Choosing the Proper Taxpayer
a.    Assignment of Income—Services
1.    Code: 61, 73
ii.    The Concept of Income Splitting
1.    If income is taxed to the person whose services or property created it, the taxpayer will pay tax at the rate that Congress ahs decided reflects the proper social burden for a particular level of income.
2.    Lucas v. Earl (1930)
a.    K b/w husband and wife ½ of what husband earns is instantly property of wife; this is b/f the joint return (this was so they could take income from the higher taxpayer and give it to the lower taxpayer), t/f the total tax is less, this is achieved by treating ourselves as community property.
b.    Justice Holmes that it was a good K and legitimate, however, for tax purposes the SC disregarded the K.
c.    a test from Lucas, it is not the person who receives the income but the person who controls the earning of the income
3.    general rule: from Lucas v. Earl, is that income is taxed to the one who earns it—it is easy to state but not always easy to apply;
a.    this is very hard to rectify;
i.    for example:  if a lawyer earns $100K for a firm, but is only paid $50K?  should he report that on GI?  No, the firm has the ultimate direction and control
4.    remember:  you cannot escape the tax system even with the most skillfully devised plan
5.    Ascher says:  you have no prospect to divert your income (you cannot even assign yourself to a trust [Vnuk v. Commissioner (1980)])—it was decided that Vnuk himself was the one who earned & controlled the income, t/f he should pay the taxes; you cannot separate the fruit from the tree!
6.    Vnuk v. Commissioner
a.    ask: “who has ultimate direction and control over the earning of the compensation” :
i.    it is important to consider who has the authority to dictate:
1.    the nature and extent of the individual’s services and
2.    to whom those services should be rendered
iii.    Shifting Income by Gratuitous transfer:
1.    Teschner v. Commissioner (1962): this is one of the very rare holes in the income shifting net.  Dad wins and designates daughter and cannot get the money.
a.    does Dad get any benefit?  Maybe psychic, but the court held since the dad never had possession he could not have t/f disposed of what he did not have.  T/f not going to be considered dad’s income.
b.    is the gift going to be taxable to the daughter?  The court says yes, however, it is a gift and a gift is not GI.
iv.    Shifting Income by Compensatory Arrangement:
1.    Fritschle v. Commissioner (1982)
a.    mom puts kids to work, but takes the cash, when the IRS comes looking mom says that it’s the kid’s money.
b.    the IRS says that mom had control over disposal and was the facilitator and t/f it is to be included in her GI
i.    this is to be contradicted to the law firm example
v.    Shifting Income to a Related Corporation:
1.    Johnson v. Commissioner (1982):
a.    Johnson has offshore companies who he contracts out his professional services to and those companies will pay him a certain amount of money for the rest of his life (shell corp).
b.     Lucas v. Earl reveals two necessary elements before the corporation, rather than its service-performer employee, may be considered the controller of the income:
i.    the service-performer employee must be just that—an employee of the corporation whom the corporation has the right to direct or control in some meaningful sense, &
ii.    there must exist b/w the corporation and the person or entity using the services a K or similar indicium’s recognizing the corporation’s controlling position
c.    in the Johnson case the court blows over 1, b/c the key is to look at 2; so if you are going to do this keep it clean with the corporation
2.    Ascher says:  the key to doing this is to keep up pretenses and put on a good show
3.    Problems:
vi.    Assignment of Income—Property
1.    Code: 102, 1015(a)
2.    Reg: 1.102-1, 1.61-9(c)
vii.    Appreciated Property Transferred by Gift
1.    1015 sets forth the rules for determining the B for property acquired by gift, embodies a legislative exception to the assignment of income doctrine for gifts of appreciated property.  Under §1015 a donee assumes the donor’s B, and pursuant to 102 the donee recognizes no income on the receipt of the property.  The donor has enjoyed an economic benefit by transferring appreciated property to the donee of their choice.

viii.    Transfers of Income from Property:
1.    Helvering v Horst (1940)
a.    Dad gave the interest coupons but not the bond that they came from.  And Scalia said that “the power to dispose of income is the equivalent of ownership of it.”
b.    Basically, the court imputed the realization on the father even thought the coupon had not matured b/c of the exercise of dominion over the interest in giving it to his son.
c.    remember: you cannot separate the fruit from the tree
d.    you can give the tree away with the fruit and then there would be no taxable GI on the donor and it would be a gift to the donee under 102 and 1015
ix.    Property and Income Transfers Compared:
1.    Moore v. Commissioner
a.    Given the interest not the property, t/f he had to pay tax
i.    GI = interest
x.    Substance v. Form Analysis:
1.    Salvatore v. Commissioner:
a.    you have to give the tree away while the fruit is still green
b.    when you K for the sale of the ripened fruit, assignment has already attached,
2.    Applestein v. Commissioner (1983)
a.    when the shareholders sign off on the deal the fruit has ripened
b.     Court Holding Co. v. Commissioner
i.    substance over form
xi.    Dividends on Stock:
1.    Who is taxable on dividend?  Ask what is the record date?  If you transfer b/c the record date then its ok; if you transfer after the record date then assignment of income will bite
2.    Reg. 1.16-9(c), look up
xii.    Assignments of Income for Consideration:
1.    Seems to have been skipped!
xiii.    Unearned Income of Children under Age Fourteen:
1.    The tax reform act of 1986 basically disrespect the separate taxpayer status of children for earned income.
2.    1(g)
a.    for non-earned income; the G taxes you at your parents marginal tax bracket
3.    Ascher asks: what if you parents are divorced?
4.    unearned income of children 14 and up is taxed at the child’s marginal tax rate
5.    Problmes:
xiv.    Below-Market & Interest Free Loans

