Question

Read the following Hornung v. Commissioner, 47 T.C. 428 (1967), which involves the constructive receipt doctrine and how it was used to determine the year of inclusion in taxable income and answer both question. How does the constructive receipt doctrine impact a cash-basis individual’s taxable income? What factors could have resulted in a different determination?

47 T.C. 428 (1967)

PAUL V. HORNUNG, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 3740-64.

United States Tax Court.

Filed January 27, 1967.

429*429 Michael J. Clare, for the petitioner.

Sanford S. Neuman and S. Earl Heilman, for the respondent.

HOYT, Judge:

Respondent determined an income tax deficiency against petitioner in the amount of $3,163.76 for the taxable year 1962. Petitioner having conceded an issue relating to a travel expense deduction, the questions remaining for decision are:

(1) Whether the value of a 1962 Corvette automobile which was won by petitioner for his performance in a professional football game should be included in his gross income for the taxable year 1962.

(2) Whether the value of the use of 1962 Thunderbird automobiles furnished to the petitioner by the Ford Motor Co. should be included in his gross income for the taxable year 1962.

(3) Whether petitioner's gross income for 1962 should include the value of a fur stole received by petitioner's mother from his employer.

FINDINGS OF FACT

The stipulated facts are found accordingly and adopted as our findings.

Petitioner is a cash basis taxpayer residing in Louisville, Ky. For the taxable year 1962, petitioner filed his Federal individual income tax return (Form 1040) with the district director of internal revenue, Louisville, Ky. Petitioner is a well-known professional football player who was employed by the Green Bay Packers in 1962. Prior to becoming a professional, petitioner attended the University of Notre Dame and was an All-American quarterback on the university football team.

Issue 1. The Corvette

Sport Magazine is a publication of the McFadden-Bartell Corp., with business offices in New York City. Each year Sport Magazine (hereinafter sometimes referred to as Sport or the magazine) awards a new Corvette automobile to the player selected by its editors (primarily by its editor in chief) as the outstanding player in the National Football League championship game. This award was won by John Unitas of the Baltimore Colts in 1958 and 1959 and by Norm Van Brocklin of the Philadelphia Eagles in 1960. A similar annual award is made to outstanding professional athletes in baseball, hockey, and basketball. The existence of the award is announced several days prior to the sporting event in question, and the selection and announcement of the winner is made immediately following the athletic contest. The Corvette automobiles are generally presented to the recipients at a luncheon or dinner several days subsequent to the sporting 430*430event and a photograph of the athlete receiving the car is published in the magazine, together with an article relating to his performance during the particular athletic event. The Corvette awards are intended to promote the sale of Sport Magazine and their cost is deducted by the publisher for Federal income tax purposes as promotion and advertising expense.

The Corvette which is to be awarded to the most valuable player in the National Football League championship game is generally purchased by the magazine several months prior to the date the game is played, and it is held by a New York area Chevrolet dealer until delivered to the recipient of the award. In some years when the game is played in New York the magazine has had the car on display at the stadium on the day of the game.

On December 31, 1961, petitioner played in the National Football League championship game between the Green Bay Packers and the New York Giants. The game was played in Green Bay, Wis. Petitioner scored a total of 19 points during this game and thereby established a new league record. At the end of this game petitioner was selected by the editors of Sport as the most valuable player and winner of the Corvette, and press releases were issued announcing the award. At approximately 4:30 on the afternoon of December 31, 1961, following the game, the editor in chief of Sport informed petitioner that he had been selected as the most valuable player of the game. The editor in chief did not have the key or the title to the Corvette with him in Green Bay and petitioner did not request or demand immediate possession of the car at that time but he accepted the award.

The Corvette which was to be awarded in connection with this 1961 championship game had been purchased by Sport in September of 1961. However, since the game was played in Green Bay, Wis., the car was not on display at the stadium on the day of the game, but was in New York in the hands of a Chevrolet dealership. As far as Sport was concerned the car was "available" to petitioner on December 31, 1961, as soon as the award was announced. However, December 31, 1961, was a Sunday and the New York dealership at which the car was located was closed. Although the National Football League championship game is always played on a Sunday, Sport is prepared to make prior arrangements to have the car available in New York for the recipient of the award on that Sunday afternoon if the circumstances appear to warrant such arrangements — particularly if the game is played in New York. Such arrangements were not made in 1961 because the game was played in Green Bay, and, in the words of Sport's editor in chief, "it seemed a hundred-to-one that * * * [the recipient of the award] would want to come in [to New York] on New Year's Eve to take possession" of the prize.

431*431 On December 31, 1961, when petitioner was informed that he had won the Corvette, he was also informed that a luncheon was to be held for him in New York City on the following Wednesday by the publisher of Sport, at which luncheon his award would be presented. At that time petitioner consented to attend the luncheon in order to receive the Corvette. There was no discussion that he would obtain the car prior to the presentation ceremony previously announced. The lunch was held as scheduled on Wednesday, January 3, 1962, in a New York restaurant. Petitioner attended and was photographed during the course of the presentation of the automobile to him. A photograph of petitioner sitting in the car outside of the restaurant was published in the April 1962 issue of Sport, together with an article regarding his achievements in the championship game and the Corvette prize award. Petitioner was not required to attend the lunch or to pose for photographs or perform any other service for Sport as a condition or as consideration for his receipt of the car.

The fair market value of the Corvette automobile received by petitioner was $3,331.04. Petitioner reported the sale of the Corvette in his 1962 Federal income tax return in Schedule D attached thereto as a short-term gain as follows:

                          Date     Date   Cross sales   Depreciation
                        acquired   sold     price          allow        Cost   Gain
1962 Corvette gift —
  Sport Magazine        1962       1962   3,331.04          0.00        0.00   None

NOTE: Section 74(b) provides an exclusion from gross income any amount received as a prize or award if

(1) Such prize or award was made primarily in recognition of past achievements of the recipient in religious, charitable, scientific, educational, artistic, literary, or civic fields.

