ACC 616
Prof. Robert Simpson
Student name: On the back

Assignment 1: Explain Assignment of Income Doctrine

The "assignment of income" doctrine states that income is taxed to the one who actually earns it. That means a taxpayer cannot avoid tax liability by assigning his income to another party or entity. Therefore, to be able to shift income to someone else, that one must actually earn the income. This doctrine aims to against the tax evasion when the taxpayer tries to deflect income to another party.
First, starting from the term “earning”, earnings can occur either through the direct efforts of the taxpayer or the taxpayer’s ownership of an asset that generates income. Based on that understanding about earning, there are 2 ways to shifting income from one to another: the transferee must really work to earn that income or share the ownership of an asset that creates income. For example, if you are an owner of a business and you want to shift one part of your income to your family member such as your son, you need to hire your son to work for your company and give him the pay rate that is appropriate with his job. And the other way is to share your investment income with him, same meaning with sharing your ownership with him. The assignment of income applies the “tree and fruit” metaphor, in which the fruits cannot be attributed to a different tree from that on which they grew. If you want to avoid the tax liability on the fruit from the tree, you must prove that the tree belongs to someone else. In other words, the one owns the tree and the one has income have to be the same.

Defense: the idea of assignment income doctrine sometimes is not clear and hard to apply. In some cases, it is not easy to determine who creates the income and has tax liability, and the “tree and fruit” analogy also will not apply perfectly for all the cases. For example, at the time the owner transfers the tree and the fruit to other parties, the fruit is sufficiently ripened. In this case the assignee has already owned the tree, but the income from ripened fruit would be attributed to the assignor. Because of the timing issue, the taxpayer and the owner of asset are not necessary the same. Also, in the context of divorce, it is difficult to divide whose income it is and who has to pay the tax on it.