Category: Accounting Periods & Methods Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Facts Issue Answer Discussion Extrapolating from Spiegel, conditions at the time the check is delivered are apparently irrelevant assuming the payor delivers the check and the check is actually honored in due course. Clearly, writing a check alone is insufficient to constitute payment for a cash basis taxpayer. The check must also be delivered. Obviously physical delivery constitutes delivery, but that is a rare event. What about mailing? We seem to have multiple answers on this account. In the Estate of Witt v. Fahs, 150 F. Supp. 521, 1956-1 USTC ¶9534 (S.D. Fla, 1956), the court ruled that a charitable contribution mailed December 31 and cashed on January 4 of the following year constituted payment in the prior year. In Revenue Ruling 73-99, 1973-1 CB 412, the IRS ruled that payroll checks mailed on the last day of the year were not considered paid until the following year in a situation in which the employees were not allowed to personally pick up the checks. In Revenue Ruling 80-355, 1980-2 CB 170, the IRS cited the Witt case and ruled that mailing constitutes delivery. The facts of the ruling involve payments for various things other than payroll. As a practical matter, what does one do about substantial checks drawn on the last day of the year, against insufficient funds based on the year-end cash balance, and deposited in the mail on that day? The choices are A) to claim the related deductions in the year the checks are written; or B) to defer the deductions into the following year. Both strategies have some risk. If deductions are claimed currently, the taxpayer may be called upon to prove (and the taxpayer has the burden of proof) actual delivery or deposit in U.S. mail in the year written. Absent certified mailing, this is practically impossible. Looking at the dates on which the checks cleared is helpful, but not conclusive. At worst, the Service could push the taxpayer's deductions into the following year with some imposition of interest and possibly penalties. On the other hand, if the deductions are deferred, the IRS could take the position that checks written December 31 should relate back to the previous year. Under ideal circumstances this would simply mean amending the prior year's return. But what if the prior year is closed? This is not a far-fetched possibility at all. Clearly in the first situation in which deductions are claimed in the year the checks are drawn, one could encounter a closed year problem too (because the taxpayer has agreed to extend the statute for the year under examination and the statute for the following year has closed); however, this seems to me to be far less likely than the closed-tax year risks associated with the second situation in which the deductions are deferred until the year after the checks are drawn. Finally, you asked about accrual basis taxpayers. In general the time of payment is not relevant to an accrual basis taxpayer; accordingly, this issue is not generally relevant to accrual taxpayers. However, a number of provisions require actual payment as a condition precedent to deduction, even for accrual basis taxpayers. Obviously, this issue becomes relevant in those situations. What are those situations? Following is a list of common items that come to mind, although it is not intended to be all-encompassing.
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