Economic Benefit Doctrine

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The economic benefit doctrine is, in essence, a cash method accounting rule and therefore applicable to cash basis taxpayers. In general, when a cash basis taxpayer receives a promise of payment from a customer, this is not a taxable transaction. It becomes taxable when the cash or other form of compensation has been received by the taxpayer. However, under the basic premise of the economic benefit doctrine, the taxpayer is taxed when they receive an “economic benefit” from a right to receive property in the future. A simple example of this would be receiving a check from a customer in late December. Even if the taxpayer does not deposit this check into the bank until January, it should still be included in the taxpayer’s income for the year it was received. The doctrine dictates that the economic benefits should be placed in an irrevocable fund or trust to be used for the taxpayer’s sole benefit, as well as being beyond the reach of the payor’s debtors. The economic benefit doctrine is used primarily in matters involving deferred compensation. It is necessary to establish whether or not compensation earned or payable on a current basis, but deferred until a future period, could be taxed as income. This could include contributions to trust or escrow accounts through an employee deferred compensation program. By placing and deferring compensation into an irrevocable, non-assignable trust that is for the sole benefit of the taxpayer, the taxpayer does not actually or constructively receive anything. As a result, a deferred compensation plan will result in the contribution by the taxpayer being excluded from income, and therefore not subject to tax in that period. The doctrine does not apply if there restrictions or conditions on receiving the funds in the future. This doctrine has also been applied to contest winnings, which must be included in

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