Assignment of Income Doctrine
By The assignment of income doctrine was established in Lucas v. Earl, 281 U.S. 111 (1930). It is a judicial doctrine that requires income earned by a taxpayer to be taxed to the taxpayer regardless of to whom it is paid. In Lucas, the taxpayer assigned to another individual his right to receive a payment for services. In Blair, 300 U.S. 5 (1937), the Supreme Court confirmed the doctrine applies to income arising from property as well as service income.
The anticipatory assignment of income doctrine is a longstanding “first principle of income taxation.” Commissioner v. Banks, 543 U.S. 426, 434 (2005) (quoting Commissioner v. Culbertson, 337 U.S. 733, 739–40 (1949)). The doctrine ensures income is taxed “to those who earn or otherwise create the right to receive it,” Helvering v. Horst, 311 U.S. 112, 119 (1940). Tax cannot be avoided “by anticipatory arrangements and contracts however skillfully devised,” Lucas v. Earl at 115.
Often, in the property context, assignment of income involves the transfer of an asset by gift to a family member or a charity. The taxpayer anticipates that by making the transfer on the eve of a sale of the asset, income will be shifted to a family member (who may be taxed at a lower rate), or she will receive a charitable deduction (at no cost to the charity that is exempt from tax). For example, in Estate of Applestein, 80 T.C. 441 (1983), a father was taxed on gain from an exchange of stock where on the eve of closing, he transferred shares to a brokerage account for his children. Although the proceeds were paid to the brokerage account owned by the children, the Tax Court ruled it was the father who truly recognized the income. The key in these cases is whether the gain triggering transaction “was practically certain to be completed despite the remote and hypothetical possibility of abandonment.” Jones v. United States, 531 F.2d 1343, 1346 (6th Cir. 1976).
The assignment of income doctrine can apply in a myriad of circumstances. The key is whether the taxpayer who earned the income (based on services or property) attempts, directly or indirectly, to divert income to another taxpayer. As noted in Applestein, the assignee’s paying some consideration for the asset transferred does not prevent the application of the doctrine. See also Friedman v. Commissioner, 346 F2d 506 (6th Cir. 1965).
John G. Hodnette is an attorney with Fox Rothschild, LLP in Charlotte.