Case Study

TAX 6025 Concepts of Federal Income

Tax

Lesson 3 Assignment of Income

Instructor: Alexander Martini

Disclaimer

• The views expressed during this course are those of the instructor in his personal capacity and do not represent those of the IRS Office of Chief Counsel or the Internal Revenue Service.

• Section 61(a): “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:”

• Compensation for services, Gross income derived from business; Gains derived from dealings in property; Interest; Rents; Royalties; Dividends; Annuities; Income from life insurance and endowment contracts; Pensions; Income from discharge of indebtedness; Distributive share of partnership gross income; Income from an interest in an estate or trust

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Whose Gross Income?

Why Assign Income?

Reasons to shift income away • Higher to lower tax rate • Phase-in of additional income or taxes • Phase-out of tax benefits

Reasons to shift income in • Lower tax rate • No tax impact • Phase-in of tax benefits

• Lucas v. Earl, 281 U.S. 111 (1930)

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Income from Services

Commissioner v. Giannini, 129 F.2d 638 (9th Cir. 1942)

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Income from Services

Services as an Agent/Employee

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• Revenue Ruling 74-581 (law school) • Rev. Rul. 65–282 (legal aid society) • Rev. Rul. 58–220 (hospital) • Rev. Rul. 58-515 (police department) • Rev. Rul. 69–274 (medical school)

• Helvering v. Horst, 311 U.S. 112 (1940)

• Blair v. Commissioner, 300 U.S. 5 (1937)

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Income from Property

• Helvering v. Horst, 311 U.S. 112 (1940)

• Blair v. Commissioner, 300 U.S. 5 (1937)

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Income from Property

Section 451(a): “The amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer.” Treas. Reg. §1.451-1(a): “Gains, profits, and income are to be included in gross income for the taxable year in which they are actually or constructively received by the taxpayer.” Treas. Reg. §1.451-2(a): “Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time.”10

Timing Issues in Assignments of Income

Estate of Stranahan v. Commissioner, 472 F.2d 867 (6th Cir. 1973)

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Timing Issues in Assignments of Income

Assignment of Income & Substance Over Form

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Salvatore v. Commissioner, 29 T.C.M. (CCH) 89; T.C. Memo. 1970-30

1.Executive has a salaried position with Hi Rolling Corporation under which she earns $80,000 each calendar year. (a)Who is taxed if Executive, at the beginning of the year, directs that $20,000

of her salary be paid to her aged parents? (b)Who is taxed if Executive at the beginning of the year directs that $20,000 of

her salary be paid to any charity the Board of Directors of Hi Rolling selects? (Executive is not a member of the Board.)

(c)Same as (b), above, except that Executive makes the same request with respect to a $10,000 year-end bonus which Corporation has announced toward the end of the year, based on services rendered during the year?

(d)Who is taxed if Executive, in her corporate role, gives a series of lectures on corporate finance at a local business school and, pursuant to her contract with Hi Rolling, turns her $1,000 honorarium over to Corporation?

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Problems pg. 242

1.Father owns land which he purchased several years ago for $80,000. It has a current fair market value of $90,000. Father leases the land on a ten-year lease and is paid $6,000 of rent each year, semi-annually April 1st and October 1st (i.e., $3,000 each payment), for the prior six months use of the land. What tax consequences to Father and Daughter in the following alternative situations? • (a) On April 2 of the current year, Father assigns Daughter all the future rental

payments. • (b) On April 2, Father gives Daughter the land with the right to all the future

rental payments. • (c) On April 2, Father gives Daughter a one-half interest in the land and the right

to all the future rental payments. 14

Problems pg. 262

1.Father owns land which he purchased several years ago for $80,000. It has a current fair market value of $90,000. Father leases the land on a ten-year lease and is paid $6,000 of rent each year, semi-annually April 1st and October 1st (i.e., $3,000 each payment), for the prior six months use of the land. What tax consequences to Father and Daughter in the following alternative situations? • (f) On April 2, Father sells Daughter the right to the two succeeding rental

payments for $5,000, their fair market value as of the time of sale. • (g) On April 2, Father sells the land and directs that the $90,000 sale price be

paid to Daughter. • (h) Prior to April 2, Father negotiates the above sale and on April 2 he transfers

the land to Daughter who transfers the land to Buyer who pays Daughter the $90,000. 15

Problems pg. 262

• 2.Determine who is taxed on the lottery winnings below if: • (a)Lucky purchases a lottery ticket and gives it to Child prior to

the lottery winner being announced. The ticket is the winning lottery ticket.

• (b)Same as (a), above, except that Lucky’s gift occurs after the lottery winner is announced.

• (c)Lucky wins the lottery, but properly elects (see § 451(j)) to be taxed on the lottery winnings in the form of an annuity each year for 20 years. After 2 years of annuity payments, Lucky gives the remaining 18 years of payments to Child.16

Problems pg. 262