Timing Prinicples

Question 1

How are checks treated?

Answer 1

Checks are equivalent to cash, absent any “substantial restrictions”

The restrictions have to be outside of the taxpayer’s control

• not bank being closed,
• Prof mentioned maybe if employer requires direct deposit and your bank has a waiting period

Question 1

Is a promissory note income?

Answer 1

No, it is merely evidence of indebtedness

Question 2

Two types of receipt: actual and constructive. What is required for constructive receipt?

Answer 2

Hornung held:
Must have “unfettered control” to have constructive receipt

This is a big arguable issue, argue both sides

prof disagrees with the court, thinks Hornung had it due to his resources as a celebrity

Prof also disagreed with problem describing lawyer, who was sick and had no assistance, being in constructive receipt of payment that client left at their apartment lobby

Question 3

Taxpayer puts check for charitable donation in the mail on DEC 31 of year 1. Deductible in year 1?

Answer 3

Charitable deduction allowed upon putting a check in the mail, so long as the check has no restriction on it

Question 4

Constructive receipt exists, what about constructive payment?

Answer 4

No (Vader Poel): There is no deduction for constructive payment of salary

Question 5

How do you deduct prepaid expenses?

Answer 5

Prepaid expenses must be capitalized and deducted ratably over the period of coverage, UNLESS

the right or benefit does not extend beyond the earlier of
- 12 months after the first date on which the taxpayer realizes the right or benefit; or
- The end of the taxable year following the taxable year in which the payment is made.

Question 6

How mortgage interest is deducted:

Answer 6

Deductible: taxpayer uses funds that are not from the mortgage loan to pay the interest (Rev. Rule 87-22)

Capitalize and deduct pro rata: interest is taken out of the loan funds by the bank