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Unformatted text preview: 29 ECONOMIC INCOME 1. J. R. Hicks defines economic income as being "the maximum amount a person can consume during a week and still expect to be as well-off at the end of the week as he was at the beginning." 2. The economist's definition is not practical for tax purposes because the concept of "well-being" is not capable of objective measurement. 3. the economic concept is an inappropriate measure of taxable income THE LEGAL/TAX CONCEPT OF INCOME 1. The legal concept of income is also less precise than that of the accountant 2. Congress has not defined income, but has specified how particular items of income are to be taxed 3. The legal concept is different from the economic and accounting concepts. 4. Gross income includes "all income from whatever source derived" unless specifically exempted by law 5. Like the accountants' concept, the legal concept does not embrace holding gains or losses 6.The legal definition of income is close to the accountants', but not identical ACCOUNTING INCOME 1. Income, from an accounting point of view, is the excess of revenues over the costs incurred in producing those revenues 2. The emphasis for the accountant is on completed transactions 3. Therefore, unlike the economist, the accountant does not recognize holding gains 4. The accountant deals exclusively with objectively measurable forms such as monetary transactions. Realization of Income 1. all gains must be "realized" before they are includible in income 2. Under the accrual method of accounting, income is recognized when a transaction is consummated 3. Under the cash method of accounting, income is recognized only when cash is received 4. To prevent cash basis taxpayers from choosing the year in which to recognize income, the Internal Revenue Service applies the constructive receipt doctrine E c o n o m ic B e n e fit, C o n stru c tiv e R e c e i p t , a n d A s s i g n m e n t o f In c o m e D o c trin e s 1. The doctrines focus on the following questions: what is income, when is it taxable, and to whom is it taxable? ECONOMIC BENEFIT DOCTRINE 1. addresses the "what" 2. Any amount of compensation granted or paid to the individual for services rendered, be it cash, bonus, profit sharing, compensation in kind, or any other ingenious method of payment, must be included in gross income a. Gross income is defined as "all income from whatever source derived." b. taxable income may consist of cash, receivables, property, land, or any other form of economic benefit. 29 CONSTRUCTIVE RECEIPT DOCTRINE 1. addresses the "when." 2. was conceived "in order to prevent the taxpayer from choosing the year in which to reduce it (income) to possession” 3. income is: a. credited to [the taxpayer's] account, or set apart for him, or otherwise made available so that he may draw upon it at any time. . . . However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions....
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- Spring '11
- Taxation in the United States, Assignment of Income