2.    Interest-free Loans as an Income-shifting Device
3.    please note:  I was absent on the day that this material was covered up until the next section iv (Divorce & Alimony)
4.    In reponse to the ease with which interest free loans were being used to circumvent assignment of income principles, Congress enacted 7872.
a.    the tax treatment of below market interest rate loans to the employee is usually traced to J. Simpson Dean v. Commissioner (1961), but became moot when spanked by §163(h)[making personal interest no longer deductible] and 7872
5.     Joint Committee on Taxation, Explanation of the Tax Reform Act of 1984
xv.    The Mechanics of 7872
1.    Code: 7872(a)-(f)
2.    Reg: Prop. Reg: 1.7872-1, 1.7872-2, 1.7872-4
3.    The first step in statutory analysis is to determine whether the transaction is a loan.
a.    The proposed Reg defines a “loan” as:
i.    an extension of credit in any transaction where one person transfers money to another for any period of time after which it is to be retransferred to the owner or applied accordingly to an express or implied agreement with the owner (1.7872-2(a)(1).
1.    each extension of credit or other transfer of money is treated as a separate loan (1.7872-2(a)(3)
4.    The second step is to determine whether the loan is below market loan.  This focus on whether or not the loan is a term loan or a demand loan.
a.    A demand loan is a below market loan if the interest rate payable on the loan is less than the applicable federal rate.  The applicable federal rate for demand loans is the federal short term rate compounded semiannually in effect under 1274(d) for the period during which the forgone interest is being compounded.
b.    A term loan is below market (7872(e)(1)(b)) if the amount loaned by the lender exceeds the present value of all payments (including principle and interest) to be made by the borrower under the terms of the loan.
5.    7872(c) then determines whether it is the  type of a below market loan to which §7872 applies.  There are six categories of 7872 loans:
i.    gifts
ii.    compensation related loans
iii.    corporations shareholder loans
iv.    tax avoidance loans
v.    a catch all category  which includes all other below market loans in which the below market interest rate arrangement significantly affects the tax liability of either the lender or the borrower and
vi.    qualified continuing care facility loans
6.    if 7872 applies, consider whether an applicable de minimis exception exempts the loan for the coverage of 7872, there are two:
a.    gift loans
i.    gift loans are exempted if
1.    the aggregate outstanding amount of the loans b/w the lender and the borrower does not exceed $10K &
2.    the loan proceeds were not used by the borrower to purchase or to carry income producing assets
b.    compensation related and corporation shareholder loans are exempted
i.    for any day on which the aggregate outstanding amount of the loans b/w lender and borrower do not exceed $10K and
ii.    if the principle purpose of the loan was not tax avoidance
7.    If the de minimis exception does not apply to the below market loan, ten 7872(a) and (b) govern the tax consequences.
a.    See page 261 for the break down of the mechanical application of §7872 and example.
8.    Kta-Tator Inc. v. Commissioner (1997):
a.    See in book

xvi.    Divorce & Alimony—
1.    Code: 71, 215, 1041(a)-(c)
2.    Reg: 1.71-1T, 1.1041-1T
xvii.    Alimony versus Property Settlements
1.    if you have an amicable divorce, you can screw the G with a good property settlement.
a.    71 requires that alimony be considered GI of the recipient and permitting a corresponding deduction by the payer to the extent that the amount was included in GI by the recipient (215)
b.    71(b) reg. for alimony
c.    71(f): no front loading to cover as property settlement
d.    10411(a) transfer b/w spouses pursuant to divorce is not realized as a realization event, the G will wait
xviii.    Tax Reform Act of 1984 & 1986
1.    To qualify as alimony or separate maintenance payment, the payment must be:
a.    in cash;
i.    71(b): and or made on behalf of the payee; and do not have to paid directly to the payee
b.    made pursuant to a divorce or separation instrument that does not specifically provide that such payment is not includable in GI to the payee and is not allowable as a deduction to the payer;
i.    71(b)(2): defines divorce or separation agreement as:
1.    a decree of divorce or separate maintenance or a written instrument incident to such a decree
2.    a written separation agreement, or
3.    another decree requiring a spouse to make payments for the support or maintenance of the other spouse
4.    w/out the written instrument, no dice
5.    71(b)(1)(B): allows spouses to not count alimony as alimony
ii.    b/w spouses who are not members of the same household at the time payment is made; &
1.    71(b)(1)(c): no shacking up, however, 71(b)(2)(B): requirement of separate households applies only to cases in which parties are legally separated under a decree of divorce or separate maintenance.  T/f if no final decree has been entered b/w the parties, the payments may be alimony, despite the same household.
iii.    subject to discontinuance on the death of the payee spouse.
1.    71(b)(1)(D), no disguising property settlements as alimony
iv.    In addition, 71(f) was added to the four as another means of preventing an installment property settlement from being disguised as alimony.
v.    71(c): no child support