PUBLISHED ON: May 1, 2003
An escrow arrangement can serve many non-tax purposes; however, an escrow can also be a very handy tax planning tool. To understand the tax advantage of an escrow, some understanding of tax accounting is necessary. Generally, with respect to the timing of inclusion of income for a taxpayer, Treasury Regulation Section 1.451-1 provides that if the liability for the payment to a taxpayer of a specific amount of income is fixed, if the amount thereof can be determined with reasonable accuracy, and if such taxpayer is an accrual method taxpayer, the requirement for income inclusion has been met, regardless of whether the payment has been received. The critical point is that once an accrual method taxpayer has a right to receive income there is no real opportunity to defer taxation. If a taxpayer is a cash method taxpayer, then such person generally includes an item in income when it is actually or constructively received.