irc assignment of income

What is “Assignment of Income” Under the Tax Law?

Gross income is taxed to the individual who earns it or to owner of property that generates the income. Under the so-called “assignment of income doctrine,” a taxpayer may not avoid tax by assigning the right to income to another.

Specifically, the assignment of income doctrine holds that a taxpayer who earns income from services that the taxpayer performs or property that the taxpayer owns generally cannot avoid liability for tax on that income by assigning it to another person or entity. The doctrine is frequently applied to assignments to creditors, controlled entities, family trusts and charities.

A taxpayer cannot, for tax purposes, assign income that has already accrued from property the taxpayer owns. This aspect of the assignment of income doctrine is often applied to interest, dividends, rents, royalties, and trust income. And, under the same rationale, an assignment of an interest in a lottery ticket is effective only if it occurs before the ticket is ascertained to be a winning ticket.

However, a taxpayer can shift liability for capital gains on property not yet sold by making a bona fide gift of the underlying property. In that case, the donee of a gift of securities takes the “carryover” basis of the donor.

For example, shares now valued at $50 gifted to a donee in which the donor has a tax basis of $10, would yield a taxable gain to the donee of its eventual sale price less the $10 carryover basis. The donor escapes income tax on any of the appreciation.

For guidance on this issue, please contact our professionals at 315.242.1120 or [email protected] .

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Battling Uphill Against the Assignment of Income Doctrine: Ryder

Benjamin Alarie

Kathrin Gardhouse

Benjamin Alarie is the Osler Chair in Business Law at the University of Toronto and the CEO of Blue J Legal Inc. Kathrin Gardhouse is a legal research associate at Blue J Legal .

In this article, Alarie and Gardhouse examine the Tax Court ’s recent decision in Ryder and use machine-learning models to evaluate the strength of the legal factors that determine the outcome of assignment of income cases.

I. Introduction

Researching federal income tax issues demands distilling the law from the code, regulations, revenue rulings, administrative guidance, and sometimes hundreds of tax cases that may all be relevant to a particular situation. When a judicial doctrine has been developed over many decades and applied in many different types of cases, the case-based part of this research can be particularly time consuming. Despite an attorney’s best efforts, uncertainty often remains regarding how courts will decide a new set of facts, as previously decided cases are often distinguished and the exercise of judicial discretion can at times lead to surprises. To minimize surprises as well as the time and effort involved in generating tax advice, Blue J ’s machine-learning modules allow tax practitioners to assess the likely outcome of a case if it were to go to court based on the analysis of data from previous decisions using machine learning. Blue J also identifies cases with similar facts, permitting more efficient research.

In previous installments of Blue J Predicts, we examined the strengths and weaknesses of ongoing or recently decided appellate cases, yielding machine-learning-generated insights about the law and predicting the outcomes of cases. In this month’s column, we look at a Tax Court case that our predictor suggests was correctly decided (with more than 95 percent confidence). The Ryder case 1 has received significant attention from the tax community. It involved tax avoidance schemes marketed by the law firm Ernest S. Ryder & Associates Inc. (R&A) that produced more than $31 million in revenue between 2003 and 2011 and for which the firm reported zero taxable income. The IRS unmasked more than 1,000 corporate entities that R&A’s owner, Ernest S. Ryder , had created and into which he funneled the money. By exposing the functions that these entities performed, the IRS played the most difficult role in the case. Yet, there are deeper lessons that can be drawn from the litigation by subjecting it to analysis using machine learning.

In this installment of Blue J Predicts, we shine an algorithmic spotlight on the legal factors that determine the outcomes of assignment of income cases such as Ryder . For Ryder , the time for filing an appeal has elapsed and the matter is settled. Thus, we use it to examine the various factors that courts look to in this area and to show the effect those factors have in assignment of income cases. Equipped with our machine-learning module, we are able to highlight the fine line between legitimate tax planning and illegitimate tax avoidance in the context of the assignment of income doctrine.

II. Background

In its most basic iteration, the assignment of income doctrine stands for the proposition that income is taxed to the individual who earns it, even if the right to that income is assigned to someone else. 2 Courts have held that the income earner is responsible for the income tax in the overwhelming majority of cases, including Ryder . It is only in a small number of cases that courts have been willing to accept the legitimacy of an assignment and have held that the assignee is liable for the earned income. Indeed, Blue J ’s “Assigned Income From Services” predictor, which draws on a total of 242 cases and IRS rulings, includes only 10 decisions in which the assignee has been found to be liable to pay tax on the income at issue.

The wide applicability of the assignment of income doctrine was demonstrated in Ryder , in which the court applied the doctrine to several different transactions that occurred between 1996 and 2011. Ryder founded his professional law corporation R&A in 1996 and used his accounting background, law degree, and graduate degree in taxation for the benefit of his clients. R&A designed, marketed, sold, and administered six aggressive tax-saving products that promised clients the ability to “defer a much greater portion of their income than they ever dreamed possible, and, as a result, substantially reduce their tax liability.” 3 In 2003 the IRS caught on to Ryder ’s activities when his application to have 800 employee stock option plans qualified at the same time was flagged for review. A decade of investigations and audits of Ryder and his law firm spanning from 2002 to 2011 followed.

What is interesting in this case is that Ryder , through his law firm R&A, directly contracted with his clients for only three of the six tax-saving products that his firm designed, marketed, and sold (the stand-alone products). The fees collected by R&A from two of the stand-alone products were then assigned to two other entities through two quite distinct mechanisms. For the other three tax-saving products, the clients contracted — at least on paper — with other entities that Ryder created (the group-tax products). Yet, the court treated the income from all six tax-saving products identically. The differences between the six types of transactions did not affect the outcome of the case — namely, that it is R&A’s income in all six instances. Blue J ’s predictor can explain why: The factors that our predictor highlights as relevant for answering the question whether the assignment of income doctrine applies have less to do with the particular strategy that the income earner conjures up for making it look like the income belongs to someone else, and more to do with different ways of pinpointing who actually controls the products, services, and funds. In Ryder , the choices ultimately come down to whether that is R&A or the other entity.

We will begin the analysis of the case by taking a closer look at two of the six tax-saving products, paying particular attention to the flow of income from R&A’s clients to R&A and Ryder ’s assignment of income to the other entities. We have selected one of the tax-saving products in which Ryder drew up an explicit assignment agreement, and another one in which he tried to make it look like the income was directly earned by another entity he had set up. Regardless of the structures and means employed, the court, based on the IRS ’s evidence, traced this income to R&A and applied the assignment of income doctrine to treat it as R&A’s income.

This article will not cover in detail the parts of the decision in which the court reconstructs the many transactions Ryder and his wife engaged in to purchase various ranches using the income that had found its way to R& A. As the court puts it, the complexity of the revenues and flow of funds is “baroque” when R&A is concerned, and when it comes to the ranches, it becomes “ rococo .” 4 We will also not cover the fraud and penalty determinations that the court made in this case.

III. The Tax Avoidance Schemes

We will analyze two of the six schemes discussed in the case. The first is the staffing product, and the second is the American Specialty Insurance Group Ltd. (ASIG) product. Each serves as an example of different mechanisms Ryder employed to divert income tax liability away from R&A. In the case of the staffing product, Ryder assigned income explicitly to another entity. The ASIG product involved setting up another entity that Ryder argued earned the income directly itself.

A. The Staffing Product

R&A offered a product to its clients in the course of which the client could lease its services to a staffing corporation, which would in turn lease the client’s services back to the client’s operating business. The intended tax benefit lay “with the difference between the lease payment and the wages received becoming a form of compensation that was supposedly immune from current taxation.” 5 At first, the fees from the staffing product were invoiced by and paid to R&A. When the IRS started its investigation, Ryder drew up an “Agreement of Assignment and Assumption” with the intent to assign all the clients and the income from the staffing product to ESOP Legal Consultants Inc. ( ELC ). Despite the contractual terms limiting the agreement to the 2004-2006 tax years, Ryder used ELC ’s bank account until 2011 to receive fees paid by the various S corporations he had set up for his clients to make the staffing product work. R&A would then move the money from this bank account into Ryder ’s pocket in one way or another. ELC had no office space, and the only evidence of employees was six names on the letterhead of ELC indicating their positions. When testifying in front of the court, two of these employees failed to mention that they were employed by ELC , and one of them was unable to describe the work ELC was allegedly performing. Hence, the court concluded that ELC did not have any true employees of its own and did not conduct any business. Instead, it was R&A’s employees that provided any required services to the clients. 6

B. The ASIG Product

R&A sold “disability and professional liability income insurance” policies to its clients using ASIG, a Turks and Caicos corporation that was a captive insurer owned by Capital Mexicana . Ryder had created these two companies during his previous job with the help of the Turks and Caicos accounting firm Morris Cottingham Ltd. The policies Ryder sold to his clients required them to pay premiums to ASIG as consideration for the insurance. The premiums were physically mailed to R& A. Also , the clients were required to pay a 2 percent annual fee, which was deposited into ASIG’s bank account. In return, the clients received 98 percent of the policy’s cash value in the event that they became disabled, separated from employment, turned 60, or terminated the policy. 7

R&A’s involvement in these deals, aside from setting up ASIG, was to find the clients who bought the policies, assign them a policy number, draft a policy, and open a bank account for the client, as well as provide legal services for the deal as needed. It was R&A that billed the client and that ensured, with Morris Cottingham ’s help, that the fees were paid. R&A employees would record the ASIG policy fee paid by the clients, noting at times that “pymt bypassed [R&A’s] books.” 8 Quite an effort went into disguising R&A’s involvement.

First, there was no mention of R&A on the policy itself. Second, ASIG’s office was located at Morris Cottingham’s Turks and Caicos corporate services. Ryder also set up a post office box for ASIG in Las Vegas. Any mail sent to it was forwarded to Ryder . Third, to collect the fees, R&A would send a letter to Morris Cottingham for signature, receive the signed letter back, and then fax it to the financial institution where ASIG had two accounts. One of these was nominally in ASIG’s name but really for the client’s benefit, and the other account was in Ryder ’s name. The financial institution would then move the amount owed in fees from the former to the latter account. Whenever a client filed for a benefit under the policy, the client would prepare a claim package and pay a termination fee that also went into the ASIG account held in Ryder ’s name. The exchanges between the clients and ASIG indicate that these fees were to reimburse ASIG for its costs and services, as well as to allow it to derive a profit therefrom. But the court found that ASIG itself did nothing. Even the invoices sent to clients detailing these fee payments that were on ASIG letterhead were in fact prepared by R&A. In addition to the annual fees and the termination fee, clients paid legal fees on a biannual basis for services Ryder provided. These legal fees, too, were paid into the ASIG account in Ryder ’s name. 9

IV. Assignment of Income Doctrine

The assignment of income doctrine attributes income tax to the individual who earns the income, even if the right to that income is assigned to another entity. The policy rationale underlying the doctrine is to prevent high-income taxpayers from shifting their taxable income to others. 10 The doctrine is judicial and was first developed in 1930 by the Supreme Court in Lucas , a decision that involved contractual assignment of personal services income between a husband and wife. 11 The doctrine expanded significantly over the next 20 years and beyond, and it has been applied in many different types of cases involving gratuitous transfers of income or property. 12 The staffing product, as of January 2004, involved an anticipatory assignment of income to which the assignment of services income doctrine had been held to apply in Banks . 13 The doctrine is not limited to situations in which the income earner explicitly assigns the income to another entity; it also captures situations in which the actual income earner sets up another entity and makes it seem as if that entity had earned the income itself, as was the case with the ASIG product. 14

In cases in which the true income earner is in question, the courts have held that “the taxable party is the person or entity who directed and controlled the earning of the income, rather than the person or entity who received the income.” 15 Factors that the courts consider to determine who is in control of the income depend on the particular situation at issue in the case. For example, when a personal services business is involved, the court looks at the relationship between the hirer and the worker and who has the right to direct the worker’s activities. In partnership cases, the courts apply the similarity test, asking whether the services the partnership provided are similar to those the partner provided. In other cases, the courts have inquired whether an agency relationship can be established. In yet other cases the courts have taken a broad and flexible approach and consulted all the available evidence to determine who has the ultimate direction and control over the earnings. 16

V. Factors Considered in Ryder

Judge Mark V. Holmes took a flexible approach in Ryder . He found that none of the entities that Ryder papered into existence had their own office or their own employees. They were thus unable to provide the services Ryder claims they were paid for. In fact, the entities did not provide any services at all — the services were R&A’s doing. To top it off, R&A did nothing but set up the entities, market their tax benefits, and move money around once the clients signed up for the products. There was no actual business activity conducted. The court further found that the written agreements the clients entered into with the entities that purported to provide services to them were a sham and that oral contracts with R&A were in fact what established the relevant relationship, so that R&A must be considered the contracting party. In the case of the ASIG product, for example, a client testified that the fees he paid to Ryder were part of his retirement plan. Ryder had represented to him that the ASIG product was established to create an alternative way to accumulate retirement savings. 17

Regarding the staffing product in which there existed an explicit assignment of income agreement between R&A and ELC , the court found that ELC only existed on paper and in the form of bank accounts, with the effect that R&A was ultimately controlling the income even after the assignment. A further factor that the court emphasized repeatedly was that R&A, and Ryder personally as R&A’s owner, kept benefitting from the income after the assignment (for example, in the staffing product case) or, as in the case of the ASIG product, despite the income allegedly having been earned by a third party (that is, ASIG). 18

VI. Analysis

The aforementioned factors are reflected in Blue J ’s Assigned Income From Services predictor. 19 We performed predictions for the following scenarios:

the staffing product and R&A’s assignment of the income it generated to ELC with the facts as found by the court;

the staffing product and R&A’s assignment of the income it generated to ELC if Ryder ’s version of the facts were accepted;

the ASIG product and service as the court interpreted and characterized the facts; and

the ASIG product and service according to Ryder ’s narrative.

