The assignment of income doctrine basically is defined as income that is taxed to the individual who earned it, even if the right to the income has been transferred to another individual prior to recognition. This means that compensation, interest, rents, dividends, and other forms of income usually must be included in the gross income of the recipient even if the income was transferred to another individual.
Assignment of Income Doctrine
A tax problem arises when an individual attempts to limit tax liability by assigning income. For example, a taxpayer has the employer forward a portion of the salary to one of the taxpayer’s creditors instead of to the taxpayer. The taxpayer would have to recognize this as income up to the amount the taxpayer received in benefit from the proceeds and had control of the income.
The Supreme Court has ruled:
“Income is realized by the assignor because he, who owns or controls the source of income, also controls the disposition of that which he could have received himself and diverts the payment from himself to others as the means of procuring the satisfaction of his wants. The taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income to procure those satisfactions, or whether he disposes of his right to collect it as the means of procuring them.”
In the past, the courts have felt that a person should not be allowed to reduce their tax liability by the voluntary assignment of income. This is referred to as the “fruit of the tree” doctrine. Income is taxable to the individual who earns the income. Thus, assignment of income will be disregarded, for tax purposes, unless the source of the income is also assigned.
Income in Another’s Possession
If a person only has physical possession over the income of another person, he or she has no tax liability. Regardless of whether or not the person received it as an agent or creditor, it is taxed to the owner of the property. The rules which govern the assignment of income apply both to income from property, as well as to income from services.