Court Rules Assignments of Income to Third Parties are Taxable
Employees must pay tax on income, even if they assigned it elsewhere.

Background. Employees sometimes "assign" part of their income to another person or to a charity thinking that they can avoid paying tax on the assigned amount since they never received it. For example, a guest speaker at a church instructs the church treasurer to deposit his compensation into the church's missions fund. Or, a pastor assigns a Christmas gift from the church to the church's building fund. It is perfectly natural for both the guest speaker and the pastor to assume that the assigned income is not taxable. A recent Tax Court case demonstrates that this is usually an incorrect assumption.

A recent case. A taxpayer (Bill) earned $100,000 that he had deposited in the bank account of a third party. Bill did not report the $100,000 as taxable income on his tax return since he never received it. The IRS audited Bill, and claimed that the $100,000 was taxable income as a result of the "assignment of income" doctrine. In a landmark tax case, the Supreme Court ruled that "the power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it." Lucas v. Earl, 281 U.S. 111 (1930).

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Posted: April 2, 2001
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