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§ 2.12 PROPERTYthe contract on December 20 of Year 1, but does not receive the cash payment untilJanuary 15 of Year 2, several weeks later.Under the cash method of accounting, the taxpayer in this example recognizesreceipt of the income on January 15, when it is actually received. 37 Underthe accrual method, the taxpayer recognizes the income on December 20, becausethe right to receive the income arose upon the completion of the contract, notwhen the payment was actually received.Assuming a calendar year taxpayer, the method of accounting will affect thetax year in which the $5,000 income in this example is taxed. The income in theexample is allocated to Tax Year 2 under the cash method of accounting, but toTax Year 1 under the accrual method.If a fiscal year beginning November 1 and ending October 31 is assumed, the$5,000 income would fall within the same taxable year under either method ofaccounting.As can be seen from this simple example, timing differences in the taxpayer’sannual accounting period and method of accounting can have significanttax consequences.§2.12 PROPERTYAs noted at the beginning of this chapter, the federal income tax system isdesigned to tax income, not wealth. Again, income is generally viewed as thecurrent receipt or realization of money or property as an economic profit or gain(accession to wealth), while wealth is previously earned and accumulated moneyor property.Income can take a number of forms. It can be in the form of a medium ofexchange, the most common medium being currency. Dollars, francs, pounds,rubles, yen, and the like are each forms of currency used by nations as their economicmedium of exchange. One may receive money (currency) in exchange forgoods or services. Noncurrency mediums of exchange, however, also exist forproviding goods and services in an economy. One may receive property, orlabor, as compensation in exchange for the provision of goods or services. Thesenoncurrency receipts are just as much income or accessions to wealth (economicgain) as are the receipts of currency (money). These forms of nonmonetary ornoncurrency income are barter income and are taxable as income.All property of every kind is either real property or personal property.(a) Real PropertyReal property essentially is land. Real property includes not just the physical land,but things that are naturally or artificially attached or annexed to the physicalland. A tree is a natural attachment to land; a building is an artificial attachment.One major characteristic of real property, as distinguished from other formsof property, is its permanence, its immobile nature. Real property, and things37 Under a rule of law known as the claim-of-right doctrine, however, this income may be taxable in Year 1. 37