Category: Accounting Periods & Methods Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Issues 2. How will commissions be characterized by the recipients when and if they are paid by the purchasing corporation? Answers 2. I see no reason why the commissions should lose their character simply because they were paid by someone other than the original employer. Discussion 1. The taxpayer must have a matured right to the income in question; 2. The income must be credited, set apart, or otherwise made available so that it can be drawn upon any time; and 3. The taxpayers' control of receipt is not subject to substantial limitations or restrictions. I assume the commissions in question have indeed been earned and are no longer subject to risk of forfeiture. I wonder why the employer has not already paid the commissions. I wonder if the taxpayers are not already in constructive receipt. I will assume that A) the commissions are not yet payable under whatever agreement exists with the employer; or B) the commissions are payable currently but the employer has insufficient cash. Once the corporation owned by the employee group purchases the assets of the employer, these individuals effectively control the disposition of the commissions. At that point, I think all three conditions for constructive receipt have possibly been met. See, for example, O.H. Kruse Grain & Milling v. Comr., 18 T.C.M. 487 (1959), aff'd on other issue, 279 F.2d 123 (9th Cir. 1960), in which the taxpayer, a corporation, successfully argued that its president, who held all of its stock in joint ownership with his wife and consequently "was, in effect, in sole control," was in constructive receipt of accrued rent payable by the corporation under a lease. Although the rental expense was accrued on the company's books, no formal account payable was recorded; nevertheless, the Tax Court held that under the circumstances the amounts accrued were subject to the president's "unqualified demand." I think a possible mitigating factor in this case may be ability to pay. Suppose the acquiring corporation were flush with cash, and once the purchase has been completed, the principals, being unfettered in their ability to collect on their matured rights to receive the commission income, simply choose not to pay the accrued commissions until some later date. I think there is little question in that case that the principals would be in constructive receipt of the commission income. In this case, however, I strongly suspect that the principals of the acquiring corporation are committing all their cash to the asset purchase and essential working capital for the new company. Accordingly, I very much suspect that the new company could not pay the commissions irrespective of the desires and needs of the principals. If it would be impossible to pay the commissions due to lack of cash, there is no constructive receipt. See, for example, Hyland v. Comr., 175 F 2d 422 (2d Cir., 1949), aff'g 7 TCM 236 (1948). I think it unlikely, however, that the purchasing corporation will have zero cash, only that it perhaps will have insufficient cash to pay the entire commission balance, or would choose to use what cash it will have for other purposes. I think to the extent the purchasing corporation has cash at all, arguably the principals are in constructive receipt to that extent. There is another possible mitigating factor. The cases involving constructive receipt with this type of fact pattern normally involve amounts owed to one person who, by virtue of a controlling interest in the corporation, could unilaterally cause the amount owed to be paid. In this case, there is a group of people to whom the commissions are owed and presumably it is that group that controls the disposition of corporate funds. If no one person can unilaterally compel payment of the accrued commissions, then the case against constructive receipt may be strengthened considerably, however, I can find no case with this fact pattern to back up this theory.
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