What is interesting and indicative of the benefits that machine-learning tools such as Blue J ’s predictor can provide to tax practitioners is that even if the court had found in Ryder ’s favor on all the factual issues reasonably in dispute, Ryder would still not have been able to shift the tax liability to ELC or ASIG respectively, according to our model and analysis.

The court found that R&A contracted directly with, invoiced, and received payments from its clients regarding the staffing product up until 2004, when Ryder assigned the income generated from this product explicitly to ELC . From then onward, ELC received the payments from the clients instead of R&A. Further, the court found that ELC did not have its own employees or office space and did not conduct any business activity. Our data show that the change in the recipient of the money would have made no difference regarding the likelihood of R&A’s liability for the income tax in this scenario.

According to Ryder ’s version of the facts, ELC did have its own employees, 20 even though there is no mention of a separate office space from which ELC allegedly operated. Yet, Ryder maintains that ELC was the one providing the staffing services to its clients after the assignment of the clients to the company in January 2004. Even if Ryder had been able to convince the court of his version of the facts, it would hardly have made a dent in the likelihood of the outcome that R&A would be held liable for the tax payable on the income from the staffing product.

With Ryder ’s narrative as the underlying facts, our predictor is still 94 percent confident that R&A would have been held liable for the tax. The taxation of the income in the hands of the one who earned it is not easily avoided with a simple assignment agreement, particularly if the income earner keeps benefiting from the income after the assignment and continues to provide services himself without giving up control over the services for the benefit of the assignee. The insight gained from the decision regarding the staffing product is that the court will take a careful look behind the assignment agreement and, if it is not able to spot a legitimate assignee, the assignment agreement will be disregarded.

The court made the same factual findings regarding the ASIG product as it did for the staffing product post-assignment. Ryder , however, had more to say here in support of his case. For one, he pointed to ASIG’s main office that was located at the Morris Cottingham offices. Morris Cottingham was also the one that, on paper, contracted with clients for the insurance services and the collection of fees was conducted, again on paper, in the name of Morris Cottingham . The court also refers to actual claims that the clients made under their policies. There is also a paper trail that indicates that the clients were explicitly acknowledging and in fact paying ASIG for its costs and services. From all this we can conclude that Ryder was able to argue that ASIG had its own independent office, had one or more employees providing services, and that ASIG engaged in actual business activity. However, even if these facts had been admitted as accurately reflecting the ASIG product, our data show that with a 92 percent certainty R&A would still be liable for the income tax payable on the income the ASIG product generated. It is clear that winning a case involving the assignment of income doctrine on facts such as the ones in Ryder is an uphill battle. If the person behind the scenes remains involved with the services provided without giving up control over them, and benefits from the income generated, it is a lost cause to argue that the assignment of income doctrine should be applied with the effect that the entity that provides the services on paper is liable for the income tax.

C. Ryder as ASIG’s Agent

Our data reveal that to have a more substantial shot at succeeding with his case under the assignment of income doctrine, Ryder would have had to pursue a different line of argument altogether. Had he set R&A up as ASIG’s agent rather than tried to disguise its involvement with the purported insurance business, Ryder would have been more likely to succeed in shifting the income tax liability to ASIG. For our analysis of the effect of the different factors discussed by the court in Ryder , we assume at the outset that Ryder would do everything right — that is, ASIG would have its own workers and office, and it would do something other than just moving money around (best-case scenario). We then modify each factor one by one to reveal their respective effect.

From this scenario testing, we can conclude that if R&A had had an agency agreement with ASIG, received some form of compensation for its services from ASIG, held itself out to act on ASIG’s behalf, and the client was interested in R&A’s service because of its affiliation with ASIG, Ryder would have reduced the likelihood to 73 percent of R&A being liable for the income tax. Add to these agency factors an element of monitoring by ASIG and the most likely result flips — there would be a 64 percent likelihood that ASIG would be liable for the income tax. If ASIG were to go beyond monitoring R&A’s services by controlling them too, the likelihood that ASIG would be liable for the income tax would increase to 82 percent. Let’s say Ryder had given Morris Cottingham oversight and control over R&A’s services for ASIG, then the question whether ASIG employs any workers other than R&A arguably becomes moot because there would necessarily be an ASIG employee who oversees R&A. Accordingly, there is hardly any change in the confidence level of the prediction that ASIG is liable for the income tax when the worker factor is absent.

Interestingly, this is quite different from the effect of the office factor. Keeping everything else as-is, the absence of having its own ASIG-controlled office decreases the likelihood of ASIG being liable to pay the income tax from 82 to 54 percent. Note here that our Assigned Income From Services predictor is trained on data from relatively old cases; only 14 are from the last decade. This may explain why the existence of a physical office space is predicted to play such an important role when the courts determine whether the entity that allegedly earns the income is a legitimate business. In a post-pandemic world, it may be possible that a trend will emerge that puts less emphasis on the physical office space when determining the legitimacy of a business.

The factor that stands out as the most important one in our hypothetical scenario in which R&A is the agent of ASIG is the characterization of ASIG’s own business activity. In the absence of ASIG conducting its own business, nothing can save Ryder ’s case. This makes intuitive sense because if ASIG conducts no business, it must be R&A’s services alone that generate the income; hence R&A is liable for the tax on the income. Also very important is the contracting party factor: If the client were to contract with R&A rather than ASIG in our hypothetical scenario, the likelihood that R&A would be held liable for the income tax is back up to 72 percent, all else being equal. If the client were to contract with both R&A and ASIG, it is a close case, leaning towards ASIG’s liability with 58 percent confidence. Much less significant is who receives the payment between the two. If it is R&A, ASIG remains liable for the income tax with a likelihood of 71 percent, indicating a drop in confidence by 11 percent compared with a scenario in which ASIG received the payment.

To summarize, if Ryder had pursued a line of argument in which he set up R&A as ASIG’s agent, giving ASIG’s employee(s) monitoring power and ideally control over R&A’s services for ASIG, he would have had a better chance of succeeding under the assignment of income doctrine. As we have seen, the main prerequisite for his success would have been to convince the court that it would be appropriate to characterize ASIG as conducting business. Ideally, Ryder also would have made sure that the client contracted for the services with ASIG and not with R&A. However, it is significantly less important that ASIG receives the money from the client. The historical case law also suggests that Ryder would have been well advised to set up a physical office for ASIG; however, given the new reality of working from home, this factor may no longer be as relevant as these older previously decided cases indicate.

VII. Conclusion

We have seen that R&A’s chances to shift the liability for the tax payable on the staffing and the ASIG product income was virtually nonexistent. The difficulty of this case from the perspective of the IRS certainly lay in gathering the evidence, tracing the money through the winding paths of Ryder ’s paper labyrinth, and making it comprehensible for the court. Once this had been accomplished, the IRS had a more-or-less slam-dunk case regarding the applicability of the assignment of income doctrine. As mentioned at the outset, an assignment of income case will always be an uphill battle for the taxpayer because income is generally taxable to whoever earns it.

Yet, in cases in which the disputed question is who earned the income and not whether the assignment agreement has shifted the income tax liability, the parties must lean into the factors discussed here to convince the court of the legitimacy (or the illegitimacy, in the case of the government) of the ostensibly income-earning entity and its business. Our analysis can help decide which of the factors must be present to have a plausible argument, which ones are nice to have, and which should be given little attention in determining an efficient litigation strategy.

1 Ernest S. Ryder & Associates Inc. v. Commissioner , T.C. Memo. 2021-88 .

2 Lucas v. Earl , 281 U.S. 111, 114-115 (1930).

3 Ryder , T.C. Memo. 2021-88, at 7.

4 Id. at 32.

5 Id. at 17, 19, and 111-112.

6 Id. at 51-52, 111-112, and 123-126.

7 Id. at 9-12.

8 Id. at 96.

10 CCH, Federal Taxation Comprehensive Topics, at 4201.

11 Lucas , 281 U.S. at 115.

12 See , e.g. , “familial partnership” cases — Burnet v. Leininger , 285 U.S. 136 (1932); Commissioner v. Tower , 327 U.S. 280 (1946); and Commissioner v. Culbertson , 337 U.S. 733 (1949). For an application in the commercial context, see Commissioner v. Banks , 543 U.S. 426 (2005).

13 Banks , 543 U.S. at 426.

14 See , e.g. , Johnston v. Commissioner , T.C. Memo. 2000-315 , at 487.

16 Ray v. Commissioner , T.C. Memo. 2018-160 .

17 Ryder , T.C. Memo. 2021-88, at 90-91.

18 Id. at 48, 51, and 52.

19 The predictor considered several further factors that play a greater role in other fact patterns.

20 The court mentions that ELC’s letterhead set out six employees and their respective positions with the company.

END FOOTNOTES

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Tax Matters

Clear Reflection of Income

JP Morgan Chase, successor to First National Bank of Chicago, engaged in interest rate swaps. These are complex financial transactions that require two parties to pay each other interest based on various factors. Chase reported the income from these swaps based on its financial accounting method. The IRS objected and assessed a deficiency based on its own method. The Tax Court rejected both methods and imposed a third. JP Morgan Chase appealed.

Result. JP Morgan Chase’s method was incorrect. The case was remanded for the Tax Court to reconsider the IRS method.

IRC section 446(a) requires taxpayers to compute their taxable income based on the accounting methods used in their books and records. Under section 446(b), the IRS can impose a different method if a taxpayer’s selected method does not clearly reflect income. The fact that the taxpayer’s method is based on GAAP does not mean it clearly reflects income. These general rules concerning selection of accounting methods give way to specifically designated methods in the tax code.

One such designated method is the mark-to-market method, which must be used by dealers in financial instruments. Since interest rate swaps are financial instruments, JP Morgan Chase was required to use this special method. If the taxpayer’s computation under a mandated method is incorrect, it is treated as a method that does not clearly reflect income and the IRS has the right to mandate the computation under section 446(b).

When the IRS imposes a method under section 446(b), it is entitled to significant deference—in fact, according to the Court of Appeals, taxpayers must follow the IRS’s method unless it is “clearly unlawful” or “plainly arbitrary.” The fact that the imposed method may not be the most accurate method to calculate income is not sufficient for rejecting it.

In this case, the method used by JP Morgan Chase was unacceptable since the IRS showed that it did not clearly reflect income. It is up to the taxpayer to prove that the IRS method was unlawful or arbitrary. The court has the power to impose a different method only if the taxpayer meets this burden. Given this very high hurdle, it is likely the IRS’s method will be imposed.

Prepared by Edward J. Schnee, CPA, PhD, Hugh Culverhouse Professor of Accounting and director, MTA program, Culverhouse School of Accountancy, University of Alabama, Tuscaloosa.

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A Tax Planning Cautionary Tale: Timing and Formalities Are Critical

A business owner learned the hard way (and at great cost) not to dawdle or cut corners when it comes to tax plans involving the sale of a business.

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A red alarm clock sits atop stacks of coins of varying heights.

This cautionary tale is based upon the recent tax case of Estate of Hoensheid v Commissioner , TC Memo 2023-34. When owners of a company plan to sell their business, there is very often a desire to minimize the resultant income tax. This tax is effectively taxing the increase in the value of the business often earned over many years and decades into a single year. The resultant tax will often be at the highest marginal rate, substantially reducing the net proceeds to the seller.

Many of the tools used to minimize income tax in this situation have a charitable giving component. When properly planned and implemented, three separate goals are achieved.

First, a portion of the otherwise taxable gain on the sale becomes nontaxable because a portion of the asset being sold is transferred to an IRS-recognized charitable structure.

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Second, there is an income tax deduction equal to the fair market value of the appreciated asset contributed to the charitable structure. This compounds the economic value of the tax savings structure. A portion of the gain is sold tax-free by the charitable organization, and the seller receives a charitable deduction equal to the fair market value of the asset contributed. For example, if we are selling a company for a $20 million taxable gain, we could expect a tax of $6 million based upon a 30% combined federal and state tax rate. This leaves net proceeds of $14 million.

Note also that the seller has no say in how the $6 million in tax is spent by the government. If we gift a portion of the company to an IRS-recognized charitable structure, then you could direct the funds to be used for the Wounded Warrior Project , the Make-A-Wish Foundation or any legitimate charitable cause that you wish. Note that those funds would need to be distributed to a 501(c)(3) charity focusing on that desired purpose.

If we transfer $5 million to a charitable structure before the sale, the taxable gain itself is now only $15 million. This is because the net gain is reduced by the $5 million contributed to charity. The stock owned by the charity is sold tax free. Then the taxable gain is further reduced by a charitable contribution deduction equal to the fair market value of the stock contributed to charity. This results in a net tax of approximately $3 million. However, this is only a small part of the story.

The third goal is where the magic happens. Contributing the appreciated asset to a well-planned charitable structure provides an economic benefit to the charity and builds substantial wealth for the family, typically due to the time value of money. These structures provide independent economic value or wealth to the family and to the charity. Careful consideration must be given to each client’s financial and nonfinancial goals.

These charitable structures are typically referred to by acronyms, leading to a veritable alphabet soup of alternatives: CRTs (charitable remainder trusts), CLTs (charitable lead trusts), PIFs (pooled income funds), CHLLCs (charitable limited liability companies), to name just a few overall categories. For my clients, we always recommend a structure that provides the client investment control of the funds while invested within the charitable structure. These structures can also provide significant asset protection for the client and their family.

An example of a $7 million investment into an intergenerational split interest trust PIF (a form of a pooled income fund) would provide the following results for a family where Dad is 49 years old and has kids ages 28, 24 and 11:

$7 million contribution
Income tax deduction: $2,171,200
Projected annual income of 6%: $420,000 per year to Dad for his entire life and, at his death, to his children for their entire lives
Client can maintain investment control
Trust can own investment income real estate, if desired

Alternatively, a $3 million investment into a deferred inheritance trust (a form of CLAT) could provide an overall benefit to the family of over $16 million. The charity would also receive over $8 million. A dollar-for-dollar income tax deduction is provided of $3 million. This provides an estimated tax savings of $1,289,100. With the tax savings, the net cost of the $3 million investment is only $1,710,900.

