Realization (tax)
Encyclopedia
Realization is a requirement in determining what must be included as income subject to taxation. It should not be confused with the separate concept of Recognition (tax)
.
in the United States can be a tricky undertaking. The Tax ladder
is a useful formula for calculating a taxpayer’s tax liability, with gross income at the top of the ladder. What is gross income? The Internal Revenue Code
gives a somewhat unhelpful definition of income in §61 as “all income from whatever source derived,” and includes an un-exhaustive list of 15 items that should be included in gross income.
Although the most common definition of income in economic theory is the Haig-Simons income calculation of consumption plus savings, practical limitations forced courts to find some kind of more suitable definition of income.
Eisner v. Macomber
held that income includes gain derived from capital, labor, or both. However, it is the US Supreme court case of Commissioner v. Glenshaw Glass Co.
which gives the most preferred test for determining what is income: gross income is an undeniable accession to wealth, clearly realized, over which the taxpayer has complete dominion.
that exists about this question. For example, Cesarini v. United States
held that a couple who found money in an old piano "realized" that money as income when they found it. It is also not entirely clear whether realization means a taxpayer must realize the actual item in question (e.g., money in a piano), or realize the value of the item (e.g., buying something and later discovering it is worth a lot more than was originally paid: the taxpayer has an income inclusion when the property is sold or exchanged, and the gain is realized).
An example of a tricky realization situation without answers- but which has given rise to substantial debate among tax professors - is the 62nd home run ball hit by Mark McGwire
. It was retrieved by a grounds crewman, Tim Forneris. Forneris gave McGwire the ball immediately after the game, amidst speculation that the ball could fetch at least $1 million in an auction. Do either McGwire or Forneris have gross income? Did Forneris realize income when he caught the ball? Tax professor Allison Christians argues it could be income to Forneris when he caught it, similar to the Treasure trove
type of theory used in Cesarini. On the other hand, the treasury trove found in Cesarini was currency. Had the treasure trove been Babe Ruth's last home run ball, there would only income as a capital gain only when it was sold.
Recognition (tax)
In United States tax law recognition is among a series of prerequisites to the manifestation of gains and losses used by the Internal Revenue Service for determining federal income tax liability. First in the series for manifesting gain and loss a taxpayer must "realize" gain and loss...
.
Defining Income
Determining what is subject to Income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
in the United States can be a tricky undertaking. The Tax ladder
Tax ladder
Tax ladder is a term sometimes used to refer to the formula for calculating a taxpayer's tax liability in a given year for United States federal personal income tax purposes...
is a useful formula for calculating a taxpayer’s tax liability, with gross income at the top of the ladder. What is gross income? The Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
gives a somewhat unhelpful definition of income in §61 as “all income from whatever source derived,” and includes an un-exhaustive list of 15 items that should be included in gross income.
Although the most common definition of income in economic theory is the Haig-Simons income calculation of consumption plus savings, practical limitations forced courts to find some kind of more suitable definition of income.
Eisner v. Macomber
Eisner v. Macomber
Eisner v. Macomber, , was a tax case before the United States Supreme Court. It is notable for the following holdings:*a pro rata stock dividend, where a shareholder received no actual cash or other property, and retained the same proportionate share of ownership of the corporation as was held...
held that income includes gain derived from capital, labor, or both. However, it is the US Supreme court case of Commissioner v. Glenshaw Glass Co.
Commissioner v. Glenshaw Glass Co.
Commissioner v. Glenshaw Glass Co., , was an important income tax case before the United States Supreme Court. The Court held as follows:...
which gives the most preferred test for determining what is income: gross income is an undeniable accession to wealth, clearly realized, over which the taxpayer has complete dominion.
Problems in line-drawing
Figuring out what this realization requirement actually requires is also a tricky undertaking, and unfortunately no clear answers emerge from the swamp of Case lawCase law
In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...
that exists about this question. For example, Cesarini v. United States
Cesarini v. United States
Cesarini v. United States, 296 F.Supp. 3 , is a historic case decided by the U.S. District Court for the Northern District of Ohio, where the court ruled that treasure trove property is included in gross income for the tax year when it was discovered...
held that a couple who found money in an old piano "realized" that money as income when they found it. It is also not entirely clear whether realization means a taxpayer must realize the actual item in question (e.g., money in a piano), or realize the value of the item (e.g., buying something and later discovering it is worth a lot more than was originally paid: the taxpayer has an income inclusion when the property is sold or exchanged, and the gain is realized).
An example of a tricky realization situation without answers- but which has given rise to substantial debate among tax professors - is the 62nd home run ball hit by Mark McGwire
Mark McGwire
Mark David McGwire , nicknamed "Big Mac", is an American former professional baseball player who played his major league career with the Oakland Athletics and the St. Louis Cardinals. He is currently the hitting coach for the St...
. It was retrieved by a grounds crewman, Tim Forneris. Forneris gave McGwire the ball immediately after the game, amidst speculation that the ball could fetch at least $1 million in an auction. Do either McGwire or Forneris have gross income? Did Forneris realize income when he caught the ball? Tax professor Allison Christians argues it could be income to Forneris when he caught it, similar to the Treasure trove
Treasure trove
A treasure trove may broadly be defined as an amount of money or coin, gold, silver, plate, or bullion found hidden underground or in places such as cellars or attics, where the treasure seems old enough for it to be presumed that the true owner is dead and the heirs undiscoverable...
type of theory used in Cesarini. On the other hand, the treasury trove found in Cesarini was currency. Had the treasure trove been Babe Ruth's last home run ball, there would only income as a capital gain only when it was sold.