Charles F. Kahler v. Commissioner
18 T.C. 31 (Tax Ct. 1952)

  • Kahler earned some commissions. He received a check for the amount he was due on December 31st 1946. He did not cash the check until January 1947.
  • When he filed his 1946 taxes, he left the commission out of the calculation of his gross income. The IRS assessed a deficiency.
    • Kahler argued that he didn't cash the check until 1947, so it should be counted as part of his 1947 gross income.
      • Kahler argued that the bank was closed by the time he got the check, so he couldn't possibly have cashed it in 1946.
    • The IRS argued that he had received the check in 1946, so it should be counted as part of his 1946 gross income.
  • The Tax Court found for the IRS.
    • The Tax Court found that income is realized as soon as the check is received. It is irrelevant when the taxpayer actually cashes the check.
    • The Court did note one exception. If the check has a restriction (like it is post-dated and therefore not cashable until a certain date), then the income is not realized until the taxpayer can actually cash the check.
  • Basically, the check itself is property (aka a negotiable instrument). You could theoretically sell that check to someone else. Therefore you have received property as soon as you receive the check, whether you cash it or not.
    • Theoretically you might be able to argue that the value of the negotiable instrument isn't as high as the face value (since people wouldn't pay face value for a check they can't cash until tomorrow). But Kahler didn't make that argument in this case.