Question

Discuss the constructive receipt doctrine and how substantial risk of forfeiture applies to this concept. How does this relate to IRC section 61? Please note: Individual taxpayers are generally cash basis taxpayers.

Answer 1

The constructive receipt doctrine is a taxation principle and this principle is used to determine when a cash-basis taxpayer is in receipt of gross income. This principle taxes income before the income is actually received. As such according to this principle the amount of gross income that is under a taxpayer’s control but has not been actually received by the taxpayer must be included by the taxpayer in his/her gross income.

The substantial risk of forfeiture applies to this concept as according to this principle a compensation/payment will be included in the gross income of the concerned individual for the 1^st taxable year in which there is no substantial risk of forfeiture of the rights to such a compensation/payment.

This relates to IRC section 61 as according to this section gross income means all income from whatever sources derived including (but not limited to) items like compensation for services, fees, commissions, fringe benefits etc. Gross income is the focal point here as well. The use of words “not limited to” puts in place an intensive redundancy.