Claim of right doctrine
Encyclopedia
In the tax law
of the United States
the claim of right doctrine causes a taxpayer to recognize income
if they receive the income even though they do not have a fixed right to the income. For the income to qualify as being received there must be a receipt of cash or property that ordinarily constitutes income rather than loans or gifts or deposits that are returnable, the taxpayer needs unlimited control on the use or disposition of the funds, and the taxpayer must hold and treat the income as its own. This law is largely created by the courts
, but some aspects have been codified into the Internal Revenue Code
.
decision. This court decision said that a taxpayer's income subject to a contingency that may take away the income but a taxpayer who receives it "without restriction as to its disposition . . . has received income" which the taxpayer "is required to [report]," even though the taxpayer "may still be adjudged liable to restore" it. In other words, A taxpayer must report the receipt of income for the time that she or he has control over it.
If a taxpayer ends up having to return the income recognized under the claim of right doctrine, then the taxpayer may receive a tax credit for that amount according to the Internal Revenue Code.
The courts limited the claim of right doctrine and will not allow the IRS to make the taxpayer recognize income if there are significant restrictions on the taxpayer's disposition of the income.
by claiming that they do not have a right to the income.
Tax law
Tax law is the codified system of laws that describes government levies on economic transactions, commonly called taxes.-Major issues:Primary taxation issues facing the governments world over include;* taxes on income and wealth...
of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
the claim of right doctrine causes a taxpayer to recognize income
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...
if they receive the income even though they do not have a fixed right to the income. For the income to qualify as being received there must be a receipt of cash or property that ordinarily constitutes income rather than loans or gifts or deposits that are returnable, the taxpayer needs unlimited control on the use or disposition of the funds, and the taxpayer must hold and treat the income as its own. This law is largely created by the courts
Case 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...
, but some aspects have been codified into 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...
.
History
The claim of right doctrine, as it dictates whether the "right" to the income subject to a contingency that may take the income away is taxable in the US, originated in the North American Oil Consolidated v. BurnetNorth American Oil Consolidated v. Burnet
North American Oil Consolidated v. Burnet, 286 U.S. 417 , was a landmark decision by the United States Supreme Court that established the claim of right doctrine.-Facts:...
decision. This court decision said that a taxpayer's income subject to a contingency that may take away the income but a taxpayer who receives it "without restriction as to its disposition . . . has received income" which the taxpayer "is required to [report]," even though the taxpayer "may still be adjudged liable to restore" it. In other words, A taxpayer must report the receipt of income for the time that she or he has control over it.
If a taxpayer ends up having to return the income recognized under the claim of right doctrine, then the taxpayer may receive a tax credit for that amount according to the Internal Revenue Code.
The courts limited the claim of right doctrine and will not allow the IRS to make the taxpayer recognize income if there are significant restrictions on the taxpayer's disposition of the income.
Impact
The claim of right doctrine has become a source of abuse attempted by taxpayers seeking to evade paying their income taxTax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
by claiming that they do not have a right to the income.