Michael T Wing CPA <mtwingcpa[at]yahoo.com> wrote:
- quote -


There's no way your portfolio of invoices could be worth
_less_ than all of my winning lottery tickets.

Fortunately, you didn't specify "an equal face amount of"
(or "equal present-payment face amount of").

(But I agree with your underlying point, that lottery
winnings are essentially guaranteed when the winning ticket
is presented, and a professional invoice carries only a hope
(often a very good one) of payment.)

Seth

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Dick Adams <rdadams[at]smart.net> wrote:

- quote -

Hmmm... If you think that an invoice for professional
accounting services and a winning lottery ticket are items
of equal value and negotiability, I will gladly trade you my
entire portfolio of invoices for all of your winning lottery
tickets. <g
MTW

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Dick Adams wrote:

- quote -

They do. However, as Albert Strangi's estate discovered, a
judge (Judge Cohen to be precise) doesn't necessarily have
to respect how you arranged those affairs <grin> .

- quote -

The issue here is one of smell. Since a smell case, by
definition, is always a case of a "facts and circumstances"
and the court always has the ability to fall back on the
"economic benefit" doctrine when the technical construction
of constructive receipt doesn't work. Since such concepts
can be "fluid" it wouldn't be terribly surprising to see the
concept expanded if a court felt a taxpayer actually had the
right to the funds and was taking action to dodge the tax
for an extended period of time.

I don't see a major problem if a taxpayer has a *minor* time
delay in getting the funds. But if a taxpayer delays for a
long period of time in going after the funds because he/she
"knows" the funds are good (there's no real risk of default
if he delays), then I could see a court deciding this is the
functional equivalent of the cases that involved the use of
trusts or similar methods of holding funds on behalf of the
client.

- quote -

Note that in the economic benefit cases (which is a distinct
doctrine from constructive receipt), the taxpayer does *not*
need to have access to the underlying funds. Rather, the
issue becomes if the interest can be valued and if the funds
are "protected" in some fashion. Traditionally that
protection has required setting aside the funds in trust,
but give a judge a bad fact situation (taxpayer clearly
sitting on the funds for months to get a lower rate) and I
would suggest the judge might find the "functional
equivalent" of a trust.

In the current climate (where the courts are now turning
away from hyper-technical decisions that come out in favor
of various tax shelters), I wouldn't bet my life that a) a
judge wouldn't go for some method of stretching economic
benefit to cover a case where the judge felt the taxpayer
was "gaming" the system and b) that the same judge's
decision wouldn't be sustained on appeal.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Ed Zollars, CPA" <ezollar[at]mindspring.com> Dick Adams wrote:

- quote -

It's always amazed me that we would disagree on this issue.
But you seem to have specific issues with different people.
So if not this one, then which other one could it be? <G
- quote -

Taxpayers have a right to manage their affairs. How often
have you delayed billing a client so the income would go
into the next year?

- quote -

The general rule is that the taxpayer wants to assert
constructive receipt to a year that is 'closed' It is
the taxpayer who argues that constructive receipt occurred
when he won the money not when he received it. It is the
IRS who argues the TP did not have constructive receipt in
the earlier year. Paul Hornung had three issues before the
Tax Court. Two dealt with constructive receipt. The more
notable one was the 1962 Corvette he received as the MVP of
the 1961 NFL Championship game. The other was the mink coat
the Packers gave his mother as a bonus for winning the
Divisional title in 1961 (Coats were given to the wives of
players who were married and to the mothers of the others).

The Tax Court said Hornung made no effort to get possession
of the Corvette in 1961, he got possession in 1962, and thus
he did not have constructive receipt in 1961. On the coat
issue, they noted that since his mother had actual receipt
of the coat in 1961, there was no reason to discuss
constructive receipt. What could be clearer??

- quote -

Correct me if I'm wrong (and I know you will <g> ), but given
a 'smell test' is the reconciliation of form and substance,
constructive receipt is a 'smell test'. It tests the
taxpayer's direct access to the underlying funds.

Try this scenario: 31 December 1982 was a Monday. I had
three things to do that day.

