kahler v. Comm'r

*32 The respondent determined a deficiency in income tax for the year 1946 in the amount of $ 2,073.30. The petitioner has conceded the correctness*230 of some of the adjustments made in determining the deficiency. The sole issue is whether petitioner realized income in 1946 when his employer paid him for commissions earned during that year by a check dated December 31, 1946, and delivered it to him after banking hours.

Some of the facts were stipulated.

FINDINGS OF FACT.

The stipulated facts are so found, and are incorporated herein.

Petitioner, an individual, residing in Grinnell, Iowa, filed his cash basis Federal income tax return for the calendar year 1946 with the collector of internal revenue at Des Moines, Iowa.

For all times material herein, petitioner was employed by a seed company from which he received a base salary and commissions for his services. Sometime after 5 p. m. on December 31, 1946, petitioner received a check drawn by his employer dated December 31, 1946, in the amount of $ 4,332.97. This commission check was cashed by petitioner at the drawee bank on January 2, 1947. The total amount of commissions earned by petitioner during 1946 amounted to $ 5,410.39 from which amount there was subtracted Federal withholding tax plus another small adjustment resulting in the net amount for which the check was made *231 out.

Petitioner reported such commissions as income for 1947. Petitioner's employer (on the accrual basis) deducted the commissions paid petitioner on December 31, 1946, in its 1946 tax return; and included within the taxes withheld on wages and commissions paid its employees during 1946, the amount withheld from such commission check.

To his tax return for 1946, petitioner attached the following letter:

February 1, 1947.

State Tax Commission,

Income Tax Division,

Des Moines Building,

Des Moines 7, Iowa.

Gentlemen:

In re: Charles F. Kahler, 1803 Eighth Avenue, Grinnell, Iowa; Social Security Number 478-07-XXXX; 1946 Income Tax Return.

In addition to the income shown on the above named taxpayer's income tax return for 1946, we wish to call your attention to the fact that the Sumner Seed Company reports payment to him for the calendar year 1946, the sum of $ 6,549.87, less withholding tax in the sum of $ 1,022.89. Of the above amounts, he actually received as weekly wages from the Sumner Seed Company during 1946 totaling $ 1,139.48. The balance of $ 5,410.39 was not received by him until the evening of December 31, 1946, after banking hours. Naturally, it was impossible to cash*232 this check for $ 5,410.39 until in 1947, and it is his contention that this *33 check should not be reported in his 1946 return, but will be shown on his 1947 return, both state and federal.

In view of the fact that this income of $ 5,410.39 will not be shown until he prepares his 1947 return and in view of the fact that he will not claim the withholding tax on this income until he makes his 1947 return, he is asking both the State of Iowa and the Collector of Internal Revenue to make an immediate audit on his returns.

He will greatly appreciate your giving this matter your very early attention.

Very truly yours,

(Signed) Charles P. Vogel

Charles P. Vogel

(Signed) C. F. Kahler

CPV/S

Petitioner did not expect to receive his 1946 commission check during 1946, since generally commission checks for any year were received sometime during the following year. His commissions for 1945 were received in January 1946, and reported in his Federal income tax return for 1946.

The respondent determined that the commissions in the amount of $ 5,410.39 were taxable income to petitioner in the calendar year 1946, and not in 1947.

OPINION.

The sole issue is when did the petitioner realize the*233 income represented by the commission check delivered December 31, 1946. Was it in 1946, as determined by respondent, or in 1947, as claimed by petitioner? This, in turn, is based on the question whether the receipt of a check by a cash basis taxpayer after banking hours on the last day of the taxable period constitutes a realization of income.

Applicable provisions of the statute are set forth in the margin. ¹

*234 In his brief, petitioner argues that "the mere receipt of a check does not give rise to income within the taxable year of receipt unless the check is received in sufficient time before the end of the taxable year so the check may be converted into cash within the taxable year." In support of such result, petitioner relies upon L. M. Fischer, 14 T. C. 792*34 (1950); Urban A. Lavery, 5 T. C. 1283 (1945), affd. (C. A. 7, 1946) 158 F. 2d 859; and Harvey H. Ostenberg, 17 B. T. A. 738 (1929).

In the Fischer case, we held that a check delivered to the taxpayer on December 31, 1942, which was not deposited until 1943, was not income in 1942 but in 1943, since the check was subject to a substantial restriction. At the time of delivery of such check, there was an oral agreement made between the drawer and the taxpayer that the latter would hold the check for a few days before he cashed it since the drawer was short of money in the bank. Such a situation is completely distinguishable from that in the instant case.

The Lavery and Ostenberg cases both decided*235 that checks delivered to the taxpayers were income in the year of delivery. In the Lavery case delivery was on December 30, and in the Ostenberg case delivery was on December 31. Petitioner relies on the dicta appearing in these cases to the effect that the result might have been different had the petitioner in either case been able to show that he could not have cashed the check in the year drawn. We fail to see where there should be any difference in result just because it might be impossible to cash a check in the year in which drawn, where delivery actually took place in such year. Respondent's regulations provide that all items of gross income shall be included in the taxable year in which received by the taxpayer, and that where services are paid for other than by money, the amount to be included as income is the fair market value of the thing taken in payment. ²

Analogous cases to the instant case are those which were concerned with*236 the proper year in which deductions might be taken where a check was drawn and delivered in one year and cashed in a subsequent year. Under the negotiable instruments law, payment by check is a conditional payment subject to the condition that it will be honored upon presentation; and once such presentation is made and the check is honored, the date of payment relates back to the time of delivery. See Estelle Broussard, 16 T. C. 23 (1951); Estate of Modie J. Spiegel, 12 T. C. 524 (1949); and cases cited therein. In the Spiegel case we said, at page 529:

It would seem to us unfortunate for the Tax Court to fail to recognize what has so frequently been suggested, that as a practical matter, in everyday personal and commercial usage, the transfer of funds by check is an accepted procedure. The parties almost without exception think and deal in terms of payment except in the unusual circumstance, not involved here, that the check is dishonored upon presentation, or that it was delivered in the first place subject to some condition or infirmity which intervenes between delivery and presentation.

Under such circumstances, *237 we feel that it is immaterial that delivery of a check is made too late in the taxable year for the check to be *35 cashed in that year. The petitioner realized income upon receipt of the commission check on December 31, 1946.

Decision will be entered for the respondent.

Murdock, J., concurring: I agree with the result reached that the receipt of a check is regarded as payment and income unless it is subject to some restriction but feel that the petitioner's case is weaker in some respects than the majority opinion might indicate. A finding is made that the check in question was received by the petitioner "sometime after 5 p. m. on December 31, 1946." There is also evidence that he could not have obtained cash for the check at the drawee bank but he could have deposited the check in that bank, later on December 31, 1946. There was another bank in the town and the evidence does not show whether or not he could have cashed the check in that bank after regular banking hours. Furthermore he might have made some other use of the check during 1946. For example, he might have cashed it at some place other than at a bank or he might have used it to discharge some*238 obligation, within the year 1946.