Here’s how that would work: The client invests $3 million into the deferred inheritance trust. Of that amount, $150,000 is invested in municipal bonds to pay the required annual charitable distributions. $2,850,000 is used to acquire a life insurance policy within the deferred inheritance trust. This will provide over $8 million to the charity and almost $17 million to the client’s children, income- and estate-tax-free.

These are only a few of the economic possibilities available with this type of planning. The key is to first identify your financial and nonfinancial goals, such as establish minimum cash flow and not worth needs. Goals may include providing predictable safe, risk-free income for yourself and your kids or other loved ones, or asset protection for yourself or your loved ones. Then identify the alternatives that best satisfy those goals.

What was lost in the case of Estate of Hoensheid v Commissioner

Any possible benefit from the above type of planning was lost to the owners of Commercial Steel Treaty Corporation (CSTC). CSTC was owned by the taxpayer in the case and his two brothers (collectively, the business owners). The loss in planning benefits is directly attributable to the taxpayer’s own conduct and behavior in waiting too long to implement and trying to save money on appraisal costs.

The business owners received a letter of intent on April 2015 from a buyer who would pay $92 million for their company. The business owners wished to make a contribution to utilize the type of tax planning referred to above, but only if the sale of the company actually closed or was completed. In correspondence with the tax attorney, the brothers indicated that they wanted to “wait as long as possible to pull the trigger” on the contributor. In part, because if the sale did not go through, then the contributor would own less stock than his two brothers and have less control over the company.

The stock was contributed to Fidelity Charitable two days before the sale actually closed. The taxpayer (probably hoping to save a few dollars) did not hire an IRS-recognized and qualified appraiser.

The court relied upon the “assignment of income doctrine” to determine that the sale had progressed too far for Fidelity Charitable to be an owner for income tax purposes. This means that the entire gain, including the portion transferred to Fidelity Charitable, is deemed owned by and taxed entirely to the taxpayer at closing for income tax purposes. In other words, the sale or deal was virtually certain to close or be completed even though the sale did not formally close for two more days.

The assignment of income doctrine is a long-standing “first principle of income taxation” that recognizes that income is taxed to those “who earn or otherwise create the right to receive it” and that tax cannot be avoided by “anticipatory arrangements and contracts however skillfully devised.” The court believed that the charitable transfer of stock was subject to a pending, pre-negotiated transaction with a fixed right to proceeds in the transaction. The court did not believe that Fidelity Charitable or the taxpayer had any meaningful risk that the sale would not close.

A qualified appraisal is important, emphasis on ‘qualified’

The case itself is replete with damaging correspondence and testimony evidence that the taxpayer did not wish to contribute any amount if the sale did not close. The result is that our first goal above was lost because the entire sale was taxable to the owner. The court then went further and denied the charitable contribution deduction itself. The taxpayer did not comply with the regulatory requirements to substantiate the deductions found in Internal Revenue Code Section 170 . In particular, the court determined that the taxpayer did not obtain a “qualified appraisal.” The taxpayer obtained a price quote from a qualified appraiser, but used an unqualified, presumably cheaper, alternative.

The bottom-line result was particularly harsh for the taxpayer. Fidelity Charitable was contractually entitled to a portion of the sale proceeds even though the entire gain was taxable to the business owner. The business owner was also not even entitled to the charitable contribution deduction due to the failure to have a qualified appraiser/appraisal. Definitely not the desired economic result for the taxpayer and his family.

Three lessons to learn from this case

1. All planning should be implemented far sooner. All planning particularly charitable and noncharitable alternatives involving a transfer of ownership prior to the sale must be completed well before the formal closing of the sale or deal. If the sale or deal has progressed too far, you run the risk of any presale transfers being disregarded for tax purposes under the assignment of income doctrine. “Too far” means there is a meaningful possibility that the sale will not actually close.

The issuance of a letter of intent (LOI), which is not typically binding, begins a countdown for completion. Try to implement the plan before the LOI is issued, even though the LOI is subject to negotiation. Note that the best planning is done long before the sale is in progress. Some of the best results are obtained by planning at least two years prior to the sale.

2. Seek a qualified tax attorney’s advice. A qualified tax attorney can guide you through the maze of decisions involved with business sales. Note that many mergers and acquisitions attorneys specifically say that they do not give tax advice. Retain and listen to the advice of your tax attorney. Be candid about concerns that you may have, such as the possibility that the sale may not close. Creative solutions may be available.

3. Carefully follow the IRS rules for the tax planning or structure. In tax planning and in life, we should strive to minimize risk and maximize benefits. Here, the taxpayer did not bother to use an IRS-qualified appraiser.

The appraisal itself did not include a statement that the appraisal was prepared for federal tax purposes, included an incorrect date of contribution (possibly as a result of the application of the assignment of income doctrine), included a premature date of appraisal, did not adequately describe the method of valuation, was not even signed by the appraiser, did not include the appraiser’s qualifications, did not describe the property contributed in sufficient detail, and did not include an explanation of the specific basis for the valuation.

The simplest advice here is to dot the i’s and cross the t’s on a timely basis. The cheapest advice may actually be the more expensive, as happened here.

constructive receipt of income

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Constructive receipt of income is a tax term which determines when a cash-basis taxpayer has received income . Constructive receipt of income occurs when a party obtains income that is not yet physically received but has been credited to the taxpayer's account and over which they have immediate control. The taxpayer is liable to pay taxes on all income constructively received.

As per 26 Code of Federal Regulations § 1.451-2 , any income received which is subject to substantial limitations or restrictions does not qualify as constructive receipt of income.

For example, a grant of company stock which, while notified of the grant today, will not be available until next, does not qualify as constructive income.
On the other hand, a check received today which is not cashed for a year does qualify as constructive receipt of income on the day it is received because the receiver has the ability to cash it immediately.

Per Hornung v. Commissioner , income is to be included in the taxable year in which it is actually or constructively received. For businesses following the cash method of accounting , this fact may cause income constructively received to be subject to a different tax bracket than it would have, had it been received later.

Notably, businesses that follow Generally Accepted Accounting Principles (GAAP) or other method of accrual accounting do not need to consider constructive receipt of income.

[Last updated in July of 2022 by the Wex Definitions Team ]

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ASSIGNMENT OF INCOME DOCTRINE – SECTION 61 INTERNAL REVENUE CODE – J. RONALD JACKSON

I don’t want to pay tax on this income, assignment of income doctrine.

By: J Ronald “Ron” Jackson, MBA, CPA

Under federal income tax law gross income is taxed to the person who earns it or to the owner of property that generates the income. It is not uncommon for a high tax bracket taxpayer to want to shift income to a lower tax bracket family member in order to save on taxes and the income stay within the family unit. Alternatively, one who has appreciated stock or other type of property that he knows will be sold in the near future may wish to save on income taxes by gifting a portion of the property to a lower tax bracket family member who will report the sale at his or her lower income tax bracket. Alternatively, the individual may want a double benefit by gifting the appreciated property to a qualified charity thereby gaining a charitable income tax deduction for the value of the contributed property and being relieved of paying income taxes on the gain from the sale of the gifted property. This shifting of income, if permitted for income tax purposes, may provide considerable income tax savings.

The assignment of income doctrine was developed from court decisions which decided the issues, including the various methods employed in attempting to determine who earned the income. There was a time during the World War II years and thereafter, until around 1963, that the top income tax brackets could be as high as 91% – 93%. In addition to family members, the issues often arose when a high bracket taxpayer would make a gift of property (often the issues were gifts of appreciated stock that were to be sold shortly) to a qualified charity. The taxpayer would then take a charitable income tax deduction and not report the gain as he no longer owned the stock when sold. This shifting of income to a lower bracket taxpayer could have large savings in taxes for the high bracket taxpayer.

A simple example of income earned and taxed to the one who earns the income is when one works for weekly wages. The work week ends on Friday but the actual paycheck is not delivered until the following Wednesday. The wages are earned, for income tax purposes, at the end of the week (Friday). If the individual tells his employer to pay the earned wages to the individual’s mother, and the employer did that, the wages would still be taxed for federal income tax purposes to the individual since he earned the wages. The fact he may have made a gift of his earned wages does not change the income tax treatment as his employer has to include the earned wages on the individual’s W-2 form.

The above is a simple illustration of the doctrine that one who earns the income has to pay income tax on the wages. Let’s look at another situation. Suppose Perry, an individual taxpayer, owns all of the stock ownership in a very successful corporation (Company A) that he has run for many years. Perry is approached by the owners of another corporation (Company B) with an interest in purchasing Perry’s stock ownership in Company A. Negotiations have progressed and a total value has been tentatively negotiated of $5,000,000.00. The actual contract is still to be finalized and there are some remaining details to settle. Perry believes it will be finalized and signed within a reasonably short time. Perry, who is in a very high federal income tax bracket and who is a very civic-minded individual, has been told of the benefit of donating appreciated property to charity. Perry contacts the local Community Foundation and arranges to create the Perry Charitable Fund through the Community Foundation. The charitable fund will provide donations to his church and to other qualified charities that Perry usually supports. Perry then donates fifteen percent of his stock ownership, valued at $750,000.00 to the Community Foundation. Later after negotiations are completed, all of Company A’s stock is sold to Company B for the negotiated price of $5,000,000.00. Perry is happy. He has made a substantial profit from his years of work, made a donation to his favorite charity for which he plans to take a charitable income tax deduction, and will only have to report and pay income tax at capital gain rates on 85% of his stock as he has given 15% away.

Perry files his income tax return for the year and reports his taxable gain on the sale of his 85% ownership interest in Company A. About one year later Perry is audited by the IRS. The IRS agent questions why he did not report gain on the 15% of stock given to the Foundation. Perry replies that he did not own the stock as it was gifted to the charity before the date of the sale. The IRS auditor states that Perry should pay income tax on the gain on the stock given to the Community Foundation since it appears to have been a “done deal” before Perry gave the stock away and for that reason Perry owes income tax on all of the stock. Perry argues that no contracts were signed until weeks after the gift and that the deal could have fallen through at any time before signed by all parties. Perry disagreed with the audit. His tax dispute is now pending before the United States Tax Court. How will the court decide?

Section 61 of the Internal Revenue Code provides that gross income means all income earned from whatever source derived, and then lists several examples such as wages, services rendered, gains from the sales of property, and several other examples. In 1930, the U. S. Supreme Court summarized when addressing who earned income that “The fruits cannot be attributed to a different tree from that on which they grew.” Lucas v. Earl, 281 U.S. 111 (1930). This in effect clarified that gross income is to be taxed to the one that earns it and led to the fact that one cannot avoid paying income tax on earned income by gifting the property that created the income when it has been earned on or before the gift. An example would be when a corporation declares a dividend payable say on November 1st to stockholders of record on October 10th. A stockholder who owned the stock on October 10th is the one who has earned the income even if he or she sells or assigns their stock between October 10th and November 1st. The dividend is taxed to the owner on October 10, the date the dividend was declared.

In Perry’s case he argues that the negotiations were not complete when he made his gift, and that Company B could have backed out of the deal. When the court decides it will consider the stage of the negotiations, whether Company B had the financial backing to complete the deal, whether any contracts or preliminary statements of intent were prepared for review, and how long was the interval between the tentative agreement and the actual sale will all be considered. Situations like these happen from time to time. When the issue arises, it should be discussed in advance of the transaction, if possible, with your legal tax advisors who should be well versed in this area of tax law. One should be aware of the assignment of income doctrine in situations where it could apply in connection with his/her estate planning. What if this had been a publicly traded company?

If you have questions regarding Assignment of Income Doctrine and would like to discuss these issues, please contact Cody Walls, MBA, CPA at Denton Law Firm at 270-450-8253.

THIS ARTICLE IS DESIGNED TO PROVIDE GENERAL INFORMATION PREPARED BY THE PROFESSIONALS AT DENTON LAW FIRM, PLLC IN REGARD TO THE SUBJECT MATTER COVERED. IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICE. ALTHOUGH PREPARED BY PROFESSIONALS, THESE MATERIALS SHOULD NOT BE UTILIZED AS A SUBSTITUTE FOR PROFESSIONAL SERVICE IN SPECIFIC SITUATIONS. IF LEGAL ADVICE OR OTHER EXPERT ASSISTANCE IS REQUIRED, THE SERVICE OF A PROFESSIONAL SHOULD BE SOUGHT.

Frost Brown Todd

Section 1202 Planning: When Might the Assignment of Income Doctrine Apply to a Gift of QSBS?

US dollars in a white envelope on a wooden table. The concept of income, bonuses or bribes. Corruption, salary, bonus.

Jan 26, 2022

Categories:

Blogs Qualified Small Business Stock (QSBS) Tax Law Defined™ Blog

Scott W. Dolson

Section 1202 allows taxpayers to exclude gain on the sale of QSBS if all eligibility requirements are met. Section 1202 also places a cap on the amount of gain that a stockholder is entitled to exclude with respect to a single issuer’s stock. [i] A taxpayer has at least a $10 million per-issuer gain exclusion, but some taxpayer’s expected gain exceeds that cap. In our article Maximizing the Section 1202 Gain Exclusion Amount , we discussed planning techniques for increasing, and in some cases multiplying, the $10 million gain exclusion cap through gifting QSBS to other taxpayers. [ii] Increased awareness of this planning technique has contributed to a flurry of stockholders seeking last-minute tax planning help. This article looks at whether you can “multiply” Section 1202’s gain exclusion by gifting qualified small business stock (QSBS) when a sale transaction is imminent.

This is one in a series of articles and blogs addressing planning issues relating to QSBS and the workings of Sections 1202 and 1045. During the past several years, there has been an increase in the use of C corporations as the start-up entity of choice.  Much of this interest can be attributed to the reduction in the corporate rate from 35% to 21%, but savvy founders and investors have also focused on qualifying for Section 1202’s generous gain exclusion.  Recently proposed tax legislation sought to curb Section 1202’s benefits, but that legislation, along with the balance of President Biden’s Build Back Better bill, is currently stalled in Congress.

