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Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

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Publication Date

Winter 1991




American Bar Association




A pervasive principle in calculating income for Federal tax purposes defers consideration of gain or loss in an investment asset until a recognition event occurs. An investor can watch the value of an investment in common stock rise over a considerable period of time without incurring any tax liability. Similarly, if the value declines, the investor does not take the loss into account. When the investor terminates the investment, the tax computation takes the net accumulated gain or loss into account at that time.

Discussion and controversy concerning this deferral principle, referred to as the realization or recognition requirement,1 have a long history. Eisner v. Macomber,2 the Supreme Court decision that established the realization principle as a constitutional requirement, generated heated controversy. 3 Many have rejected the constitutional grounding for the requirement but justify its incorporation into the tax law by statute or judicial gloss on policy grounds.4 Some critics, responsive to a more expansive definition of income, prefer an accrual tax system which takes current account of changes in value of investments.5 They rationalize departures from this standard as concessions to two practical concerns, lack of liquidity and difficulty in valuation. Consumption tax advocates, on the other hand, favor far broader deferral for savings and investments.6 Intermediate solutions propose enlargement of deferral for reinvestment of proceeds on certain dispositions in qualified assets, a general rollover scheme. 7

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