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Can a Taxpayer Assign Income to Someone Else?

October 2015

Gross income is taxed to the person who earns it by performing services, or who owns the property that generates the income. Under the assignment of income doctrine, a taxpayer cannot avoid tax liability by assigning a right to income to someone else. The doctrine is invoked, for example, for assignments to creditors, family members, charities, and controlled entities. Thus, the income is taxable to the person who earned it, even if the person assigns the income to another and never personally receives the income. The doctrine can apply to both individuals and corporations.

A taxpayer cannot assign income that has already accrued from the property the taxpayer owns, and cannot avoid liability for tax on that income by assigning it to another person or entity. This result often applies to interest, dividends, rent, royalties, and trust income. The doctrine applies when the taxpayer's right to income has ripened so that the receipt of income is practically certain to occur. Once a right to receive income has ripened, the taxpayer who earned it or otherwise created that right will be taxed on the income.

Similarly, under the anticipatory assignment of income doctrine, a taxpayer cannot shift tax liability by transferring property that is a fixed right to income. However, a taxpayer can assign future income by making an assignment of property for value or a bona fide gift of the underlying property.

The doctrine does not apply if a right to income is sold or exchanged for value. If a gift of income-producing property is made, income earned after the date of the gift is taxed to the donee of the gift. If a taxpayer assigns a claim to income that is contingent or uncertain, the assignee of the right is taxable on income that the assignee collects on the claim. If a taxpayer transfers appreciated property prior to a sale or exchange, the appreciation is income to the person owning the property at the time of the sale or exchange.

For more information on this topic, contact a professional at Grossman St. Amour CPAs PLLC, 315.422.1391 or info@gsacpas.com.

Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.  Tax articles in this site are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. 




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