First I stopped at a client for the sole purpose of handing
them my invoice for the month of December. I could have
given them my invoice on the previous Wednesday when I was
in their office, but I did not want the income in 1982. I
received payment later that week. No way did I have
constructive receipt in 1982. And that is no different than
a lottery winner timing presentation of a winning ticket.

Second I went to another client where I put in a very long
day to finish a project by year end and handed them an
invoice at approximately 10:30pm. To my surprise the second
client paid me immediately upon receipt of the invoice.
Since a check is a negotiable financial instrument, like it
or not I had constuctive receipt in 1982 even though there
was barely more than one hour left in the year.

Third I went to a New Year's Eve party. But there was
nobody there to whom I owed any money <G> .

Dick

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Dick Adams wrote:

- quote -

We have disagreed a bit on this one <grin> . My own take is, to be
honest, it's going to be a "smell test" case. If the judge has the
opinion that the IRS is being overly picky (winner won on December 31 a
half hour before the lottery office closed, but rates dropped January 1)
the court is likely to be swayed by your issue.

However, if the taxpayer sat on a winning ticket for many months because
he/she knew rates were going to drop, then the court is just as likely
going to dig for a rationale to get the income taxed at the higher rates.

As I recall the cases in question, the matter involved an issue of a
couple of days and, in at least one of the cases, it was the *TAXPAYER*
who was trying to assert constructive receipt because it turns out being
taxed in the earlier year worked out better. Such cases have smell
problems, since in the first case it "smells" as if the IRS was being
unreasonable (the taxpayer had take extraordinary steps to get the money
in the current taxable year) *OR* the taxpayer looks like he/she was
waiting to figure out which year worked out best and then take his/her
position (that is, if you *could* have received it prior to year end,
why didn't you take it--and then the whole issue would be moot?).

I think there's always a risk of falling "too much" in love with
technical readings of the law while totally avoiding the smell issues.
Much of the recent tax shelter activity is going after structures that
do meet the literal technical requirements of the Code, but, as the
large firms are discovering, the courts are willing to shoot them down
either by invoking broad "overriding" concepts (economic reality tests)
or by simply broadly interpreting other provisions to undo the deal.

Actually, I think the Fifth Circuit's recent "discovery" that Section
2036(a) might be an issue in the FLP realm is somewhat related, though
there it mainly shows that the courts are aware of how the winds are
blowing <grin> . For many years the Fifth Circuit virtually
automatically would reverse in FLP cases, so much so that we ended with
opinions from the Tax Court that were appealable to the Fifth that
clearly read as *if* the court was going to throw out the FLP discounts,
but then allowed them based on a very technical holding(Kerr, for
example) or a technicality (the issue of holding the IRS raised the 2036
issue too late in Strangi I).

The Fifth Circuit, by reversing the Tax Court on the issue of whether
the 2036 argument could be heard in Strangi pretty much indicated that
they were now "agreeable" to that attack (which, in its most extreme
form, would cause most problems for almost all FLPs), so the Tax Court
has now written an opinion that lists a slew of reasons why 2036(a)(1)
and (2) apply. I actually read Strangi II as kind of a game--the Tax
Court is giving the Fifth Circuit a laundry list of 2036(a) reasoning
and waiting to see on appeal which one (if any) they sustain <grin> .

--
Ed Zollars, CPA
Phoenix, Arizona

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"D.F. Manno" <dommanno[at]netscape.net> inquired:
- quote -

It's covered in Section 451. The taxpayer has to be able
to draw against it for constructive receipt to exist.

While most prizes are paid out by authorized lottery
retailers, large prizes (guessing $2,000 or more) have to
processed by the Lottery Commission directly. Win on a
Wednesday, show up on Thursday, and you might have a
check on Monday - but maybe not until the next Friday.

Plus, in most lotteries, you have 180 days to claim your
winnings.

Two constructive receipt cases worth reading are:
Paul Hornung v. Commissioner, 47 T.C. 428 (1967)
Lewis H. Ross v. Commissioner, 159 F.2d 483 (1948)

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