Avery v. Commissioner
Headline: Stockholder-president’s year-end dividends taxed when actually received, not when declared, because the company held December checks until the first business day of January, affecting officers and employee-payments.
Holding: The Court held that the dividends were taxable in the years the stockholder actually received the checks in January, not in the years they were declared, because the company withheld payment until the following business day.
- Taxes dividends when shareholders actually receive payment, not when declared.
- Benefits officers and employees who receive year-end checks after the calendar year.
Summary
Background
The case involves a large stockholder who was also president of a company that declared dividends late each year. Dividends were declared payable on or before December 31, but the company’s practice was to hold checks for officers and employees in the treasurer’s office and distribute them on the first business day of the next month. The petitioner kept his accounts on a cash basis and received checks dated December 31 on January 2 in both 1925 and 1930. The tax Commissioner treated those dividends as income in the years they were declared (1924 and 1929). Lower tax and appellate bodies agreed, and the matter reached the Court.
Reasoning
The central question was whether the dividends were "received" for tax purposes in the year they were declared or in the year the shareholder actually got the money. The relevant tax statutes say amounts are included in gross income for the year in which they are received. A Treasury regulation said dividends count when cash is "unqualifiedly made subject to" a shareholder’s demand. The Court found that, under the company’s practice, the cash was not truly available on December 31. The checks never left the treasurer’s office, the company did not intend actual payment that day, and the shareholder had no right to demand earlier payment. Because the payments were not unqualifiedly subject to demand, the Court held they were taxable when actually received.
Real world impact
The decision treats these dividends as income in the year the shareholder actually received the checks, not the year they were declared. It affects employees or officers who receive year-end checks only after the calendar year ends, clarifying timing for cash-basis taxpayers.
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