Legal Definitions - assignment-of-income doctrine

The assignment-of-income doctrine is a fundamental principle in tax law that establishes who is responsible for paying taxes on income. It states that the individual who *earns* income, or who owns the property that generates the income, is the one responsible for paying taxes on it, regardless of whether they direct that income to be paid to someone else.

Essentially, you cannot avoid your tax obligations by simply assigning your future earnings or income from your personal efforts or property to another person or entity. The law looks to who generated the income, not just who physically received it.

• Example 1: Professional Services

  A highly skilled freelance graphic designer completes a large project for a client. Before receiving payment, the designer instructs the client to send the entire $8,000 fee directly to their elderly parent to help with living expenses.

  How it illustrates the doctrine: Under the assignment-of-income doctrine, the graphic designer would still be responsible for paying income tax on the full $8,000. Even though the money went directly to their parent, the designer was the one who performed the services and earned the income. The law prevents them from shifting the tax burden by merely directing where the payment goes.

• Example 2: Rental Income

  A property owner rents out a vacation home. For the upcoming summer season, they instruct their renters to make all monthly rent payments directly to a local animal shelter, rather than to themselves.

  How it illustrates the doctrine: The property owner, as the landlord, is the one generating the rental income from their property. Therefore, according to the assignment-of-income doctrine, they would still be taxed on the total rent received, even though the payments were sent directly to the animal shelter. While donating to charity can offer tax deductions, simply assigning the income itself doesn't remove the initial tax liability from the person who earned it.

• Example 3: Business Commissions

  A top-performing salesperson earns a significant commission on a major sale. Wishing to share their success, they instruct their employer to pay 30% of that commission directly to their business partner as a gesture of appreciation.

  How it illustrates the doctrine: The salesperson is the individual who performed the work and generated the commission. The assignment-of-income doctrine dictates that the salesperson would still be taxed on 100% of the commission earned, including the 30% directed to their business partner. The salesperson cannot avoid tax on income earned from their efforts by simply assigning the right to receive a portion of those future earnings to someone else.