The Benefits of Gifting QSBS

Section 1202(h)(1) provides that if a stockholder gifts QSBS, the recipient of the gift is treated as “(A) having acquired such stock in the same manner as the transferor, and (B) having held such stock during any continuous period immediately preceding the transfer during which it was held (or treated as held under this subsection by the transferor.” This statute literally allows a holder of $100 million of QSBS to gift $10 million worth to each of nine friends, with the result that the holder and his nine friends each having the right to claim a separate $10 million gain exclusion. Under Section 1202, a taxpayer with $20 million in expected gain upon the sale of founder QSBS can increase the overall tax savings from approximately $2.4 million (based on no Federal income tax on $10 million of QSBS gain) to $4.8 million (based on no Federal income tax on $20 million of QSBS gain) by gifting $10 million worth of QSBS to friends and family. [iii]

A reasonable question to ask is whether it is ever too late to make a gift of QSBS for wealth transfer or Section 1202 gain exclusion cap planning? What about when a sale process is looming but hasn’t yet commenced? Is it too late to make a gift when a nonbinding letter of intent to sell the company has been signed? What about the situation where a binding agreement has been signed but there are various closing conditions remaining to be satisfied, perhaps including shareholder approval? Finally, is it too late to make a gift when a definitive agreement has been signed and all material conditions to closing have been satisfied?

Although neither Section 1202 nor any other tax authorities interpreting Section 1202 address whether there are any exceptions to Section 1202’s favorable treatment of gifts based on the timing of the gift, the IRS is not without potential weapons in its arsenal.

Application of the Assignment of Income Doctrine

If QSBS is gifted in close proximity to a sale, the IRS might claim that the donor stockholder was making an anticipatory assignment of income. [iv]

As first enunciated by the Supreme Court in 1930, the anticipatory assignment of income doctrine holds that income is taxable to the person who earns it, and that such taxes cannot be avoided through “arrangement[s] by which the fruits are attributed to a different tree from that on which they grew.” [v] Many assignment of income cases involve stock gifted to charities immediately before a prearranged stock sale, coupled with the donor claiming a charitable deduction for full fair market value of the gifted stock.

In Revenue Ruling 78-197, the IRS concluded in the context of a charitable contribution coupled with a prearranged redemption that the assignment of income doctrine would apply only if the donee is legally bound, or can be compelled by the corporation, to surrender shares for redemption. [vi] In the aftermath of this ruling, the Tax Court has refused to adopt a bright line test but has generally followed the ruling’s reasoning. For example, in Estate of Applestein v. Commissioner , the taxpayer gifted to custodial accounts for his children stock in a corporation that had entered into a merger agreement with another corporation. Prior to the gift, the merger agreement was approved by the stockholders of both corporations. Although the gift occurred before the closing of the merger transaction, the Tax Court held that the “right to the merger proceeds had virtually ripened prior to the transfer and that the transfer of the stock constituted a transfer of the merger proceeds rather than an interest in a viable corporation.” [vii] In contrast, in Rauenhorst v. Commissioner , the Tax Court concluded that a nonbinding letter of intent would not support the IRS’ assignment of income argument because the stockholder at the time of making the gift was not legally bound nor compelled to sell his equity. [viii]

In Ferguson v. Commissioner , the Tax Court focused on whether the percentage of shares tendered pursuant to a tender offer was the functional equivalent of stockholder approval of a merger transaction, which the court viewed as converting an interest in a viable corporation to the right to receive cash before the gifting of stock to charities. [ix] The Tax Court concluded that there was an anticipatory assignment of income in spite of the fact that there remained certain contingencies before the sale would be finalized. The Tax Court rejected the taxpayer’s argument that the application of the assignment of income doctrine should be conditioned on the occurrence of a formal stockholder vote, noting that the reality and substance of the particular events under consideration should determine tax consequences.

Guidelines for Last-Minute Gifts

Based on the guidelines established by Revenue Ruling 78-197 and the cases discussed above, the IRS should be unsuccessful if it asserts an assignment of income argument in a situation where the gift of QSBS is made prior to the signing of a definitive sale agreement, even if the company has entered into a nonbinding letter of intent. The IRS’ position should further weakened with the passage of time between the making of a gift and the entering into of a definitive sale agreement. In contrast, the IRS should have a stronger argument if the gift is made after the company enters into a binding sale agreement. And the IRS’ position should be stronger still if the gift of QSBS is made after satisfaction of most or all material closing conditions, and in particular after stockholder approval. Stockholders should be mindful of Tax Court’s comment that the reality and substance of events determines tax consequences, and that it will often be a nuanced set of facts that ultimately determines whether the IRS would be successful arguing for application of the assignment of income doctrine.

Transfers of QSBS Incident to Divorce

The general guidelines discussed above may not apply to transfers of QSBS between former spouses “incident to divorce” that are governed by Section 1041. Section 1041(b)(1) confirms that a transfer incident to divorce will be treated as a gift for Section 1202 purposes. Private Letter Ruling 9046004 addressed the situation where stock was transferred incident to a divorce and the corporation immediately redeemed the stock. In that ruling, the IRS commented that “under section 1041, Congress gave taxpayers a mechanism for determining which of the two spouses will pay the tax upon the ultimate disposition of the asset. The spouses are thus free to negotiate between themselves whether the ‘owner’ spouse will first sell the asset, recognize the gain or loss, and then transfer to the transferee spouse the proceeds from the sale, or whether the owner spouse will first transfer the asset to the transferee spouse who will then recognize gain or loss upon its subsequent sale.” Thus, while there are some tax cases where the assignment of income doctrine has been successfully asserted by the IRS in connection with transfers between spouses incident to divorce, Section 1041 and tax authorities interpreting its application do provide divorcing taxpayers an additional argument against application of the doctrine, perhaps even where the end result might be a multiplication of Section 1202’s gain exclusion.

More Resources

In spite of the potential for extraordinary tax savings, many experienced tax advisors are not familiar with QSBS planning. Venture capitalists, founders and investors who want to learn more about QSBS planning opportunities are directed to several articles on the Frost Brown Todd website:

Planning for the Potential Reduction in Section 1202’s Gain Exclusion
Section 1202 Qualification Checklist and Planning Pointers
A Roadmap for Obtaining (and not Losing) the Benefits of Section 1202 Stock
Maximizing the Section 1202 Gain Exclusion Amount
Advanced Section 1045 Planning
Recapitalizations Involving Qualified Small Business Stock
Section 1202 and S Corporations
The 21% Corporate Rate Breathes New Life into IRC § 1202
View all QSBS Resources

Contact  Scott Dolson  or  Melanie McCoy  (QSBS estate and trust planning) if you want to discuss any QSBS issues by telephone or video conference.

[i] References to “Section” are to sections of the Internal Revenue Code.

[ii] The planning technique of gifting QSBS recently came under heavy criticism in an article written by two investigative reporters. See Jesse Drucker and Maureen Farrell, The Peanut Butter Secret: A Lavish Tax Dodge for the Ultrawealthy. New York Times , December 28, 2021.

[iii] But in our opinion, in order to avoid a definite grey area in Section 1202 law, the donee should not be the stockholder’s spouse. The universe of donees includes nongrantor trusts, including Delaware and Nevada asset protection trusts.

[iv] This article assumes that the holder of the stock doesn’t have sufficient tax basis in the QSBS to take advantage of the 10X gain exclusion cap – for example, the stock might be founder shares with a basis of .0001 per share.

[v] Lucas v. Earl , 281 U.S. 111 (1930). The US Supreme Court later summarized the assignment of income doctrine as follows: “A person cannot escape taxation by anticipatory assignments, however skillfully devised, where the right to receive income has vested.” Harrison v. Schaffner , 312 U.S. 579, 582 (1941).

[vi] Revenue Ruling 78-197, 1978-1 CB 83.

[vii] Estate of Applestein v. Commissioner , 80 T.C. 331, 346 (1983).

[viii] Gerald A. Rauenhorst v. Commissioner , 119 T.C. 157 (2002).

[ix] Ferguson v. Commissioner , 108 T.C. 244 (1997).

Before you send us any information, know that contacting us does not create an attorney-client relationship. We cannot represent you until we know that doing so will not create a conflict of interest with any existing clients. Therefore, please do not send us any information about any legal matter that involves you unless and until you receive a letter from us in which we agree to represent you (an "engagement letter"). Only after you receive an engagement letter will you be our client and be properly able to exchange information with us. If you understand and agree with the foregoing and you are not our client and will not divulge confidential information to us, you may contact us for general information.

ESTATES, TRUSTS & GIFTS

Strategies for Minimizing the Impact of Income in Respect of a Decedent

Taxation of Estates & Trusts

Estates, Trusts & Gifts

Advisers focused on private clients commonly overlook planning for the income and estate taxes on income in respect of a decedent (IRD). This item discusses issues created by IRD and presents strategies and planning insights to assist taxpayers and their tax advisers with minimizing its impact.

IRD includes items of income earned or accrued during life but not received until after death. According to the Sec. 691 regulations and commentary over the years, IRD has four characteristics:

The item of income would have been taxable to the decedent if the decedent had survived to receive the income;
The income right had not matured sufficiently to have been properly included in the decedent's final income tax return;
The receipt must be of income and not a capital asset described in Sec. 1014(a); and
If the item of IRD is payable to someone other than the decedent's estate, the taxpayer acceding to it must have acquired the property right solely because of the decedent's death.

The most frequently received items of IRD are compensation income, commissions, retirement income, certain partnership distributions, and payments for crops. Under Sec. 691(a), IRD must be included in gross income by the estate or other person who acquires the right to receive the income for the tax year when received.

Even though a decedent does not receive IRD before his or her date of death, the property is still included in the decedent's estate because it is considered property in which the decedent had an interest at death, within the meaning of Sec. 2033. IRD does not receive a step-up in basis since the income has not been taxed on the decedent's income tax return. As such, IRD creates both estate and income tax liabilities. Sec. 691(c) offers some mitigation of the double taxation by allowing the IRD's ultimate recipient to reduce the amount of taxes owed through an income tax deduction for estate tax paid with respect to the IRD. This item reviews the Sec. 691(c) calculation and methodology.

IRD represents income to the person (or entity, in the case of the decedent's estate) who receives the income. For example, deferred compensation payments often are taxed to the decedent's surviving spouse, partnership receipts are frequently taxed to the decedent's estate, and retirement income is principally taxed to the decedent's surviving spouse or designated beneficiary.

Beneficiaries of a cash-basis decedent must claim all IRD when actually received unless the income was constructively received on the decedent's date of death. By contrast, beneficiaries of an accrual-basis decedent must claim as IRD only qualified death benefits and deferred compensation owed to the decedent. The other components of income, such as interest and wages accrued on the decedent's date of death, would be reported on the final Form 1040, U.S. Individual Income Tax Return , of the accrual-basis decedent.

The examples in the regulations, as well as the case law interpreting Sec. 691, provide the context for interpreting Sec. 691 and determining the amount of IRD, the character of the IRD, the identity of the taxpayer required to report the IRD, and the proper tax year for reporting the IRD. The first example in the Sec. 691 regulations concerns a decedent entitled upon his death "to a large salary payment to be made in equal annual installments over five years" (Regs. Sec. 1.691(a)-2(b), Example (1)). In the hypothetical, the estate collects two installments, and the right to the remaining installments is distributed to the residuary legacy of the estate. In this case, two installment payments would be included in the estate's gross income, and the balance would be taxable to the legatee and included in his gross income in the year received.

O'Daniel's Estate , 173 F.2d 966 (2d Cir. 1949), presents a similar situation. In O'Daniel , a vice president and director of a large company, who had participated in the company's bonus plan, died. The amount of the decedent's bonus was not set until several months after his death. Eventually, the bonus was paid to the decedent's estate, and the Tax Court ruled that the payment was IRD. The Second Circuit agreed, stating, "The bonus was derived through rights he had acquired, which even if not fixed at the time of his death were then expectancies which later bore fruit." Such rights were passed to the estate under his will and were taxable to the estate in the year the payments were received.

Sec. 691(a)(4) treats certain receipts from installment sales "uncollected by a decedent" and reportable under Sec. 453 as IRD (see Regs. Sec. 1.691(a)-5). It should be noted, however, in a typical sale to a defective grantor trust, the payments on a note the trust gave in consideration for the assets the grantor sold to the trust are disregarded since the trust is a disregarded entity. Whether Regs. Sec. 1.691(a)-5 applies to these notes has been disputed by commentators. A majority of commentators have argued that, by definition, IRD exists only where the receipt of property is treated as if the decedent had lived and received it. Under the analytical framework created in Rev. Rul. 85-13, it can be argued that because the decedent would not have recognized income if the note were paid during life, note payments after death are not properly characterized as IRD. In other words, the income tax result should be the same as if the note had been paid before the grantor's death: no income realization in either event.

A Roth IRA distribution is an exception to the rule that retirement plan distributions are IRD. With Roth IRAs, the tax-free nature of the distributions applies to the successor in interest as well as the original account owner.

Farmers have interesting IRD questions, and some of these questions have ended up in litigation with the IRS. Another example in the regulations discusses the tax result for an apple grower who sold some of his apples to a canning factory but failed to receive payment before death (Regs. Sec. 1.691(a)-2(b), Example (5)). The grower had been negotiating to sell additional apples to another buyer but had yet to enter into a contract. The regulations provide that the gain realized upon receipt of payment from the canning factory is IRD to the decedent's estate. The sale consummated between the second buyer and the executor of the decedent's estate, however, does not qualify as IRD, even though the apples had been grown and were ready for sale at the time of death.

Lastly, under Sec. 706, partnership income attributable to the period before the decedent's death should be included in the partner's final income tax return. Partnership income attributable to postmortem periods will be included in the income tax return of the successor to the deceased partner's interest (usually the estate). Sec. 691(e) cross-references Sec. 753, which provides that Sec. 736(a) payments are IRD. Sec. 736(a) includes payments a partnership made in liquidation of a retired or deceased partner's interest in excess of those made under Sec. 736(b), which are payments for a partner's interest in partnership property.

