Assignment of Income: Why You Can't Give Away Your Earnings
The doctrine that taxes income to the person who earns it or owns the property that produces it, the arrangements it defeats, and the ones that legitimately shift income.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The assignment of income doctrine says income is taxed to the person who earns it or owns the property that produces it. You cannot shift tax on your services by directing a client to pay your spouse, child, or trust. Income from property can be shifted only by transferring the property itself before the income is earned.
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What does the doctrine cover?
| Attempt | Result |
|---|---|
| Contract making your future salary and fees jointly owned with your spouse (the facts of Lucas v. Earl, decided March 17, 1930) | Taxed to you |
| Instructing a client to pay your child for your consulting work | Taxed to you; the payment to the child may be a gift |
| Clipping bond coupons and giving them to a child before they are paid | Interest taxed to you |
| Giving the bond itself to the child | Future interest taxed to the child |
| Having your corporation bill for services you personally control and perform | Taxed to the corporation if it is a genuine employer with a real contract; taxed to you if the corporation is a conduit |
| Donating appreciated stock to charity before a sale | Gain avoided, if the sale was not already locked in |
| Donating stock after agreeing to sell it | Gain taxed to you |
The image courts use is the fruit and the tree: you can give away the tree (the property), but not the fruit (the income) while keeping the tree.
How does it affect business owners?
- Family payroll. Wages to a spouse or child are deductible only for work actually performed at a reasonable rate; paying a child for your work is an assignment.
- Personal service corporations. Income from an athlete's, performer's, or professional's services belongs to the corporation only if the corporation controls the work — an employment agreement between the individual and the corporation, and the corporation contracting with the client — rather than the individual contracting personally and routing payment.
- Trusts and gifts of business interests. Giving a share of a business transfers its income only if the gift is of a real ownership interest, with the recipient entitled to the profits and not just a nominal holder; for a gifted partnership interest, Section 704(e) first allows reasonable compensation for the donor's services, and the donee's share from donated capital cannot be proportionately larger than the donor's.
- Pre-sale gifts. Gifting shares of a business to children or charity shifts the gain only if done before the sale is a practical certainty.
What legitimately shifts income?
Transferring income-producing property outright; employing family members for real work; forming an entity that contracts with clients, employs the owner, and bears the risk; and allocating partnership profit under agreements with economic substance. The common thread is that the recipient must own the source or perform the service.
Frequently asked questions
Can my corporation receive income for work I do?
Yes, when the corporation is the contracting party, has the right to control your work, and employs you; this is the normal arrangement for professional corporations.
Can I split my freelance income with my spouse on a joint return?
A joint return already combines income; the doctrine matters for separate returns, self-employment tax, and retirement contributions, which follow the spouse who actually earned the income.
Is a loan to my child so they can earn interest an assignment?
A genuine loan is not; interest the child earns on the borrowed funds is the child's, subject to the kiddie tax — but if you charge little or no interest, the below-market loan rules of Section 7872 can impute interest income to you.
Does the doctrine apply to income from a partnership interest I give away?
A gift of a capital interest in a partnership where capital matters shifts the income from that interest, after a reasonable allocation of compensation to the donor's services and provided the donee's share from donated capital is not proportionately larger than the donor's.
Official sources
The Supreme Court held: “That seems to us the import of the statute before us, and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.” — Supreme Court of the United States, Lucas v. Earl, 281 U.S. 111 (1930), https://supreme.justia.com/cases/federal/us/281/111/
The IRS explains: “If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee’s distributive share of partnership income is subject to both of the following restrictions.” — Internal Revenue Service, Publication 541 (12/2025), Partnerships, https://www.irs.gov/publications/p541
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Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk structures family and entity arrangements so the income follows the person who actually earns or owns it. See pricing or book a free fit call.
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