Assignment of Income Doctrine Is Actually Part of the Internal Revenue Code and Law

Assignment of Income Doctrine is actually part of the Internal Revenue Code and law. It is a long-standing principle that gross income includes all income from whatever source derived. I.R.C. § 61(a). This includes compensation an individual receives for services.

“Income is taxable to the person who earned it. Commissioner v. Culbertson, 337 U.S. 733,739-40 (1940). The person who earns the income cannot deflect the tax on it by attempting to assign or transfer the income to another person or entity. Lucas v. Earl, 281 U.S. 111, 114-15(1930). The test of taxability is not who is the ultimate recipient of the income, but rather, who controlled the earning of the income. American Savings Bank v. Commissioner, 56 T.C. 828,839 (1971).” It appears this happens most often when people set up unrevocable trusts to put the money earned from services into assuming they would not responsibility for income taxes ion it when it is put into the fund. (SOURCE: Traderstatus.com. Assignment of Income. http://www.traderstatus.com/ assignmentofincome.htm. Updated 2006. Accessed 11/17/09.)

Fruit of the tree doctrine has been determined by the Supreme Court. “In its 1930 opinion Lucas v. Earl [8 AFTR 10287 (50 S.Ct. 241), 3/17/1930], the Supreme Court addressed directly the issue of taxability of earnings where a contract between husband and wife stipulated that any property would be acquired as joint tenants. The Court decided the proper reasoning should be in accordance with tax statutes. Contractual arrangements and anticipatory arrangements could not prevent earned income from vesting in the person that earned it, at least momentarily. The Court provided this anticipatory assignment of income doctrine with its sobriquet stating that “no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.” SOURCE: The CPA Journal. Contingent Attorneys’ Fees: The Income Tax Dilemma. http://www.nysscpa.org/cpajournal/ 2005/405/essentials/p42.htm. Accessed 11/17/09.) Putting it in simpler terms, if you will experience the benefits of the transaction, you will owe taxes on it.

If neither of these existed you would be able to put money into a trust for your children, have your pay deposited to it, withdraw the money you need to handle whatever comes up, but since it would be in your children’s names you would have no income at death that could be taxed, and indeed, no income, even though you earned a paycheck, while you were alive that could be taxed. Or without a trust, you could take your pay and purchase bonds that you would then give to your children. If they are not worth any money until cashed, they would divert all your income to the children and avoid taxes on the money while you are alive.