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III. The $2 Million Fee
Petitioner did not include as income for its taxable year
ended November 30, 1997, a $2 million portion of the $2.5 million
fee from NSI. Petitioner paid the $2 million to CKH, and CKH
reported the $2 million in income for its short taxable year
ended March 31, 1997. The transfer to CKH was to match the
income with $2 million in losses that was already available to
CKH in order to eliminate the incidence of tax on the $2 million
of income earned by petitioner.
A. The Assignment of Income Doctrine
In United States v. Newell, 239 F.3d 917 (7th Cir. 2001),
the Court of Appeals for the Seventh Circuit held that a 50-
percent S corporation shareholder was required to include in
income payments for services rendered by the S corporation, even
though the payments were made to an offshore Bermuda corporation.
In United States v. Newell, supra at 919-920, the Court of
Appeals reviewed various leading cases under the assignment of
income doctrine and explained:
To shift the tax liability, the assignor must
relinquish his control over the activity that generates
the income; the income must be the fruit of the
contract or the property itself, and not of his ongoing
income-producing activity. See Blair v. Commissioner,
300 U.S. 5, * * * (1937); Greene v. United States, 13
F.3d 577, 582-83 (2d Cir. 1994). This means, in the
case of a contract, that in order to shift the tax
liability to the assignee the assignor either must
assign the duty to perform along with the right to be
paid or must have completed performance before he
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