When is tax measured/paid? Need for timing rules

The Realization Principle

An unrealized fluctuation in asset value is (usually) not income

A loan is not income

The elimination of the obligation to repay is income (usually) Sec. 108

A disputed amount is income when held under a claim of right w/o restriction

EG. Last mos. Rent, Security deposits

The Accounting method principle

Individuals and small businesses are generally allowed to measure income based on actual cash receipts and disbursements, not accruals

Administrative convenience: most taxpayers aren't accountants

(Paid preparers about 50% of all returns)

Resulting issue: treatment of "constructive" receipts

Forced by existence of the cash method, to avoid abuse: cash method income treated as received when available, set aside, under Tp control

Mandatory accrual for large corporations and all inventory businesses

Annual accounting

Each year stands on its own: the rate is applied to the income for that year

Interaction w/ progressivity

income smoothing lowers tax: 2 30K's lower than 1 60K

Interaction w/ ability to pay/ legislative grace:

Business losses exceeding income in year 1 are available to offset income in other years

Interaction w/ legislative grace:

 item deducted in year 1 is refunded in year 2. See Sec. 111

Interaction w/ tax engineering:

Deferral of income on retirement savings: Sec. 401 ff

Interaction with aggregate principle:

Current losses in one activity (due to timing) net out against current income in other activities

Led to tax shelters, and complex limits on current availability of capital and of "passive" losses