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  Copyright© 2006 Colin M. Cody, CPA and, LLC, All Rights Reserved.


Please note: "Nominee" "Alter-Ego" "Reverse Alter-Ego" "Agents" "Agency" "Straw Man" "Dead Cat" "Assignment of Income" "Off-shore Trusts" "Asset Protection" "Series LLCs" "Xtreme LLCs" "Nevada Corporations" "Unity of Interest" "Instrumentality Rule" "Identity Rule" and many other entities and schemes have been found to have been used for improper or illegal purposes.  Nothing on this website is to be used or to be considered as promoting anything other than proper, legal tax planning with advisory from your own qualified lawyer. 

Do not read further if you are seeking illegal federal income tax avoidance strategies or other inappropriate or illegal activities, as you will not find anything here to be of interest to you.

Strictly speaking assignment of income derived from your personal services to a trust (for example) is not allowable for federal income tax purposes.  For amount in excess of $12,000 per year a taxable gift might even be the result increasing total taxes even more than if no money was placed in the irrevocable trust.

Theories of Prosecution
In determining the validity of trust arrangements, courts look at a taxpayer's control over his/her assets and sources of income. Courts have routinely invalidated abusive trust arrangements and found the income taxable to the individual taxpayer, and not the trust by using one or more of the following legal theories: lack of economic substance (sham theory), unlawful assignment of income or the grantor trust rules.

Unlawful Assignment of Income
Another possible legal theory involves the assignment of income doctrine. It is a long-standing principle that gross income includes all income from whatever source derived. I.R.C. § 61(a).This includes compensation an individual receives for services. Fundamental to this principle is that income is taxable to the person who earned it. Commissioner v. Culbertson, 337 U.S. 733,739-40 (1940). The person who earns the income cannot deflect the tax on it by attempting to assign or transfer the income to another person or entity. Lucas v. Earl, 281 U.S. 111, 114-15(1930). The test of taxability is not who is the ultimate recipient of the income, but rather, who controlled the earning of the income.  American Savings Bank v. Commissioner, 56 T.C. 828,839 (1971).Courts routinely invalidate trust arrangements that are designed to allow a taxpayer to unlawfully assign income which he/she earns from personal services. See Vnuk v.Commissioner, 621 F.2d 1318, 1321 (8th Cir. 1980) (medical doctor cannot assign income to trust when trust did not supervise doctor's employment, did not determine doctor's compensation, and doctor was under no legal duty to earn money for or perform services for trust); Holman v. United States, 728 F.2d 462 (10th Cir. 1984) (same); United States v. Russell,804 F.2d 571 (9th Cir. 1986)("personal services contract" through which taxpayers attempt to sell life services to a trust was an unlawful anticipatory assignment of income); United States v. Krall, 835 F.2d 711 (8th Cir. 1987)(optometrist unlawfully attempted to assign business receipts to foreign trusts); Estrada v. Commissioner, T.C. Memo. 1997-180 (nurse anesthetist who administered anesthesia and received compensation for services cannot assign such income to trust), aff'd, 156 F.3d 1236 (9th Cir. 1998); and Leonard v. Commissioner, T.C. Memo. 1998-290 (taxpayer, who earned income as firefighter, welder and contractor, unlawfully assigned into to trust).

Whose income is it?
The answer is not always obvious. You can't simply assign income you earn to a trust or other entity. The judicially-created assignment of income doctrine applies in determining which taxpayer must include an item of income. Under the doctrine, income from personal services (e.g., wages) must be included in the gross income of the person who rendered the services. For example, you're a licensed plumber and you have a corporation that is licensed to do plumbing in your county. If you contract personally to do a job for a customer, but have him cut the check to your corporation, the income still belongs to you personally. Only if the corporation contracts to do the job is the income taxable to the corporation. Similarly, income from property (e.g., rents) must be included in the gross income of the person who owns the property. And ownership of property isn't dependent solely on in whose name title exists. The IRS and courts can look to who exercises control over the property.

 Assignments for Valid and Adequate Consideration
Where income-producing property, such as an interest in a claim, is transferred in an arm's length transaction for valid consideration, the assignment of income doctrine should not apply, and the income from the property (e.g., the proceeds from the litigation or settlement of the claim) should be taxed to the transferee when ultimately received; income to the transferor is measured by the amount realized in the transfer (consideration received for the transfer of the claim).

CCA 200335034 (Damages received in a settlement are taxable income to the entity that acquired the right to receive the damages in an arm's length transfer for adequate consideration, even if the entity was formed after the claim for damages arose; transferor is taxable upon the assignment of the right to receive the damages); see Cotlow v. Comr., 228 F.2d 186 (2d Cir. 1955); Schulze v. Comr., T.C. Memo 1983-263.
Offshore Trusts and Accounts Must Be Reported - IRS Implications
If any offshore trust or account is created for you then you MUST report it. Most of the companies that promote offshore accounts stress the strict privacy of the accounts, and the anonymity the account holders enjoy.

Promoters particularly like to stress the fact that offshore banks are free from the reporting requirements of the IRS. If you are a US citizen, however, YOU must report to the IRS every offshore trust to which you have any connection, and every offshore account over which you exert substantial control.

Should someone inform you that you do not have to report such an entity to the IRS, be wary that you are about to become a victim of offshore fraud.

The IRS has recently started to crackdown on unreported offshore trusts, and has issued numerous warnings about these. The following is a warning from the IRS Criminal Investigative Division (CID) - visit them at before they visit you!

Glossary of Offshore Terms

Assignment of Income should not be confused with assets titled to a "straw man" or to a "nominee" which is done legitimately in everyday business transactions.

 A Traders Tax Responsibilities

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