Generally speaking, Sec. 736(a) payments are for income, and Sec. 736(b) payments are for property. In a service partnership, payments for unrealized receivables and unstated goodwill made to a general partner are considered Sec. 736(a) payments. However, there is some latitude in drafting the partnership agreement to designate goodwill payments as property payments taxable under Sec. 736(b) and, therefore, not IRD. A deceased S corporation shareholder receives his or her pro rata share of any IRD items (accrued but unpaid income items) as IRD. The decedent's S corporation stock, however, receives a basis step-up.

Transferring the Rights to IRD

As a general rule, the transfer of a right to receive IRD, whether by gift or by sale, triggers immediate taxation of the IRD to the transferor. However, the general rule is inapplicable to a "transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent" (Sec. 691(a)(2)). In those cases, the transferee (rather than the transferor) is taxable on the IRD when it is paid to the transferee. This treatment stems from the concept that income earned over years or as a result of the termination of long-term employment should not be bunched into the one tax year of estate administration. Example (1) in Regs. Sec. 1.691(a)-2 showcases this result. Accordingly, the transfer of IRD under Sec. 691(a)(2) creates a tremendous planning opportunity to defer the realization of IRD and to transfer it to a beneficiary in a lower tax bracket. Taxation should be deferred until the beneficiary actually receives the income.

In a basic example concerning retirement accounts, if a child's residuary trust is the designated beneficiary of a decedent's retirement plan, the child has the right to stretch the minimum required distributions from the IRA over his or her life expectancy. Because IRD is taxable income only as it is received, the deferral of income tax on the distributions is achieved through this planning approach. However, estate planners must be careful. If IRD is transferred to an heir or trust in fulfillment of a pecuniary gift (a gift of a fixed dollar amount) as opposed to a fractional gift or a residuary bequest, the transfer is treated as a "sale" of the benefits, causing immediate realization of income to the funding trust (the transferor). This was the case in Letter Ruling 200644020, which concluded that the transfer of a dollar amount of an IRA to satisfy a charitable gift triggered tax to the transferring entity. Using IRD for charitable bequests can be a good strategy, but it's an area that requires attention to detail by an experienced tax adviser to achieve optimal results.

To better understand the result in Letter Ruling 200644020, it is helpful to contrast that ruling with Letter Ruling 200702007. In the latter letter ruling, a decedent who was a participant in a qualified profit sharing plan designated a qualified terminable interest property (QTIP) trust as the beneficiary of his interest in the plan. The designation of the QTIP trust as a beneficiary did not trigger the acceleration of tax on the IRD when the plan passed to the trust. Instead, the amounts of IRD in the plan were included in the gross income of the beneficiary of the QTIP trust only when she received a distribution from the trust. Though not explained in the ruling, the rationale for this treatment appears to be that the account was transferred, intact, to the QTIP by reason of the decedent's estate plan.

Another planning idea for retirement assets that works to eliminate IRD and double taxation is a deathbed Roth conversion. Under this strategy, the decedent pays the embedded income tax liability before death and then passes the Roth IRA to his or her child. Factors that may make a deathbed Roth conversion favorable include (1) a relatively small estate, and therefore little or no Sec. 691(c) deduction, and (2) circumstances where the effective income tax rate of the beneficiary is expected to be equal to or greater than that of the decedent. The risk to this strategy is that subsequent legislation could change the rules governing Roth IRAs.

Rollert Residuary Trust , 80 T.C. 619 (1983), aff'd, 752 F.2d 1128 (6th Cir. 1985), states the general rule that IRD items are not included in distributable net income. In Rollert , an estate claimed an income distribution deduction for the distribution of rights to receive future payments of IRD to the decedent's residuary trust, without having taken the value of the rights into the estate's gross income. The court held that this treatment was inconsistent with Sec. 691 and that the full value of the payments actually received was includible as IRD in the years received by the residuary trust.

In Chief Counsel Advice 200644016, the IRS noted that the assignment of rights to receive IRD to a beneficiary by a trust or estate is governed by different rules than the receipt of actual payments by the trust or estate, followed by a distribution of cash to the beneficiaries . The residuary legatee must report amounts subsequently collected as IRD when collected.

Sec. 691(b) ensures that the deductions corresponding to the IRD included in taxable income are not lost because of death. Without such a law, deductions could be lost with the death of the taxpayer whose services or activities generated the related IRD. The so-called deductions in respect of a decedent (DRD) encompass five deductions and one credit, including Sec. 162 business expenses, Sec. 163 interest deductions, Sec. 164 deductions for taxes, Sec. 212 expenses for the production of income, Sec. 611 depletion deductions, and the Sec. 27 foreign tax credit (see Regs. Sec. 1.691(b)-1(a)). The deduction cannot be accelerated, but rather is allowable only to the person who receives the IRD to which the deduction relates.

Calculating the Sec. 691(c) Deduction

Even if IRD is recognized in taxable income, if the estate was subject to federal estate tax, the Code permits a deduction to prevent the IRD from being taxed both as an asset of the estate and as income to the recipient.

Indeed, Regs. Sec. 1.691(c)-1 sets forth the method of calculating the amount of the deduction and its allocation. In step one of the calculation, one must first add up the fair market value of all IRD items included in the decedent's gross estate, as calculated for federal estate tax purposes. Next, the net value of the IRD is determined by reducing the IRD by the total amount of DRD. Then, the net estate tax on the gross estate is calculated, including the value of all IRD, and that number is reduced by any credits allowed. Finally, the estate tax is calculated with all of the IRD items removed. The simplest way to do this is to remove the IRD items (and related DRD items) in the software program used to prepare the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return , and determine what the estate tax would have been if no IRD had been included in the estate. The difference between the two figures is the net estate tax attributable to the IRD. That is the amount of the Sec. 691(c) deduction.

If one beneficiary received all of the IRD in one tax year, the allocation of the deduction is easy to complete. That taxpayer includes the IRD items on his or her Form 1040 and deducts the full Sec. 691(c) deduction as calculated above. (It is important to note that a Sec. 691(c) deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous itemized deductions.) If, however, multiple beneficiaries receive different items of IRD across several, or even decades of, tax years, the calculation becomes more intricate. In that case, the issue arises as to how to treat the investment income attributable to the IRD earned subsequent to the transfer of the account to the beneficiary, but which has yet to be distributed and therefore taxed to the beneficiary. For example, if a beneficiary of her father's IRA elects to take distributions over her life expectancy (commonly called a stretch IRA payout), what portion of the annual minimum required distribution (MRD) is IRD? The IRS has been silent on this issue.

Many advisers use a first-in, first-out approach. Under this methodology, each distribution is deemed to be made first from the IRD in the retirement account until the dollar value of the deduction is exhausted. In this way, the beneficiary is relieved from making an annual determination of the portion of the MRD that is IRD versus subsequently earned investment income. A good way to handle the calculation is to provide a schedule to the beneficiary that shows the MRD for the ensuing years when there will be a corresponding Sec. 691(c) deduction. The schedule continues until the Sec. 691(c) deduction is exhausted. In situations with multiple beneficiaries, the Sec. 691(c) deduction is allocated pro rata. In other words, the amount of the Sec. 691(c) deduction is multiplied by the fraction of the IRD property received by the beneficiary. Using the deduction in a year when no IRD is taxable to the recipient is not permitted.

Although the IRD rules are contained in only one Code section, the concept permeates many aspects of proper tax preparation following a taxpayer's death. The complexity of implementing the rules is exacerbated when there are different preparers for the Form 706 estate tax return and the subsequent Forms 1041, U.S. Income Tax Return for Estates and Trusts , and Forms 1040 for the recipients of IRD and Sec. 691(c) deductions. Strong recordkeeping and the creation of schedules delineating the annual deduction are recommended to keep taxpayers from losing this valuable deduction.

Editor Notes

Mindy Tyson Weber is a senior director, Washington National Tax for McGladrey LLP.

For additional information about these items, contact Ms. Weber at 404-373-9605 or [email protected] .

Unless otherwise noted, contributors are members of or associated with McGladrey LLP.

Sale of clean-energy credits: Traps for the unwary

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This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

PRACTICE MANAGEMENT

CPAs assess how their return preparation products performed.

FAQ: What Is the Assignment of Income?

Assignment of income allows you to assign part of your income directly to another person. While there are several valid reasons to assign your income to someone else, many taxpayers mistakenly believe that it can help lower their taxable income. While assignment of income allows you to divert income, you cannot divert taxes.

In this article, we’ll provide some examples of failed attempts at avoiding income taxes through the assignment of income and the valid reasons someone might want to assign income to someone else.

RELATED: Tax Evasion Vs. Tax Avoidance: The Difference and Why It Matters

You Can’t Use Assignment of Income to Avoid Paying Taxes

The assignment of income doctrine states that the taxpayer who earns the income must pay the tax on that income, even if he gave the right to collect the income to another person.

The doctrine is quite clear: taxpayers must pay their own taxes. However, that doesn’t stop many people from thinking they can avoid paying taxes or minimize their taxable income through the assignment of income.

Here are a few scenarios we commonly see.

High-Earning Individuals: In an attempt to avoid having to pay the higher tax rates on their substantial income, high-earning individuals sometimes try to divert income to a lower-income family member in a significantly lower tax bracket. The assignment of income doctrine prevents this scheme from working.
Charitable Donating : Even if a taxpayer assigns part of their income to a charitable organization, they will still have to pay the taxes. However, they might be eligible to claim a deduction for donations to charity while building some good karma by helping others in need.
Owning Multiple Businesses: A taxpayer who controls multiple businesses might try to divert income from one business to another, especially if one has the potential to receive a tax benefit but requires a higher income to do so. Not only is this illegal, but it also will not lower the taxable income of the business.

You Can Use Assignment of Income to… Assign Your Income

The assignment of income doctrine does not stop you from diverting part of your income to someone else. In fact, that’s the whole point! Maybe you’re helping to support an elderly family member, or you consistently donate to the same charity every month or year. Whatever the case, you can assign the desired amount of your income to go to another person or organization.

While there are no tax benefits involved in assigning income versus making traditional payments or donations, it can be a more convenient option if you’re making regular payments throughout the year.

S.H. Block Tax Services Provides Clear Answers For Complicated Questions

If you have any questions about how to go about assigning part of your income to a family member in need or a separate business entity, please contact S.H. Block Tax Services today. We can answer all of your questions and address all of your concerns regarding the assignment of income and provide suggestions on valid and legal ways to save on your taxes.

Please call us today at (410) 872-8376 or complete this brief contact form to get started on the path toward tax compliance and financial freedom.

The content provided here is for informational purposes only and should not be construed as legal advice on any subject.

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What Happens if you Assign your Income?

There are some instances when a person may choose to assign a portion of their income to another individual. You may be able to do this by asking your employer to send your paycheck directly to a third party.

It should be noted, however, that if you choose to assign your income to a third party, then this does not mean that you will be able to avoid paying taxes on that income. In other words, you will still be responsible for paying taxes on that income regardless of whether you decide to assign your income to a third party or not. This guideline is known as the “assignment of income doctrine.”

The primary purpose of the “assignment of income doctrine” is to ensure that a person does not simply assign their income to a third party to avoid having to pay taxes. If they do, then they can be charged and convicted of committing tax evasion .

One other important thing to bear in mind about income assignments is that they are often confused with the concept of wage garnishments. However, income or wage assignments are different from wage garnishments. In a situation that involves wage garnishment, a person’s paycheck is involuntarily withheld from them to pay off a debt like outstanding child support payments and is typically ordered by a court.

In contrast, an income or wage assignment is when a person voluntarily agrees to assign their income to someone else through a contract or a similar type of agreement.

How is Assigned Income Taxed?

Are there any exceptions, should i consult with an attorney.

As previously discussed, a taxpayer will still be required to pay taxes on any income that is assigned to a third party. The person who earns the income is the one who will be responsible for paying taxes on the income, not the person to whom it is assigned. The same rule applies to income that a person receives from property or assets.

For example, if a person earns money through a source of what is considered to be a passive stream of income, such as from stock dividends, the person who owns these assets will be the one responsible for paying taxes on the income they receive from it. The reason for this is because income is generally taxed to the person who owns any income-generating property under the law.

If a person chooses to give away their income-generating property and/or assets as a gift to a family member, then they will no longer be taxed on any income that is earned from those property or assets. This rule will be triggered the moment that the owner has given up their complete control and rights over the property in question.

In order to demonstrate how this might work, consider the following example:

Instead, the person to whom the apartment building was transferred will now be liable for paying taxes on any income they receive from tenants paying rent to live in the building since they are the new owner.

There is one exception to the rule provided by the assignment of income doctrine and that is when income is assigned in a scenario that involves a principal-agent relationship . For example, if an agent receives income from a third-party that is intended to be paid to the principal, then this income is usually not taxable to the agent. Instead, it will be taxable to the principal in this relationship.

Briefly, an agent is a person who acts on behalf of another (i.e., the principal) in certain situations or in regard to specific transactions. On the other hand, a principal is someone who authorizes another person (i.e., the agent) to act on their behalf and represent their interests under particular circumstances.

For example, imagine a sales representative that is employed by a large corporation. When the sales representative sells the corporation’s product or service to a customer, they will receive money from the customer in exchange for that service or product. Although the sales representative is the one being paid in the transaction, the money actually belongs to the corporation. Thus, it is the corporation who would be liable for paying taxes on the income.

In other words, despite the fact that this income may appear to have been earned by the corporation’s agent (i.e., the sales representation in this scenario), the corporation (i.e., the principal) will still be taxed on the income since the sales representative is acting on behalf of the corporation to generate income for them.

One other exception that may apply here is known as a “kiddie tax.” A kiddie tax is unearned or investment-related income that belongs to a child, but must be paid by the earning child’s parent and at the tax rate assigned to adults (as opposed to children). This is also to help prevent parents from abusing the tax system by using their child’s lower tax rate to shift over assets or earned income and take advantage of their child’s lower tax bracket rate.

