The assignment of income doctrine is a judicial doctrine developed in United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 case law

Case law

In law, case law is the set of reported judicial decisions of selected appellate courts and other courts of first instance which make new interpretations of the law and, therefore, can be cited as precedents in a process known as stare decisis...

 by courts trying to limit tax evasion

Tax evasion

Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...

. The assignment of income doctrine seeks to "preserve the progressive rate structure of the Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States 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

Lucas v. Earl, 281 U.S. 111 , 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. The case addresses the taxpayer's attempt at tax avoidance based on a contract with his wife. The contract...

decision. The Supreme Court held that income from services is taxed to the party who performed the services. 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

Helvering v. Horst

Helvering v. Horst, , is an opinion of the United States Supreme Court which further developed the “fruit-and-tree” metaphor established in Lucas v. Earl,...

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. 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.