Tomiko owns the copyright to several classic Motown songs. In 2009, he became aware that Tinseltown Records was selling several of his songs without his permission. He sues Tinseltown seeking $1,000,000 in damages. In 2011, the court awards Tomiko $500,000 in compensatory damages, $50,000 in prejudgment interest, post judgment interest to the date of payment, and court costs. Tinseltown is aware that Tomiko is likely to appeal the judgment and offers to settle for $600,000 with no payment of postjudgment interest or court costs. On the advice of his attorney, Tomiko rejects the settlement offer.
On December 29, 2011, Tomiko receives a check for $600,000 from Tinseltown. An accompanying letter notes that the payment is in full settlement of the order of the court. Tomiko believes that if he cashes the check, he will forfeit his right to appeal the judgment, the postjudgment interest, and court costs. Accordingly, he immediately returns the check to Tinseltown via overnight mail, stating in a letter that his appeal rights are not exhausted and he is returning the check until such time as the issue is settled. Tinseltown remails the check on December 31, 2011. Included with the check is a letter advising Tomiko that Tinseltown intends to deduct the $600,000 in 2011 and that the funds are available for his unrestricted use. On January 15, 2012, Tomiko files an appeal seeking an increase in the damage award. The next day, he deposits Tinseltown’s check into his business account. On June 5, 2012, the appeals court rejects Tomiko’s appeal for higher damages. Tomiko is a cash basis taxpayer. In what year should he include the $600,000 in income?
Read the following authorities, and determine the proper year for Tomiko to include the $600,000 in income:
Sec. 451.
Reg. Sec. 1.451-2.
Walter I. Bones, 4 T.C. 415 (1944).
Fromson v. Comm., 74 A.F.T.R.2d, 5642 (Cl. Ct., 1994), 94-2 USTC
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