SCOTUS Reports

Tag: Anticipatory Assignment

  • Estate of Applestein v. Commissioner, 80 T.C. 331 (1983): Taxation on Anticipatory Assignments of Income and Control over Assets

    Estate of Margita Applestein, Deceased, Louis Applestein, Administrator, and Louis Applestein, Surviving Husband, Petitioners v. Commissioner of Internal Revenue, Respondent, 80 T. C. 331 (1983)

    An individual is taxable on income from an asset if they retain control over it and its proceeds, even if nominally transferred to another party.

    Summary

    Louis Applestein, an experienced stock trader, transferred National Realty stock to his children’s accounts just before a merger and engaged in extensive trading using these accounts. The Tax Court ruled that the gains from the merger and subsequent trades were taxable to Applestein because he retained control over the assets and their proceeds. The court applied the assignment of income doctrine, holding that the transfers were anticipatory assignments of income and that Applestein never relinquished the benefits and burdens of ownership over the securities.

    Facts

    Louis Applestein, a retired IRS manager and experienced stock trader, learned of a proposed merger between National Realty Corp. and United National Corp. in late December 1972. He bought additional shares of National Realty and transferred them to his minor children’s custodial accounts just before the merger’s effective date. Applestein also conducted extensive stock trading in these accounts, using funds from his and his relatives’ accounts, treating these as loans to his children. The children reported the income from these transactions on their tax returns.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Applestein’s 1973 federal income tax. Applestein petitioned the U. S. Tax Court, which ruled in favor of the Commissioner, holding that Applestein was taxable on the gains from the merger and the subsequent stock trading.

    Issue(s)

    1. Whether Louis Applestein is taxable on the gain from the exchange of National Realty stock transferred to his children after the merger was approved but before its effective date?
    2. Whether Louis Applestein is taxable on income derived from securities trading in accounts set up for his children?

    Holding

    1. Yes, because the transfer of the stock constituted an anticipatory assignment of income, as the merger was virtually certain to occur after shareholder approval, and Applestein retained control over the stock until the merger’s effective date.
    2. Yes, because Applestein never relinquished the benefits and burdens of ownership over the securities, treating the accounts as his own and controlling the use of proceeds.

    Court’s Reasoning

    The court applied the assignment of income doctrine, emphasizing that the substance of the transaction, not its form, determines tax liability. For the National Realty stock, the court found that the merger was virtually certain to occur after shareholder approval on February 7, 1973, making the stock merely a vehicle for the merger proceeds. The transfer to the children’s accounts shortly before the merger’s effective date was an anticipatory assignment of income. Regarding the stock trading, the court noted that Applestein retained control over the accounts, using his funds and discretion in trading, and treated the proceeds as reducing debts owed to him by his children. The court cited Helvering v. Horst and Lucas v. Earl to support its conclusion that income from property is taxable to the party who retains control over it.

    Practical Implications

    This decision reinforces the principle that tax liability follows control over assets and their income. It warns against using family members or other entities to shift income for tax purposes without relinquishing control. Practitioners should advise clients to avoid arrangements where they retain control over assets nominally transferred to others, as such arrangements may be treated as anticipatory assignments of income. This case has been cited in subsequent rulings to uphold the taxation of income to the party who retains control over the asset producing it, emphasizing the importance of substance over form in tax law.

  • Doyle v. Commissioner, 3 T.C. 1092 (1944): Assignment of Income Doctrine

    3 T.C. 1092 (1944)

    An assignment of the right to receive future income, even if framed as a transfer of property, is still taxable to the assignor when the income is eventually received by the assignee.

    Summary

    Richard Doyle assigned portions of his interest in a future judgment payout to his wife and sons after the judgment was final but before payment. The Tax Court held that the income was taxable to Doyle, the assignor, not to his wife and sons, the assignees. The court reasoned that Doyle was assigning the right to receive future income, and the assignment of income doctrine dictates that such income is taxable to the one who earned it, regardless of who ultimately receives it. The critical factor was that the right assigned represented an interest in a future gain that was virtually assured.

    Facts

    Briggs & Turivas (B&T) had a contract with the U.S. Shipping Board that was breached. B&T sued and won a judgment in the Court of Claims. Doyle, along with others, acquired an interest in the proceeds of this judgment through an assignment from a prior party (Friedeberg). After the Supreme Court denied certiorari, and with payment from Congress pending, Doyle assigned portions of his interest to his wife and two minor sons as gifts. The judgment was paid out, and Doyle’s wife and sons received their assigned shares.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Doyle’s income tax, including in his gross income the amounts received by his wife and sons from the judgment proceeds. Doyle challenged this determination in the Tax Court.

    Issue(s)

    Whether the assignment of a portion of a taxpayer’s interest in the future proceeds of a judgment, made after the judgment is final but before payment, constitutes an anticipatory assignment of income taxable to the assignor, or a transfer of property, the income from which is taxable to the assignee?

    Holding

    No, the assignment constituted an anticipatory assignment of income because the taxpayer, Doyle, assigned a right to future income, not a capital asset. Therefore, the income is taxable to Doyle, because he cannot escape taxation by gifting income about to be received.

    Court’s Reasoning

    The Tax Court emphasized that Doyle’s gifts were not of income-producing property, but rather of a right to receive income that was virtually certain. The court distinguished this from a gift of property that then generates income, which would be taxable to the donee. The court reasoned that before the assignment, Doyle’s gain was practically assured because the judgment was final, and only congressional appropriation remained. The court stated, “While it is not incorrect to speak of this as ‘property,’ it is still but a contractual expectancy of gain to be derived when the interest is reduced to cash by the distribution of the net proceeds of the judgment.” Citing Helvering v. Horst and Harrison v. Schaffner, the court applied the principle that one cannot avoid income tax by assigning the right to receive income. The fact that the amounts were used for the children’s education was not controlling.

    Practical Implications

    This case illustrates the importance of distinguishing between assigning income-producing property and assigning the right to receive future income. If the assignment occurs close to the realization of income and the assignor has a high degree of certainty of receiving the income, courts are more likely to view it as an assignment of income taxable to the assignor. The assignment of income doctrine continues to be a crucial tool for the IRS to prevent taxpayers from avoiding taxes by gifting income about to be received. Later cases applying this principle often focus on the degree of certainty of the income stream at the time of the assignment.