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Court has referred to this assignment of income rule as “the
first principle of income taxation”, Commissioner v. Culbertson,
337 U.S. 733, 739 (1949), and as “a cornerstone of our graduated
income tax system”, United States v. Basye, 410 U.S. 441, 450
(1973). Attempts to subvert this principle by deflecting income
away from its true earner to another entity by means of
contractual arrangements, however cleverly drafted, are not
recognized as dispositive for Federal income tax purposes,
notwithstanding their validity under State law. See Vercio v.
Commissioner, 73 T.C. 1246, 1253 (1980) (citing United States v.
Basye, supra, and Lucas v. Earl, supra).
The assignment of income rule applies with particular force
to personal service income. In the landmark case of Lucas v.
Earl, supra, Mr. Earl and his wife entered into a contract
providing that any property acquired by either of them, including
salary and fees, would be considered joint property. The Supreme
Court assumed that the contract was valid under State law, but
held that Mr. Earl was still taxable on his entire salary and
professional fees, stating:
this case is not to be decided by attenuated
subtleties. It turns on the import and reasonable
construction of the taxing act. There is no doubt that
the statute could tax salaries to those who earned them
and provide that tax could not be escaped by
anticipatory arrangements and contracts however
skillfully devised to prevent the salary when paid from
vesting even for a second in the man who earned it.
* * * [Lucas v. Earl, supra at 114-115.]
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