Lucas v. Earl
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Lucas v. Earl, 281 U.S. 111 (1930)[1] is a United States Supreme Court case concerning taxation, about a man who reported only half of his earnings for years 1920 and 1921. The case addresses the taxpayer's attempt at tax avoidance based on a contract with his wife. The contract specified that earnings were owned by the couple as joint tenants. Justice Oliver Wendell Holmes delivered the Court’s opinion which generally stands for the proposition that income from services is taxed to the party who performed the services.[2] The case is used to support the proposition that the substance of the transaction, rather than the form, is controlling for tax purposes.[3]
[edit] Facts and procedural history
Earl, an attorney, entered into a contract with his wife where all property and earnings "shall be treated and considered . . . to be . . . owned by us [Earl and his wife] as joint tenants . . . with rights of survivorship."[4] Earl intended to cut his tax liability in half.[5] The issue before the court centered on whether Earl alone or Earl and his wife should be taxed on salary and attorneys fees earned by Earl in 1920 and 1921.[6]
The Bureau of Internal Revenue (the predecessor to the Internal Revenue Service) determined, and the Board of Tax Appeals (predecessor to the United States Tax Court) ruled, that the tax imposed on Mr. Earl was imposed on his entire salary, including the portion assigned to his wife.[7] Earl appealed, and the decision was reversed by the Circuit Court of Appeals for the Ninth Circuit.[8]
[edit] Holding: the Anticipatory Assignment of Income Doctrine
The validity of Earl’s contract was not questioned.[9] However, the Court reversed the decision of the Ninth Circuit Court of Appeals and ruled in favor of the tax collector. The Court indicated there was "no doubt that the statute required salaries to be taxed by those who earned them and provided 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."[10] Holmes concludes his opinion with the classic metaphor: The fruits cannot be attributed to a different tree from that on which they grew.[11]
