The Relationship Between Basis and Deductions from Taxable Income
An important point concerning the fact that adjusted basis is income that has already been subject to tax is that deductions, i.e., reductions in taxable income allowed to the taxpayer because taxpayer spent income in some specified way, are only allowed if taxpayer has a tax basis in them. Section 170 permits a deduction of contributions made to charitable organizations. In point of fact, a charitable deduction only reduces the taxable income in which taxpayer has adjusted basis. This explains why the taxpayer may deduct the costs of transportation to get himself/herself to the place where s/he renders services to a charity, but not the value of his/her services for which the charity pays him/her nothing. Presumably taxpayer incurred the costs of transportation from after-tax income and paid no income tax on the income s/he did not receive.
Another implication of the SHS conception of income is that we might have to follow the money into or out of taxpayer’s store of property rights and/or his expenditures on consumption. If a taxpayer takes money from savings and spends it on instant gratification so that s/he acquires no asset in which s/he has an adjusted basis, intuitively we know that taxpayer does not have any income on which s/he must pay income tax. The SHS definition of income accounts for this by an offsetting decrease to taxpayer’s store of property rights and increase in rights exercised in consumption.