A tax doctrine that applies to cash basis taxpayers who receive compensation for services. It provides that a taxpayer is taxed when the taxpayer receives an "economic benefit" from an absolute right to receive property in the future.

The doctrine provides for the current taxation of economic and financial benefits that are:

The economic benefit doctrine can apply to situations involving employee deferred compensation that is deposited into a trust or escrow account (Sproull v. Comm'r, 16 T.C. 244 (1951), aff'd per curiam, 194 F.2d 541 (6th Cir. 1952)).

A related doctrine is the cash equivalency doctrine. If the promise to pay deferred compensation is unconditional and assignable, the promise has been viewed as the equivalent of cash and is taxable as if received by the employee (see Cowden v. Comm'r, 289 F.2d 20 (5th Cir. 1961)).

To avoid the application of the economic benefit doctrine to amounts deferred under a nonqualified deferred compensation plan, the deferred amounts should be subject to the claims of the employer's general creditors.

Section 409A of the Internal Revenue Code (IRC) sets out a comprehensive set of rules governing nonqualified deferred compensation. However, the Internal Revenue Service has stated that Section 409A does not affect the application of any other provision of the IRC or common law tax doctrine. Therefore, the economic benefit doctrine continues to apply in addition to Section 409A. For more information on Section 409A, see Practice Note, Section 409A: Deferred Compensation Tax Rules: Overview.