So, even though a parent has assigned money or assets to a child that could be considered their earned income, the money will still have to be paid by the parent and taxed at a rate that is reserved for adults. The child will not need to pay any taxes on this earned income until it reaches a certain amount.

In general, the tax rules that exist under the assignment of income doctrine can be confusing. There are several exceptions to these rules and many of them require knowing how to properly apply them to the specific facts of each individual case.

Therefore, if you have any questions about taxable income streams or are involved in a dispute over taxable income with the IRS, then it may be in your best interest to contact an accountant or a local tax attorney to provide further guidance on the matter. An experienced tax attorney can help you to avoid incurring extra tax penalties and can assist you in resolving your income tax issue in an efficient manner.

Your attorney will also be able to explain the situation and can recommend various options to settle the assignment of income issue or any related concerns. In addition, your attorney will be able to communicate with the IRS on your behalf and can provide legal representation if you need to appear in court.

Lastly, if you think you are not liable for paying taxes on income that has been assigned to you by someone else, then your lawyer can review the facts of your claim and can find out whether you may be able to avoid having to pay taxes on that income.

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Anticipatory assignment of income, charitable contribution deduction, and qualified appraisals.

Estate of Hoenshied v. Comm’r, T.C. Memo. 2023-34 | March 15, 2023 | Nega, J. | Dkt. No. 18606-19

Summary: In this 49-page opinion the Tax Court addresses a deficiency arising from the charitable contribution of appreciated shares of stock in a closely held corporation to a charitable organization that administers donor-advised funds for tax-exempt purposes under section 501(c)(3). The contribution in issue was made near contemporaneously with the selling of those shares to a third party. The timeline (truncated heavily for this blog) is as follows:

On June 11, 2015, the shareholders of the corporation in issue unanimously ratified the sale of all outstanding stock of the corporation. Immediately following the shareholder meeting, the corporation’s board of directors unanimously approved Petitioner’s request to be able to transfer a portion of his shares to Fidelity Charitable Gift Fund, a tax-exempt charitable organization under section 501(c)(3). Thereafter, the corporation and the purchaser of shares continued drafting and revising the Contribution and Stock Purchase Agreement.

On July 13, 2015, Fidelity Charitable first received a stock certificate from Petitioner.

On July 14, 2015, the Contribution and Stock Purchase Agreement was revised to specify that Petitioner contributed shares to Fidelity Charitable on July 10, 2015, and on July 15, 2015, the Contribution and Stock Purchase Agreement was signed and the transaction was funded.

Fidelity Charitable, having provided an Irrevocable Stock Power as part of the transaction, received $2,941,966 in cash proceeds from the sale, which was deposited in Petitioner’s donor-advised fund giving account.

On November 18, 2015, Fidelity Charitable sent Petitioner a contribution confirmation letter acknowledging a charitable contribution of the corporate shares and indicating that Fidelity Charitable received the shares on June 11, 2015.

In its 2015 tax return, Petitioner did not report any capital gains on the shares contributed to Fidelity Charitable but claimed a noncash charitable contribution deduction of $3,282,511. In support of the claimed deduction, a Form 8283 was attached to the return.

Petitioner’s 2015 tax return was selected for examination. The IRS issued to Petitioners a notice of deficiency, determining a deficiency of $647,489, resulting from the disallowance of the claimed charitable contribution deduction, and a penalty of $129,498 under section 6662(a).

Key Issues:

Whether and when Petitioners made a valid contribution of the shares of stock? Whether Petitioners had unreported capital gain income due to their right to proceeds from the sale of those shares becoming fixed before the gift? Whether Petitioners are entitled to a charitable contribution deduction? Whether Petitioners are liable for an accuracy-related penalty under section 6662(a) with respect to an underpayment of tax?

Primary Holdings:

(1) Petitioners failed to establish that any of the elements of a valid gift was present on June 11, 2015. No evidence was presented to credibly identify a specific action taken on June 11 that placed the shares within Fidelity Charitable’s dominion and control. Instead, the valid gift of shares was made by effecting delivery of a PDF of the certificate to Fidelity Charitable on July 13.

(2) Yes. None of the unresolved contingencies remaining on July 13, 2015 were substantial enough to have posed even a small risk of the overall transaction’s failing to close. Thus, Petitioners, through the doctrine of anticipatory assignment of income, had capital gains on the sale of the 1,380 appreciated shares of stock, even though Fidelity Charitable received the proceeds from that sale.

(3) No, Petitioners failed to show that the charitable contribution met the qualified appraisal requirements of section 170. The appraiser was not shown to be qualified, per regulations, at trial or in the appraisal itself, and the appraisal did not substantially comply with the regulatory requirements. “The failure to include a description of such experience in the appraisal was a substantive defect. . . . Petitioners’ failure to satisfy multiple substantive requirements of the regulations, paired with the appraisal’s other more minor defects, precludes them from establishing substantial compliance.” In addition, Petitioners failed to establish reasonable cause for failing to comply with the appraisal requirements “because petitioner knew or should have known that the date of contribution (and thus the date of valuation) was incorrect.” Thus, the IRS’s determination to disallow the charitable contribution deduction is sustained.

(4) No. While Petitioners did not have reasonable cause for their failure to comply with the qualified appraisal requirement, their liability for an accuracy-related penalty was a separate analysis, and the IRS did not carry the burden of proof. Petitioners did not follow their professional’s advice to have the paperwork for the contribution ready to go “well before the signing of the definitive purchase agreement.” But, Petitioners adhered to the literal thrust of the advice given: that “execution of the definitive purchase agreement” was the firm deadline to contribute the shares and avoid capital gains (even if that proved to be incorrect advice under the circumstances).

Key Points of Law:

Gross Income. Gross income means “all income from whatever source derived,” including “[g]ains derived from dealings in property.” 26 U.S.C. § 61(a)(3). In general, a taxpayer must realize and recognize gains on a sale or other disposition of appreciated property. See id. at § 1001(a)–(c). However, a taxpayer typically does not recognize gain when disposing of appreciated property via gift or charitable contribution. See Taft v. Bowers, 278 U.S. 470, 482 (1929); see also 26 U.S.C. § 1015(a) (providing for carryover basis of gifts). A taxpayer may also generally deduct the fair market value of property contributed to a qualified charitable organization. See 26 U.S.C. § 170(a)(1); Treas. Reg. 16 § 1.170A-1(c)(1). Contributions of appreciated property are thus tax advantaged compared to cash contributions; when a contribution of property is structured properly, a taxpayer can both avoid paying tax on the unrealized appreciation in the property and deduct the property’s fair market value. See, e.g., Dickinson v. Commissioner, T.C. Memo. 2020-128, at *5.

Donor-Advised Fund. The use of a donor-advised fund further optimizes a contribution by allowing a donor “to get an immediate tax deduction but defer the actual donation of the funds to individual charities until later.” Fairbairn v. Fid. Invs. Charitable Gift Fund, No. 18-cv-04881, 2021 WL 754534, at *2 (N.D. Cal. Feb. 26, 2021).

Two-Part Test to Determine Charitable Contribution of Appreciated Property Followed by Sale by Donee. The donor must (1) give the appreciated property away absolutely and divest of title (2) “before the property gives rise to income by way of a sale.” Humacid Co. v. Commissioner, 42 T.C. 894, 913 (1964). Valid Gift of Shares of Stock. “Ordinarily, a contribution is made at the time delivery is effected.” Treas. Reg. § 1.170A-1(b). “If a taxpayer unconditionally delivers or mails a properly endorsed stock certificate to a charitable donee or the donee’s agent, the gift is completed on the date of delivery.” Id. However, the regulations do not define what constitutes delivery, and the Tax Court evaluates applicable state law for the threshold determination of whether donors have divested themselves of their property rights via gift. See, e.g., United States v. Nat’l Bank of Com., 472 U.S. 713, 722 (1985). In determining the validity of a gift, Michigan law, for example (and as applied in Estate of Hoensheid), requires a showing of (1) donor intent to make a gift; (2) actual or constructive delivery of the subject matter of the gift; and (3) donee acceptance. See Davidson v. Bugbee, 575 N.W.2d 574, 576 (Mich. Ct. App. 1997).

Present Intent. The determination of a party’s subjective intent is necessarily a highly fact-bound issue. When deciding such an issue, the Tax Court must determine “whether a witness’s testimony is credible based on objective facts, the reasonableness of the testimony, the consistency of statements made by the witness, and the demeanor of the witness.” Ebert v. Commissioner, T.C. Memo. 2015-5, at *5–6. If contradicted by the objective facts in the record, the Tax Court will not “accept the self-serving testimony of [the taxpayer] . . . as gospel.” Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).

Delivery. Under Michigan law, the delivery requirement generally contemplates an “open and visible change of possession” of the donated property. Shepard v. Shepard, 129 N.W. 201, 208 (Mich. 1910). Manually providing tangible property to the donee is the classic form of delivery. Manually providing to the donee a stock certificate that represents intangible shares of stock is traditionally sufficient delivery. The determination of what constitutes delivery is context-specific and depends upon the “nature of the subject-matter of the gift” and the “situation and circumstances of the parties.” Shepard, 129 N.W. at 208. Constructive delivery may be effected where property is delivered into the possession of another on behalf of the donee. See, e.g., In re Van Wormer’s Estate, 238 N.W. 210, 212 (Mich. 1931). Whether constructive or actual, delivery “must be unconditional and must place the property within the dominion and control of the donee” and “beyond the power of recall by the donor.” In re Casey Estate, 856 N.W.2d 556, 563 (Mich. Ct. App. 2014). If constructive or actual delivery of the gift property occurs, its later retention by the donor is not sufficient to defeat the gift. See Estate of Morris v. Morris, No. 336304, 2018 WL 2024582, at *5 (Mich. Ct. App. May 1, 2018).

Delivery of Shares. Retention of stock certificates by donor’s attorney may preclude a valid gift. Also, a determination of no valid gift may occur where the taxpayer instructs a custodian of corporate books to prepare stock certificates but remained undecided about ultimate gift. In some jurisdictions, transfer of shares on the books of the corporation can, in certain circumstances, constitute delivery of an inter vivos gift of shares. See, e.g., Wilmington Tr. Co. v. Gen. Motors Corp., 51 A.2d 584, 594 (Del. Ch. 1947); Chi. Title & Tr. Co. v. Ward, 163 N.E. 319, 322 (Ill. 1928); Brewster v. Brewster, 114 A.2d 53, 57 (Md. 1955). The U.S. Court of Appeals for the Sixth Circuit has stated that transfer on the books of a corporation constitutes delivery of shares of stock, apparently as a matter of federal common law. See Lawton v. Commissioner, 164 F.2d 380, 384 (6th Cir. 1947), rev’g 6 T.C. 1093 (1946); Bardach v. Commissioner, 90 F.2d 323, 326 (6th Cir. 1937), rev’g 32 B.T.A. 517 (1935); Marshall v. Commissioner, 57 F.2d 633, 634 (6th Cir. 1932), aff’g in part, rev’g in part 19 B.T.A. 1260 (1930). The transfers on the books of the corporation were bolstered by other objective actions that evidenced a change in possession and thus a gift. See Jolly’s Motor Livery Co. v. Commissioner, T.C. Memo. 1957-231, 16 T.C.M. (CCH) 1048, 1073.

Acceptance. Donee acceptance of a gift is generally “presumed if the gift is beneficial to the donee.” Davidson, 575 N.W.2d at 576.

Anticipatory Assignment of Income. The anticipatory assignment of income doctrine is a longstanding “first principle of income taxation.” Commissioner v. Banks, 543 U.S. 426, 434 (2005). The doctrine recognizes that income is taxed “to those who earn or otherwise create the right to receive it,” Helvering v. Horst, 311 U.S. 112, 119 (1940), and that tax cannot be avoided “by anticipatory arrangements and contracts however skillfully devised,” Lucas v. Earl, 281 U.S. 111, 115 (1930). A person with a fixed right to receive income from property thus cannot avoid taxation by arranging for another to gratuitously take title before the income is received. See Helvering, 311 U.S. at 115–17; Ferguson, 108 T.C. at 259. This principle is applicable, for instance, where a taxpayer gratuitously assigns wage income that the taxpayer has earned but not yet received, or gratuitously transfers a debt instrument carrying accrued but unpaid interest. A donor will be deemed to have effectively realized income and then assigned that income to another when the donor has an already fixed or vested right to the unpaid income. See Cold Metal Process Co. v. Commissioner, 247 F.2d 864, 872–73 (6th Cir. 1957), rev’g 25 T.C. 1333 (1956). The same principle is often applicable where a taxpayer gratuitously transfers shares of stock that are subject to a pending, prenegotiated transaction and thus carry a fixed right to proceeds of the transaction. See Rollins v. United States, 302 F. Supp. 812, 817–18 (W.D. Tex. 1969).

Determining Anticipatory Assignment of Income. In determining whether an anticipatory assignment of income has occurred with respect to a gift of shares of stock, the Tax Court looks to the realities and substance of the underlying transaction, rather than to formalities or hypothetical possibilities. See Jones v. United States, 531 F.2d 1343, 1345 (6th Cir. 1976) (en banc); Allen v. Commissioner, 66 T.C. 340, 346 (1976). In general, a donor’s right to income from shares of stock is fixed if a transaction involving those shares has become “practically certain to occur” by the time of the gift, “despite the remote and hypothetical possibility of abandonment.” Jones, 531 F.2d at 1346. The mere anticipation or expectation of income at the time of the gift does not establish that a donor’s right to income is fixed. The Tax Court looks to several other factors that bear upon whether the sale of shares was virtually certain to occur at the time of a purported gift as part of the same transaction. Relevant factors may include (1) any legal obligation to sell by the donee, (2) the actions already taken by the parties to effect the transaction, (3) the remaining unresolved transactional contingencies, and (4) the status of the corporate formalities required to finalize the transaction.

