Taxing the income generated by prepayments for property or services: A legal and time value of money analysis

The general theme of this dissertation might be best described as "taxation and the time value of money", in that it utilizes time value of money principles for the purpose of measuring income and loss for income tax purposes. More particularly, it applies these principles for the purpose of measuring the income positions of taxpayers engaging in prepayment transactions, and illustrates the effect of the deferral of the recognition of income or the acceleration of the deduction of loss in these transactions. The specific subject matter of this analysis is further sub-divided into the categories of conventional prepayments for property or services and prepaid reclamation obligations.; In regards to conventional prepayments for property or services, it is suggested that a "notional loan approach" should apply to the payer of a prepayment. Under this approach, the payer would include in its income imputed interest computed on the amount of prepayment, similar to the current treatment accorded to holders of original issue discount debt obligations. In contrast, under current law, payers are not subject to taxation in this manner and are generally under-taxed. With respect to recipients of prepayments, it is suggested that the treatment under current law---under which a recipient may defer the recognition of all or part of the prepayment to the time of performance---may be warranted as a second best measure of the recipient's income position. In regards to prepaid reclamation obligations, it is suggested that a "reverse depreciation approach" should apply to taxpayers making these payments, at least to the extent that the reclamation costs reflect negative salvage vale. Under this approach, taxpayers obliged to incur reclamation costs would be allowed to deduct their prepayments (the amounts invested currently to fund the payment of the costs) as they were made and to earn tax-exempt income thereon up to the time of reclamation. However, the reverse depreciation approach is not generally warranted for reclamation costs that reflect positive salvage value.