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 actually does attempt to tax. At the beginning of his article, Professor Kahn summarizes the problem he seeks to resolve:"When cash is received for services, it typically will constitute gross income to the recipient. But what if the payments are made in a noncommercial setting such as the payment by a parent to a child for mowing the lawn or performing household chores? As discussed later in this Essay, there are reasons to conclude that such payments do not constitute income. The problem of how to treat receipts from a noncommercial activity frequently arises in the context of an exchange of services. A similar problem arises when services are provided by several persons pursuant to a pooling of labor to accomplish a common noncommercial goal."Professor Kahn then offers two limiting principles, which he posits operate as exclusions, thus eradicating the gap. Specifically, he suggests that the apparent dissonance vanishes if we understand that ―the income tax operates only on commercial transactions‖3 and, as a corollary, that ―joint efforts should not be treated as an exchange of services but rather as a jointly conducted activity,‖4 which does not produce income ―[w]hen the common goal has no business connection.‖5 For Professor Kahn, these two 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. We will refer to these principles collectively as the "commercial/noncommercial distinction" or the "commercial/ noncommercial rule."