(2) Recipient was selected without any action on his part to enter the contest or proceeding.

(3) Recipient is not required to render substantial future services as a condition to receiving the prize or award.

Petitioner did not include the fair market value of this car in his gross income for 1962, or for any other year. McFadden-Bartell Corporation deducted its cost as a promotion and advertising expense.

Issue 2. The Thunderbird

When petitioner was discharged from the Army in late July of 1962 he contacted a friend of his who had a job with Ford Motor Co. and asked if the friend could arrange to provide a car for petitioner to drive while in Green Bay.^[1] During 1962 the Ford Motor Co. through 432*432 a dealership in Green Bay furnished petitioner a 1962 Thunderbird automobile. Title to this car was retained by Ford, and the automobile was replaced with a new one after a few months. Petitioner drove the two successive Thunderbirds a total of approximately 3,000 miles during 1962 and paid for the insurance and all operating expenses.

When petitioner was given the Thunderbird to use he did not have any arrangement or obligation to be photographed in the car, nor was he asked to make any personal appearances at Ford dealerships or to make any special effort to be seen by the public driving the car. However, petitioner was asked if he "would come in and say hello to the kids at Milwaukee Punt, Pass and Kick Contest," a contest for children regularly sponsored by Ford Motor Co. which petitioner and "a few of the ball players" would regularly attend. The Ford Motor Co. has also furnished Thunderbirds to other members of the Packer team for their use in and around Green Bay.

Petitioner did not recognize or report gross income with respect to his use of the Thunderbirds during 1962. The fair rental value of petitioner's use of the Thunderbirds during 1962 was determined by respondent to be $600.

Issue 3. The Mink Stole

A few days after the Packers won the title to the Western Division of the National Football League in 1961^[2]the players were informed that the Green Bay Packers, Inc., their employer, would give a fur stole to the wife, friend, or mother of each player on the team. Since petitioner was not married at the time, the Packers' head coach suggested that in his case the fur stole be given to his mother. Petitioner's mother received the fur stole before the end of 1961; she had it in her possession in Green Bay during the week prior to the championship game on December 31, 1961.

The cost of all of the fur stoles purchased by the Green Bay Packers, Inc., to be given away as described above was entered in the corporation's general journal on December 31, 1961, as "Miscellaneous Player Expense." The Green Bay Packers, Inc., employs the accrual method of accounting. No deduction was claimed by the Green Bay Packers, Inc., on its 1961 corporate income tax return for this expense. It was treated on said return under the heading "other unallowable deductions," and was described as "Awards to players' wives, etc."

The cost of these stoles to the Packers was $395 per stole, less an 8-percent discount. A total of 36 stoles were ordered and the invoices for all but 9 of these were dated subsequent to January 1, 1962. The invoice for the other 9 was dated December 29, 1961.

433*433 Petitioner reported no gross income in any year with respect to the receipt by his mother of the fur stole in 1961. The fur stole had a fair market value of $395.

Respondent determined that petitioner's taxable income for 1962 was understated by reason of his failure to include therein ordinary income in the amount of $4,331.04 as reflected by the fair market value of the following items:

    1962 Corvette                       $3,331.04
    Personal Use of 1962 Thunderbird       600.00
    Fur coat                               400.00
                                        _________
      Total                              4,331.04

ULTIMATE FINDINGS OF FACT

The dominant motive and purpose of McFadden-Bartell in awarding the Corvette to petitioner was to promote and benefit their business of publishing Sport Magazine. Petitioner has failed to carry his burden of proving that the free use of Thunderbird automobiles provided by Ford Motor Co. to petitioner in 1962 was not taxable income or that the value thereof was other than as determined by respondent.

Required:

How does the constructive receipt doctrine impact a cash-basis individual’s taxable income? What factors could have resulted in a different determination?

Answer 1

Constructive receipt is the income that a tax payer is liable for. This income has not been physically received by the tax payer but will be available for the tax payer for use at a future point of time. Constructive receipt doctrine is mainly applicable to those tax payers who use a cash basis method of accounting.

Constructive receipt doctrine will have an impact on the taxable income of an individual that follows the cash basis of accounting. It should be noted that in case of cash basis of accounting income is reported in the year it was received where-as the accrual-basis reports income in the year it was earned. As constructive receipt applies to income recorded under the cash-basis method all income received during the year will be reported in the year.

In the context of Hornung v. Commissioner, the issue was whether a corvette won as a prize in December 1961, but not delivered until January 1962, a loaned Thunderbird in 1962, and a fur stole received in December 1961, but given to someone else as a gift, should have been considered income in 1962 due to the rules of constructive receipt. The defendant claims that all items should be excluded due to being gifts and or non-taxable awards. The regulations under IRS section 451 state that “income, although not actually reduced to a taxpayers possession is constructively received by him in the taxable year during which it is credited to his account, set apart from him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.

Since the corvette was awarded December 31, 1961, a Sunday and there was no way for the taxpayer to take possession in such a short time frame, it is constructively received in 1962 and should be income in that year, as well as the loan value of the thunderbirds. The stole however was received in 1961 and would not constitute income in 1962.

Some factors that could have changed this case are for example, if the corvette would have been received on the day it was awarded, it would not have been part of the 1962 income. I suppose another case would have been brought forth to determine if it was income in 1961 with results that it should have been. Second, I believe that if the dealership would have received some benefit from a celebrity football player using one of their cars, that portion of the case could have been argued differently. I do not see any other circumstances that could have changed the outcome of the stole.