The Agency Exception to the Anticipatory Assignment of Income Doctrine

Abstract

One consequence of having graduated income tax rates is that it becomes advantageous to shift income from a high bracket taxpayer to a person in a lower tax bracket. A number of different vehicles have been tried to shift the incidence of the income tax to another person, and the courts and Congress have adopted a number of rules to prevent that from occurring. As early as 1930, the Supreme Court adopted the anticipatory assignment of income doctrine to prevent a person who anticipates earning income from his services from shifting that income to another person in a lower tax bracket. Income is taxed to the person whose services produced it rather than to the person who has the beneficial right to possess the income once it is earned. This article discusses the tax treatment of an employee whose services create income for his employer. The anticipatory assignment of income doctrine does not apply in these circumstances under the so-called agency exception. This article explains the policy justification of the agency exception and uses examples to help illustrate when and when not the agency exception should apply.