American has two sets of tax laws. The set that you read about is the laws passed by Congress and administered by the White House (through the IRS). Most tax planners know these laws.
This blog explains the second set of tax laws and explains tax planning with a Nevada trust.
Another equally important set of tax laws are created by the courts. America is a common law country. In a common law country courts create laws. For example, the concept of a trust exists only in common law countries.
Tax laws created by courts are known as “doctrines.” Ignoring a doctrine in your tax planning subjects you to an IRS penalty and in some cases prison.
One of the first doctrines is income must be taxed to him that earned it.
This principle was well stated by the United States Supreme Court in Lucas Earl, as follows:
“… this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it.”
“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.”
In Helvering v. Horst, the Supreme Court stated:
“The taxpayer has equally enjoyed the fruits of his labor or investment and obtained the satisfaction of his desires whether he collects and uses the income to procure those satisfactions, or whether he disposes of his right to collect it as the means of procuring them.”
The idea that anticipated earnings may not be assigned to another has been upheld in the courts in the transference of securities. For taxpayers living on the West Coast, the Ninth Circuit Court of Appeals made the point about securities as follows:
“Under the anticipatory assignment of income doctrine, once a right to receive income has ripened”.
“The taxpayer who earned or otherwise created that right will be taxed on any gain realized from it, notwithstanding the fact that the taxpayer has transferred the right before actually receiving the income.”
The key word is “right”. “Right” does not mean appreciation. “Right” means that the sale is in process or has been completed (and you are waiting for payment).
An old income tax regulation regarding the use of a trust to avoid taxes provides that a person who transfers his right to future income earned by his services is taxed on the income.
This regulation applies despite the assignor not having control over the trust. This type of trust is used for estate planning and asset protection.
Let me provide you an example of what is not the assignment of income.
You live in high tax state such as New York or California. You decide to form a trust in Nevada (see more on the IRS designer trust used to avoid state income taxes on this link).
You own shares of stock in a company. The shares have appreciated in value. You gift the shares to our Nevada trust. The trust sales the shares. The trust is taxable on the gain. The gift of the shares to the trust is not an assignment of income.
On the other hand, a buyer enters into a contract with you to purchase your shares. While the buyer is due his due diligence, you gift the shares to the trust. The gift of the shares is an assignment of income and you are taxable on the gain.
Need help your tax planning? Then contact me, Brian Dooley, CPA, MBT at [email protected]
 Commissioner v. Culbertson, 337 U.S. 733; Helvering v.
Clifford, 309 U.S. 331 (1940); National Carbide Corp. v. Commissioner, 336
U.S. 422 (1949).
 281 U.S. 111 (1930),
 311 U.S. 112 (1940),
 Hallowell v. Commissioner, 56 T.C. 600 (U.S. Tax Ct., 1971)
 Ferguson v. Commissioner, 174 F.3d 997 (U.S. App., 1999).
 Treas. Reg. Section 1.671-1(c)