Corporate Formalities. Also relevant is the status of the corporate formalities necessary for effecting the transaction. See Estate of Applestein, 80 T.C. at 345–46 (finding that taxpayer’s right to sale proceeds from shares had “virtually ripened” upon shareholders’ approval of proposed merger agreement). Under Michigan law, a proposed plan to exchange shares must generally be approved by a majority of the corporation’s shareholders. Formal shareholder approval of a transaction has often proven to be sufficient to demonstrate that a right to income from shares was fixed before a subsequent transfer. However, such approval is not necessary for a right to income to be fixed, when other actions taken establish that a transaction was virtually certain to occur. See Ferguson, 104 T.C. at 262–63. Charitable Contribution Deduction. Section 170(a)(1) allows as a deduction any charitable contribution (as defined) payment of which is made within the taxable year. “A charitable contribution is a gift of property to a charitable organization made with charitable intent and without the receipt or expectation of receipt of adequate consideration.” Palmolive Bldg. Invs., LLC v. Commissioner, 149 T.C. 380, 389 (2017). Section 170(f)(8)(A) provides that “[n]o deduction shall be allowed . . . for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization that meets the requirements of subparagraph (B).” For contributions of property in excess of $500,000, the taxpayer must also attach to the return a “qualified appraisal” prepared in accordance with generally accepted appraisal standards. 26 U.S.C. § 170(f)(11)(D) and (E). Contemporaneous Written Acknowledgement (“CWA”). A CWA must include, among other things, the amount of cash and a description of any property contributed. 26 U.S.C. § 170(f)(8)(B). A CWA is contemporaneous if obtained by the taxpayer before the earlier of either (1) the date the relevant tax return was filed or (2) the due date of the relevant tax return. Id. at § 170(f)(8)(C). For donor-advised funds, the CWA must include a statement that the donee “has exclusive legal control over the assets contributed.” 26 U.S.C. § 170(f)(18)(B). These requirements are construed strictly and do not apply the doctrine of substantial compliance to excuse defects in a CWA.

Qualified Appraisal for Certain Charitable Contributions. Section 170(f)(11)(A)(i) provides that “no deduction shall be allowed . . . for any contribution of property for which a deduction of more than $500 is claimed unless such person meets the requirements of subparagraphs (B), (C), and (D), as the case may be.” Subparagraph (D) requires that, for contributions for which a deduction in excess of $500,000 is claimed, the taxpayer attach a qualified appraisal to the return. Section 170(f)(11)(E)(i) provides that a qualified appraisal means, with respect to any property, an appraisal of such property which—(I) is treated for purposes of this paragraph as a qualified appraisal under regulations or other guidance prescribed by the Secretary, and (II) is conducted by a qualified appraiser in accordance with generally accepted appraisal standards and any regulations or other guidance prescribed under subclause (I). The regulations provide that a qualified appraisal is an appraisal document that, inter alia, (1) “[r]elates to an appraisal that is made” no earlier than 60 days before the date of contribution and (2) is “prepared, signed, and dated by a qualified appraiser.” Treas. Reg. § 1.170A-13(c)(3)(i).

Qualified Appraisal Must Include: Treasury Regulation § 1.170A-13(c)(3)(ii) requires that a qualified appraisal itself include, inter alia:

(1) “[a] description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property that was appraised is the property that was (or will be) contributed;”

(2) “[t]he date (or expected date) of contribution to the donee;”

(3) “[t]he name, address, and . . . identifying number of the qualified appraiser;”

(4) “[t]he qualifications of the qualified appraiser;”

(5) “a statement that the appraisal was prepared for income tax purposes;”

(6) “[t]he date (or dates) on which the property was appraised;”

(7) “[t]he appraised fair market value . . . of the property on the date (or expected date) of contribution;” and

(8) the method of and specific basis for the valuation.

Qualified Appraiser. Section 170(f)(11)(E)(ii) provides that a “qualified appraiser” is an individual who (I) has earned an appraisal designation from a recognized professional appraiser organization or has otherwise met minimum education and experience requirements set forth in regulations, (II) regularly performs appraisals for which the individual receives compensation, and (III) meets such other requirements as may be prescribed . . . in regulations or other guidance. An appraiser must also demonstrate “verifiable education and experience in valuing the type of property subject to the appraisal.” The regulations add that the appraiser must include in the appraisal summary a declaration that he or she (1) “either holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis;” (2) is “qualified to make appraisals of the type of property being valued;” (3) is not an excluded person specified in paragraph (c)(5)(iv) of the regulation; and (4) understands the consequences of a “false or fraudulent overstatement” of the property’s value. Treas. Reg. § 1.170A-13(c)(5)(i). The regulations prohibit a fee arrangement for a qualified appraisal “based, in effect, on a percentage . . . of the appraised value of the property.” Id. at subpara. (6)(i).

Substantial Compliance with Qualified Appraisal Requirements . The qualified appraisal requirements are directory, rather than mandatory, as the requirements “do not relate to the substance or essence of whether or not a charitable contribution was actually made.” See Bond v. Commissioner, 100 T.C. 32, 41 (1993). Thus, the doctrine of substantial compliance may excuse a failure to strictly comply with the qualified appraisal requirements. If the appraisal discloses sufficient information for the IRS to evaluate the reliability and accuracy of a valuation, the Tax Court may deem the requirements satisfied. Bond, 100 T.C. at 41–42. Substantial compliance allows for minor or technical defects but does not excuse taxpayers from the requirement to disclose information that goes to the “essential requirements of the governing statute.” Estate of Evenchik v. Commissioner, T.C. Memo. 2013-34, at *12. The Tax Court generally declines to apply substantial compliance where a taxpayer’s appraisal either (1) fails to meet substantive requirements in the regulations or (2) omits entire categories of required information.

Reasonable Cause to Avoid Denial of Charitable Contribution Deduction. Taxpayers who fail to comply with the qualified appraisal requirements may still be entitled to charitable contribution deductions if they show that their noncompliance is “due to reasonable cause and not to willful neglect.” 26 U.S.C. § 170(f)(11)(A)(ii)(II). This defense is construed similarly to the defense applicable to numerous other Code provisions that prescribe penalties and additions to tax. See id. at § 6664(c)(1). To show reasonable cause due to reliance on a professional adviser, the Tax Court generally requires that a taxpayer show (1) that their adviser was a competent professional with sufficient expertise to justify reliance; (2) that the taxpayer provided the adviser necessary and accurate information; and (3) that the taxpayer actually relied in good faith on the adviser’s judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). “Unconditional reliance on a tax return preparer or C.P.A. does not by itself constitute reasonable reliance in good faith; taxpayers must also exercise ‘[d]iligence and prudence’.” See Stough v. Commissioner, 144 T.C. 306, 323 (2015) (quoting Estate of Stiel v. Commissioner, T.C. Memo. 2009-278, 2009 WL 4877742, at *2)).

Section 6662(a) Penalty. Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any underpayment of tax required to be show on a return that is attributable to negligence, disregard of rules or regulations, or a substantial understatement of income tax. Negligence includes “any failure to make a reasonable attempt to comply” with the Code, 26 U.S.C. § 6662(c), or a failure “to keep adequate books and records or to substantiate items properly,” Treas. Reg. § 1.6662-3(b)(1). An understatement of income tax is “substantial” if it exceeds the greater of 10% of the tax required to be shown on the return or $5,000. 26 U.S.C. § 6662(d)(1)(A). Generally, the IRS bears the initial burden of production of establishing via sufficient evidence that a taxpayer is liable for penalties and additions to tax; once this burden is met, the taxpayer must carry the burden of proof with regard to defenses such as reasonable cause. Id. at § 7491(c); see Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). The IRS bears the burden of proof with respect to a new penalty or increase in the amount of a penalty asserted in his answer. See Rader v. Commissioner, 143 T.C. 376, 389 (2014); Rule 142(a), aff’d in part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015); see also RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39 (2017), aff’d sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019). As part of the burden of production, the IRS must satisfy section 6751(b) by producing evidence of written approval of the penalty by an immediate supervisor, made before formal communication of the penalty to the taxpayer.

Reasonable Cause Defense to Section 6662(a) Penalty. A section 6662 penalty will not be imposed for any portion of an underpayment if the taxpayers show that (1) they had reasonable cause and (2) acted in good faith with respect to that underpayment. 26 U.S.C. § 6664(c)(1). A taxpayer’s mere reliance “on an information return or on the advice of a professional tax adviser or an appraiser does not necessarily demonstrate reasonable cause and good faith.” Treas. Reg. § 1.6664-4(b)(1). That reliance must be reasonable, and the taxpayer must act in good faith. In evaluating whether reliance is reasonable, a taxpayer’s “education, sophistication and business experience will be relevant.” Id. para. (c)(1).

Insights: Going forward, this opinion of Estate of Hoenshied v. Commissioner will likely be a go-to source for any practitioner involved in a taxpayer’s proposed transfer of corporate shares (or other property) to a donor-advised fund or other charitable organization as part of a buy-sell transaction that is anywhere close in time to the proposed donation.

Have a question? Contact Jason Freeman , Managing Member Legal Team.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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Study protocol
Open access
Published: 29 April 2024

Miracle friends and miracle money in California: a mixed-methods experiment of social support and guaranteed income for people experiencing homelessness

Benjamin F. Henwood ORCID: orcid.org/0000-0001-8346-3569 1 ,
Bo-Kyung Elizabeth Kim 1 ,
Amy Stein 1 ,
Gisele Corletto 1 ,
Himal Suthar 2 ,
Kevin F. Adler 3 ,
Madeline Mazzocchi 3 ,
Julia Ip 1 &
Deborah K. Padgett 4

Trials volume 25 , Article number: 290 ( 2024 ) Cite this article

37 Accesses

Metrics details

This paper describes the protocols for a randomized controlled trial using a parallel-group trial design that includes an intervention designed to address social isolation and loneliness among people experiencing homelessness known as Miracle Friends and an intervention that combines Miracles Friends with an economic poverty-reduction intervention known as Miracle Money. Miracle Friends pairs an unhoused person with a volunteer “phone buddy.” Miracle Money provides guaranteed basic income of $750 per month for 1 year to Miracle Friends participants. The study will examine whether either intervention reduces social isolation or homelessness compared to a waitlist control group.

Unhoused individuals who expressed interest in the Miracle Friends program were randomized to either receive the intervention or be placed on a waitlist for Miracle Friends. Among those randomized to receive the Miracle Friends intervention, randomization also determined whether they would be offered Miracle Money. The possibility of receiving basic income was only disclosed to study participants if they were randomly selected and participated in the Miracle Friends program. All study participants, regardless of assignment, were surveyed every 3 months for 15 months.

Of 760 unhoused individuals enrolled in the study, 256 were randomized to receive Miracle Friends, 267 were randomized to receive Miracle Money, and 237 were randomized to the waitlist control group. In the two intervention groups, 360 of 523 unhoused individuals were initially matched to a phone buddy. Of the 191 study participants in the Miracle Money group who had been initially matched to a volunteer phone buddy, 103 were deemed to be participating in the program and began receiving monthly income.

This randomized controlled trial will determine whether innovative interventions involving volunteer phone support and basic income reduce social isolation and improve housing outcomes for people experiencing homelessness. Although we enrolled unhoused individuals who initially expressed interest in the Miracle Friends program, the study team could not reach approximately 30% of individuals referred to the study. This may reflect the general lack of stability in the lives of people who are unhoused or limitations in the appeal of such a program to some portion of the unhoused population.

Trial registration

ClinicalTrials.gov NCT05408884 (first submitted on May 26, 2022).

Peer Review reports

People experiencing homelessness (PEH) suffer from extreme health disparities including high rates of disease (e.g., obesity, cancer, and depression) [ 1 , 2 , 3 , 4 , 5 , 6 , 7 ], early onset of geriatric conditions, and decades-early mortality [ 8 , 9 , 10 , 11 , 12 , 13 , 14 ]. More apparent drivers of these health disparities that are a direct result of homelessness include difficulty accessing quality health care and maintaining medication adherence [ 15 , 16 , 17 , 18 ], increased exposure to victimization [ 19 ], and accidents and extreme weather [ 20 , 21 ]. Less often discussed is the role of social exclusion, isolation, and loneliness, despite the high prevalence of these factors among PEH [ 22 , 23 ] and significant evidence linking them to increased morbidity and mortality [ 1 ]. This is particularly noteworthy because evidence-based interventions, most notably Housing First, can effectively address homelessness but do not necessarily increase community integration or reduce social isolation and loneliness [ 24 , 25 , 26 , 27 ]. This may account for why research on supportive housing programs that successfully end homelessness has yet to document a significant reduction in health disparities [ 28 ].

Given that research has established a clear causal link between social isolation and loneliness and health outcomes [ 29 ], interventions that focus on social connectedness could be considered to reduce health disparities among PEH [ 30 ]. Unfortunately, although there have been various efforts to design interventions to address social isolation and loneliness more generally, there is limited evidence of their effectiveness using rigorous designs such as randomized controlled trials [ 31 , 32 ]. Of course, it is unlikely that focusing only on social isolation and loneliness without addressing other social determinants of health will significantly improve health outcomes of PEH [ 33 ]. In short, interventions that address both economic and social poverty (i.e., loneliness and social isolation) are likely needed to reduce health disparities among PEH.

This paper describes the protocols for a randomized controlled trial of an intervention initially designed to address social isolation and loneliness among PEH and subsequently paired with an economic poverty-reduction intervention. The program that delivers these interventions is a nonprofit organization known as Miracle Messages, whose mission is to “end relational poverty on the streets and, in the process, inspire people everywhere to embrace their homeless neighbors not as problems to be solved, but as people to be loved” [ 34 ]. One intervention that this program implements is known as Miracle Friends, in which an unhoused person is paired with a volunteer “phone buddy” who provides social support. Miracle Friends is not intended to replace other social services and volunteers are not expected to have any specific training to provide counseling or case management services. Instead, the goal is for volunteers to develop an informal friendship that provides the unhoused person with someone to talk to.

