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
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
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
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
http://www.treas.gov/irs/ci/tax_fraud/trusts.htm before they visit
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
Colin M. Cody, CPA, CMA
6004 Main Street
Trumbull, Connecticut 06611-2400