 What is the constructive receipt doctrine? Well, it's an IRS principle to determine when income should be taxed. So from the IRS perspective, when should they tax you? Well, here's what the IRS looks at. If they believe you have access to the money, if the money is credited to your account, if the money is available to you, then you did receive it. If you did receive it, you have access to it. If you have access to it, you should pay your taxes. So under this doctrine, doctrine and individual or business is considered to have received income even if they don't physically receive it. So let's assume the money was credited to your account. You did not receive it, but it's available to you. It is your money. Therefore, you need to pay taxes. So the purpose of this doctrine is to ensure that taxpayers cannot avoid paying taxes by deferring or delaying its receipt because one tax strategy is to delay paying taxes because of the time value of money. The more you can delay it, the better off you are. So if income is available to an individual or a business, they are considered to have constructively received it. And it must be reported as taxable income in the appropriate tax year, regardless whether they actually did receive it or not. So for example, let's assume you received a check in the mail on December 31st. You did not pick it up until January 15th. You went on vacation. Well, guess what? You did receive it. You had access to it December 31st, but you just chose not to get it. Well, you have it. It's income to you for that year. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead. Start your free trial today. Now, let's talk about original issue discount bond. Why is that important? Well, because what is a discount? A discount is the difference between the face value of a note, face value, and how much cash you received or how much cash you paid up front. So, for example, lenders, what they do, they often offer loans with maturity payment, exceeding the original amount, resulting in this is what we call original issue discount. So, if you're a lender, you go to borrow money from the bank, they would say, okay, I would like to borrow $100,000. They would say, yes, here's what we're going to do. You want to borrow 100, that's going to be the face value of the loan. We're going to issue a loan for 80,000. So, right now, we'll give you cash, we'll give you cash of 80,000, but you will pay us, you'll have to pay us back 100,000. So, this is called a discount loan. It means you're getting 80,000 today, you'll pay them 100,000 later. Now, regardless of the taxpayer accounting method, original issue discount must be reported as it accrues, and interest earned is computed using the effective interest rate method. Now, you may not pay this face value until three years later. Well, you'll get 80,000 now, you will pay it, or let's assume, let's assume the opposite, let's assume you went to the bank and you deposited 80,000, and you're going to get 100,000 later, three years from now. Well, guess what? Your total return is 20,000, you're not going to get it until three years later. Regardless, each year, year one, year two, year three, what you have to do is you have income that you have to report. In total, you're going to get 20,000. Let's take a look at an example. Let's assume on January 1st, X1, John a taxpayer using cash basis lends 907,030 to a financial institution to a bank by purchasing a CD. The certificate is priced to yield 5% as the effective interest rate. So, simply put, John's going to earn 5% every year for two years, 24 months. The interest is computed annually. No interest payments are made until maturity when John collects a million dollars. So, John walks into the bank today, lends the bank 907,030. Two years later, John can walk into the bank and get a million dollars. But that's again, two years later. And this deal yields to John. John will earn 5%. So, here's what's going to happen. As of year one, John will do what? Will take, this money will grow at 1.05, which is the original amount plus 5%. So, if we take 907, 907, 30 times 5%, John earned the first year 45,351.50. This money was added to the original amount. This is what I did. And by the end of the year, John will have 952.381. Now, this number is in the bank account of John, but John cannot take this money until the end of the year. Guess what? This 45,000 is taxable. This is kind of a form of original issue discount. John gave 907,030, purchased a CD and will not get their return until two years later. But the IRS says, well, they credited the money to your account. You have to pay taxes. Well, I didn't get the money. Well, yeah, that's the deal. Now, this money will stay in the account for year two and will earn this money will stay in the account and will earn another 5%. When they earn another 5%, which is the original amount plus 5%, John will withdraw a million dollars. So, in year two, if we take 952, 381.5 times 0.05, John earned in year two, 47,620 dollars rounding or 619.50, 619.50. So, this is how much John earned in year two. Well, this amount is taxable too. So, notice, now in year two, which is good, John should have the ability to pay because John received their money. That's fine in year two. But in year one, John did not see this money, cannot touch it. They can, but they'll get a penalty if they do. But they're going to have to pay taxes on it. So, this is what we mean by the money is taxable as it accrues regardless whether you are a cash basis or not.