The assignment of income doctrine is a
judicial doctrine developed in
United States case law
Case law, also used interchangeably with common law, is law that is based on precedents, that is the judicial decisions from previous cases, rather than law based on constitutions, statutes, or regulations. Case law uses the detailed facts of a l ...
by courts trying to limit
tax evasion. The assignment of income doctrine seeks to "preserve the progressive rate structure of
the Code by prohibiting the splitting of income among taxable entities."
History
The
United States Supreme Court created the assignment of income doctrine in the ''
Lucas v. Earl
''Lucas v. Earl'', 281 U.S. 111 (1930), is a United States Supreme Court case concerning U.S. Federal income taxation, about a man who reported only half of his earnings for years 1920 and 1921. Guy C. Earl and his wife had entered into a contract ...
'' decision. The Supreme Court held that income from services is taxed to the party who performed the services.
[''Lucas v. Earl,'' 281 U.S. at 115.] To elaborate on this principle, the decision used the metaphor that "the fruits cannot be attributed to a different tree from that on which they grew."
The case is used to support the proposition that the substance of the transaction, rather than the form, is controlling for tax purposes.
The doctrine was later expanded in the ''
Helvering v. Horst'' decision to include income from property.
[.] The decision relied on the principle that the power to dispose of income and the enjoyment of property's economic benefits is the equivalent of ownership.
Impact
This doctrine has important implications for taxpayers trying to shift their tax burden to another person. When assigning income to another person (particularly a family member) in the form of a gift, the courts will usually see it as a way to avoid tax and thus consider it “fruit.” Only in an arms-length sale do the courts see the “tree” itself being moved.
[Donaldson, Samuel A., ''Federal Income Taxation of Individuals: Cases, Problems and Materials'' 155 (2d ed. 2007).]
See also
*
Transfer pricing
*
Kiddie tax
References
{{Reflist
United States tax law
Legal doctrines and principles