Understanding the Assignment of Income Doctrine – With a Focus on the Anticipatory Assignment of Income
By Cody Heimerdinger
The assignment of income doctrine is a long-standing principle of U.S. tax law designed to ensure that taxpayers cannot avoid tax by redirecting income that they have already earned, or are on the brink of earning, to someone else. In essence, the doctrine holds that income is taxed to the person who earns it, regardless of how it may be assigned or transferred afterward.
The Core Rule
The Supreme Court first articulated the rule in Lucas v. Earl (1930), holding that a husband who attempted to split his salary with his wife by contract could not escape being taxed on the full amount. The rationale is straightforward: income is taxed to the individual who controls its earning, not to whom it is later assigned.Anticipatory Assignment of Income
- Helvering v. Horst (1940): A father detached interest coupons from bonds and gave them to his son. The Court held the father taxable because he had the power to dispose of the income.
- Palmer v. Commissioner (1974), later adopted in Rev. Rul. 78-197: A donor can avoid tax if a valid gift is made before a binding sale is in place. The charity, as the new owner, then bears the tax consequences of any subsequent sale.
- Ferguson v. Commissioner (1999): Taxpayers gifted stock after a merger was already effectively locked in. The Ninth Circuit applied the anticipatory assignment doctrine, holding that the gain had already ripened and thus was taxable to the donors.
Practical Takeaways
- Timing is critical. A transfer made before there is a legally binding sale or an inevitable income event can be effective for tax purposes. Once the income right is fixed, it is too late.
- Substance over form. Courts look beyond paperwork to the economic reality, whether the transferor truly gave up control and whether the transferee bore real risk of ownership.
- Charitable gifts. When structured properly, contributions of appreciated property to charity before a binding sale can be respected. If the sale is already inevitable, the donor remains taxable on the gain.
- Penalty risk. Missteps can lead not only to additional tax but also to accuracy-related penalties, particularly where the IRS views the transaction as a willful attempt to avoid gain recognition.
Conclusion
The assignment of income doctrine — and its anticipatory branch, reinforces the principle that income follows ownership and control at the time it is earned. Taxpayers and advisors should carefully consider the timing and substance of transfers of appreciated property, particularly in the context of planned sales, to ensure that the tax consequences align with their intended objectives.