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SAMPLE TAX MEMORANDUM FACTS: Ralph Revenue owned a piece of rental property in addition to his other business property. He sold the right to receive the rents on the property to his son for $100,000.00. The rents had been averaging approximately $70,000 a year. Ralph retained the right to deduct the expenses on the property. ISSUE: By purporting to sell property, can a taxpayer assign income to another, and retain the ownership of the property and the right to deduct related expenses? DISCUSSION: I.R.C. § 61 indicates that Gross Income includes amounts received as rent. Attempts to assign this and other forms of income to be included in the Gross Income of another taxpayer have often not been successful. In one of the earlier cases dealing with this issue, the taxpayer attempted to assign half of his income to his wife at a time before joint returns were permitted. The U.S. Supreme Court held that this was not possible, and that salaries were to be attributed to the parties who had earned them. Lucas v. Earl , 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1929). In a case involving unearned income, the taxpayer detached interest coupons from bonds and gave the coupons to his son as a gift while retaining ownership of the bonds. The taxpayer maintained that the interest income had successfully been assigned to the son. The U.S. Supreme Court in Helvering v. Horst , 311 U.S. 112, 61 S. Ct. 144, 85 L.Ed. 75 (1940),
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disagreed and held that the party who owns or controls the source of the income must pay the tax. The Court stated that, “(t)he dominant purpose of the revenue laws is the creation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid.” 311 U.S. at 116 Consequently, the taxpayer would have had to transfer the bonds themselves in order to avoid liability for the tax. A taxpayer cannot retain ownership in income producing property and assign or give away a portion of the income, and escape liability. Greer v. U.S. , 408 F.2d 631 (CA6 1969). The taxpayers in a number of cases attempted to “sell” the right to receive income to another. In Cotlow v. C.I.R. . , 228 F.2d 186 (CA2 1955), a life insurance agent purchased from other agents their rights to renewal commissions on policies. The agent reported no income although he received $23,563.33 over the original cost of the assignments. The Court of Appeals found this excess, less some adjustments, represented taxable income. The Court distinguished this
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This note was uploaded on 12/07/2010 for the course ACG 3361, 4401 taught by Professor Goldwater,canada,judd,byrd,theniel during the Spring '10 term at University of Central Florida.

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