Lavery worked for the American
Bar Association Journal. He left his job in December 1941. In addition
to being paid in full for his services, the Board gave him a bonus check
for $2666 as "payment in full satisfaction of all his claims against
the said Association and the members of the said Board of Editors on
account of his said employment as such Managing Editor and the termination
of that position."
It was probably a pay-off to
keep him quiet about whatever happened during his employment...
Lavery didn't cash this bonus
check until January 1942.
When Lavery filed his 1941
taxes, he did not include the $2666 in his adjusted gross income. The IRS disagreed and assessed a deficiency.
The IRS argued that Lavery
received the check in 1941, therefore he should pay taxes on it as part
of his 1941 return.
Lavery argued that he didn't
get the cash until January 1942, so it should be included in his 1942 tax
In addition, Lavery argued
that the $2666 was for services that he would not perform until 1942 (his
continued silence). It was not fair to tax him in 1941 for income he
would not receive nor earn until
The Tax Court found for the
IRS. Lavery appealed.
The Appellate Court affirmed.
The Court found that receipt
of a check is the equivalent to the receipt of cash.
See Charles F. Kahler v.
Commissioner (18 T.C. 31 (1952)).
The Court found that the
date of payment, not the date of the rendition of services is the date
that the income was earned for tax purposes.
The Court considered Lavery,
like most individual taxpayers, to be operating on the cash method of accounting. Under that method, income is
counted as it is received, not when it is earned.
Under the alternate
accounting style, the accrual method,
income is counted when all of the events that entitle the taxpayer to
receive the income have occurred.