It’s Not a Rule: A Better Way to Understand the Definition of Income

Abstract

In a recent article Professor Douglas Kahn explores a particular dissonance between the positive and very broad definition of income that includes all realized accessions to wealth, and what the government can and does actually attempt to tax. He then offers two limiting principles, which he posits operate as exclusions and thus eradicate the gap. Specifically, Professor Kahn suggests that the dissonance vanishes if we understand that “the income tax operates only on commercial transactions” and, as a corollary, that “joint efforts should not be treated as exchanges of services but rather as a jointly conducted activity,” which does not produce income “[w]hen the common goal has no business connection.” Professor Kahn derives these principles by examining a series of provocative hypothetical problems and suggests that these principles explain why a number of items that would seem to come within the broad positive definition of income are not in fact subject to tax despite the absence of a statutory exclusion.

In Defining Income, an article we recently published, we argued that the desire for theoretical precision that prompts articles such as Professor Kahn’s has led to a long tradition of interpreting the definition of income as a rule. We proposed as an alternative that the definition of income be thought of as a standard — specifically, that questions about whether a particular accession to wealth constitutes income be answered by employing an all-things-considered inquiry based on the values relevant to federal income tax. Our claim was that treating income as a standard effectively addresses the puzzling gap between what the broad positive definition of income would seem to include and what is actually taxed.

The commercial/noncommercial distinction that shapes Professor Kahn’s proposed principles functions as a rule. In this Essay we propose a thought experiment: What if we were to think about the problems Professor Kahn poses from the perspective of income-as-standard? Doing so would allow us to explore the utility of such an approach concretely. We therefore consider the precise issues Professor Kahn discusses, but use an income-as-standard approach. Having contrasted the two approaches, we return to the conclusion we reached in Defining Income: standards have important virtues that make them superior to rules for resolving some fundamental questions in federal income tax law. Contemporary tax analysis often assumes that all tax formulations are rules; we believe we have shown that while many are, income is not.

Keywords: tax, income, Glenshaw Glass, administrability, definition, public law, private law, rules, standards, barter, Douglas Kahn, non-commercial

JEL Classification: K19, K29, K34, K49