Another intervention that the program has recently added is known as Miracle Money, in which unhoused individuals who are participating in the Miracle Friends receive guaranteed basic income. Guaranteed basic income, sometimes referred to as a cash transfer program, has been increasingly adopted globally as a means to reduce poverty and has been shown to improve outcomes including education, employment, and health [ 35 ]. During the coronavirus pandemic, the U.S. federal government provided an unprecedented form of basic income to many Americans by funding more than $476 million in cash transfer payments [ 36 , 37 ]. Although basic income programs can vary in terms of program design (e.g., who qualifies, how funds are distributed, amount and frequency of income distribution), pilot programs in the United States have mainly targeted safety-net populations in large cities including Los Angeles, Chicago, New York, Philadelphia, and Washington, DC [ 38 ]. Although many of these cities have large homeless populations [ 39 ], few basic income programs have been designed for PEH [ 40 ]. Some of the measures for the current study were borrowed from an ongoing randomized controlled trial of a 12-month program providing unconditional cash transfers to unhoused people living Colorado known as the Denver Basic Income Project [ 41 , 42 ].

Interventions: miracle friends and miracle money

In 2020, a Miracle Money proof-of-concept pilot was conducted in which nine PEH who were participating in Miracle Friends received $500 a month for 6 months. At the end of the pilot, six participants had secured housing and most reported improved social connections and less psychological distress [ 41 ]. Although participants in the pilot reported that most of their funds were used on food (30.6%) and rent (29.9%), they also reported spending funds on individualized needs that could not have been predicted, such as getting a service dog to help with anxiety, obtaining clean clothes to wear at a mosque, supporting family members, and donating to charity [ 41 ]. Importantly, many participants reported that the Miracle Friends phone buddy program was a critical component of the success or improvement that they experienced from receiving basic income [ 41 ].

To better understand the impact of the Miracle Friends intervention and how adding basic income influences outcomes, the Miracle Messages nonprofit and the University of Southern California Suzanne Dworak-Peck School of Social Work established a community–academic partnership in 2022 to design and conduct a randomized controlled trial of these interventions. Through private philanthropy, funding was secured to provide basic income to as many of 105 individuals for 1 year. The study takes place in the Los Angeles and San Francisco Bay areas of California, which have high rates of homelessness. California accounts for 30% of all people in the USA experiencing homelessness, including half ( n = 115,491) of all unsheltered people, many of whom reside in the Los Angeles and San Francisco Bay areas [ 39 ]. In these urban regions and nationally, African Americans are overrepresented in the homeless population. Nationally, African Americans comprise 40% of the homeless population while representing only 13% of the general population [ 39 ]. This is an important factor to consider for this study, because although Whites are more likely to become homeless due to individual risk factors such as health impairments or disabilities, research suggests that African Americans are more likely to become homeless due to lack of income and social capital [ 43 ], both of which are target outcomes for the Miracle Money intervention [ 44 ]. However, it is unclear whether increased income and social support can overcome other forms of discrimination experienced by African Americans that may be required to exit homelessness [ 45 ].

The overarching research questions that this study seeks to answer are: (1) Is the Miracle Friends intervention associated with reduced social isolation and increased social support? (2) Is the Miracle Friends intervention associated with improved housing outcomes? (3) Does the addition of basic income through the Miracle Money intervention improve these outcomes of interest? (4) Are there differences in outcomes based on race?

Design overview

Miracle Messages, the nonprofit that delivers the Miracle Friends and Miracle Money interventions, is headquartered in the San Francisco Bay Area but expanded to have staff members in Los Angeles for this study. Through partnerships with homeless service agencies or direct street outreach, Miracle Messages staff members engaged unhoused individuals to explain the Miracle Friends intervention, which requires having a phone, and signed up anyone who expressed interest in a phone buddy. Those who signed up also learned about a study to evaluate the Miracle Friends intervention, and those who expressed interest were referred to a study team affiliated with the University of Southern California. For those who agreed and provided written informed consent to participate in the study, a random number generator was used to determine sequentially whether a study participant would be offered the Miracle Friends intervention or put on a waitlist. Participants were told that they had a two-thirds chance to be offered Miracle Friends but were not told that approximately half of those offered Miracle Friends would be assigned to a third arm of the study that could receive basic income. For this group, receiving basic income through Miracle Money was contingent on participating in Miracle Friends. Figure 1 depicts how participants were randomized using a parallel-group trial design to one of three groups with a 1:1:1 allocation ratio: (a) those offered Miracle Friends only; (b) those who would be offered Miracle Money if they participated in Miracle Friends; and (c) those on a waitlist for Miracle Friends. Recruitment continued until at least 100 people began receiving Miracle Money.

Randomized controlled trial design

Study team members interacting with participants for recruitment purposes were informed by a single study administrator via telephone just prior to enrollment about whether a participant had been randomized to receive Miracle Friends or put on a waitlist, but were blinded to whether the Miracle Friend assignment was part of the Miracle Money condition. Once enrolled, the single study administrator provided the Miracle Messages staff with the group assignment of each participant to determine whether Miracle Friends should be offered. For those assigned to Miracle Money, the possibility of receiving guaranteed income was only disclosed after it had been determined that they were participating in the Miracle Friends intervention.

Nondisclosure of the Miracle Money condition, a form of deception, was deemed necessary to avoid (a) unduly influencing people to participate in the research and (b) biasing results such that people might have engaged in the Miracle Friends program only because they were interested in guaranteed income. Because revealing that a participant may have been eligible for but was not offered basic income could potentially cause more distress than the deception, the study team will not debrief participants at the conclusion of the study about the complete study design, which is consistent with the Code of Federal Regulations on the protection of human subjects [ 46 ].

Regardless of group assignment, all participants identified by a unique study identification number to preserve confidentiality have been asked to complete a baseline survey and five subsequent quarterly surveys; participants will receive a $30 gift card incentive for each completed survey. Qualitative interviews with a subset of 20 participants receiving basic income have and will be conducted shortly after receipt of the first of 12 monthly payments, with another follow-up qualitative interview scheduled around the time of the last payment. A single qualitative interview will be conducted with 20 volunteers serving as a phone buddy for at least 6 months to understand their experience of delivering the Miracle Friends intervention. Participants will receive a $30 incentive at the end of each qualitative interview. This human subjects’ research is being performed in accordance with the Declaration of Helsinki with protocols approved by the first author’s institutional review board. Reporting of study protocols follows the SPIRIT guidelines [ 47 ], which include a schedule of enrollment, interventions, and assessments, as depicted in Fig. 2 . The SPIRIT checklist for Trails can be found in the Supplementary materials .

Schedule of enrollment, interventions, and assessments

Interventions

Miracle friends.

Miracle Messages program staff members have recruited volunteers who want to serve as a phone buddy and unhoused individuals who expressed an interest in being matched with a phone buddy. Recruitment of volunteers has occurred primarily through people who learned about the program through media coverage, word of mouth, social media, or internet searches about helping PEH, with most volunteers signing up on the Miracle Messages website. Volunteers are required to complete an application listing any preferences for a friend (e.g., gender, language, shared interests, text or calls preferred) and attend a 30-min training call offered once a week synchronously. A recording of the training call is available as needed to those with significant scheduling conflicts. Volunteers receive a program handbook that outlines expectations for logging into an online platform to record any contact or attempted contact with an unhoused friend. After completing a waiver of liability, volunteers receive a phone number through Dialpad or similar service (which allows the volunteers to avoid divulging their personal phone numbers if they wish) and are subsequently matched with an unhoused friend, usually in a few weeks. Weekly support calls are offered to all volunteers, in addition to one-on-one support provided upon request based on completing the contact logs. Currently, there are approximately 300 Miracle Friend volunteers.

Recruitment of unhoused individuals has happened primarily through (a) site visits at local partner sites, including shelters, transitional housing facilities (e.g., tiny homes), converted hotels or motels for unhoused individuals, etc.; (b) referrals from caseworkers and social workers at these partner sites; and (c) limited direct outreach on the streets in and around partner sites or at events designed to address the needs of PEH (e.g., food pantries, homeless connect events). Miracle Friends program staff members explain the intervention and sign up anyone who expresses an interest in a phone buddy. Like with the volunteers, unhoused participants are also asked to complete an application listing any preferences for a friend (e.g., gender, language, shared interests, text or calls preferred).

Matching of unhoused individuals and volunteers has been primarily based on preferences and shared interests, as indicated on the enrollment application. Once a match is determined, volunteers receive the phone number of their assigned unhoused friend and are asked to make contact as soon as possible. The program has no time limit, and the development of friendships is expected to occur naturally over time and be unique to each matched pair. Communication is bidirectional in that both participants can call or text each other. Volunteers are encouraged to provide a friendly voice and be a compassionate listener without judgment; there is no expectation of formal counseling or case management. If a lack of fit occurs or communication is not maintained between the two individuals, the program offers to rematch the unhoused individual, volunteer, or both. If a volunteer or Miracle Messages staff members cannot contact an unhoused person after five attempts by the volunteer and one attempt by the staff, the person is removed from the list of people needing to be matched—effectively representing a discharge from the program. However, participants can reenroll at any time. Once matched, volunteers are expected to attempt weekly phone voice or text contact. Volunteers log their efforts on the program’s online platform after each attempt, helping the program monitor the progression of friendships and address any issues. Based on volunteer responses, the Miracle Friends program can provide referrals to the unhoused person if there is a more urgent need or contact a formal service provider if authorized by the unhoused individual.

Miracle money

Whereas the Miracle Money proof-of-concept provided $500 for 6 consecutive months, for this study, funds were raised so that Miracle Messages could provide up to 110 individuals with $750 per month for 12 months. This was based on pilot work that suggested that $500 per month meaningfully changed lives [ 41 ] but recognition that a living wage in these cities would be much higher [ 48 ]. As noted, Miracle Money is not advertised to those interested in the Miracle Friends intervention; unhoused individuals are only notified about the possibility of receiving basic income if they are randomized to the Miracle Money condition and participate in the Miracle Friends interventions. Although participation was defined as having had at least two contacts with a matched volunteer in a 1-month period, at the outset of the study there were efforts to ensure that the two contacts could be characterized as “meaningful” based on volunteer feedback to help ensure that the matching process would result in a prolonged friendship or relationship. Yet because many of the initial contacts could not be confirmed to be meaningful, Miracle Messages increasingly came to accept any type of contact with volunteers as meeting the criteria of Miracle Friend participation that would then allow participants to start receiving Miracle Money.

Volunteers are notified when the person with whom they have been matched becomes eligible for Miracle Money so that the volunteer can be present during the phone call in which the study participant is offered Miracle Money. Those who qualify and decide to move forward with receiving basic income payments are asked to complete an application for a cash transfer technology company known as AidKit, which has been contracted to process monthly payments sent via a debit card or direct deposit. Although we do not expect many people to turn down Miracle Money, we envision that some may decide against receiving income payments based on how it may affect other benefits that depend on income (e.g., Supplemental Security Income, Supplemental Nutrition Assistance Program), although the intent of guaranteed basic income is to supplement rather than replace existing resources. When participants are first offered Miracle Money, the Miracle Messages staff discusses benefits and encourages participants to discuss the topic with a case manager; referrals to financial coaching are also offered. Participants are told that they can use the money in any way they choose but that the program requests the money not be used for any illicit purposes.

Recruitment and enrollment

As noted, study recruitment has occurred via the Miracle Messages program, which notifies the study team about unhoused individuals interested in participating in an evaluation of the Miracle Friends intervention. This has occurred in person when the study team accompanied Miracle Messages staff members to outreach events or through a shared online referral document that provided the study team with the contact information of individuals interested in Miracle Friends and the evaluation study. Once the study team confirmed that an individual met the inclusion criteria—which included (a) being 18 years old or older; (b) speaking English or Spanish; (c) currently experiencing homelessness based on definition from the U.S. Department of Housing and Urban Development; and (d) expressed interest in the Miracle Friends phone buddy intervention—enrollment into the study occurred in person with signed informed consent or over the phone with informed consent, requiring an electronic signature completed via email using the REDCap platform [ 49 , 50 ]. The informed consent process ensures that individuals understand that participation in the study may result in being assigned to a waitlist where they would be ineligible to participate in Miracle Friends for 15 months unless they withdrew from the study. Once enrolled in the study, participants complete a baseline survey and learn whether they have been randomly assigned to the waitlist or Miracle Friends. Surveyors are blinded to whether a participant is assigned to the group that will be offered Miracle Friends only or the group that will be offered Miracle Money if they participate in Miracle Friends. The Miracle Messages administrative staff is notified to which of the three groups a participant has been assigned to determine whether someone should be matched to a phone buddy and monitor which individuals become eligible for Miracle Money based on participation in Miracle Friends. Study recruitment continued until at least 100 people started receiving Miracle Money.

Quantitative data collection procedures

Upon enrollment in the study and regardless of group assignment, the participants complete a baseline survey that takes approximately 45 min and includes questions about demographic characteristics, homelessness history, physical and mental health status, health service utilization, employment, substance use, socioeconomic status, and income. Participants are also asked to provide an email address and collateral contact information for one or more people to ensure that the study team can reconnect with them when it is time to complete a shorter survey five more times, one every 3 months (i.e., quarterly) until 15 months. The quarterly survey asks about similar topics and takes approximately 25 min. Surveys can be completed in person or over the phone, with responses recorded by a surveyor directly into the REDCap data management platform [ 49 , 50 ] that is also used to support data visualization to monitor data quality and study retention. Upon request, participants also receive a link to self-administer the survey in English or Spanish. Table 1 describes all study measures.

At the end of each survey, participants are asked two open-ended questions: (1) Looking back over the last 3 months, what do you think was the most significant change to your quality of life? (2) Tell me in a sentence or two, what are your most important goals in life right now? If the survey is administered by a surveyor, responses are entered verbatim as much as possible; if self-administered, participants enter their responses directly. All surveyors complete a training on best practices for trauma-informed interviewing.

Qualitative data collection procedures

Miracle money recipients.

Qualitative interviews will be conducted in English with a subset of 20 participants who receive basic income—shortly after receipt of the first of 12 monthly payments and again around the time of their last payment. During the first quarterly survey, participants who received monthly income will be purposively sampled and asked if they would be interested in participating in an additional in-depth qualitative interview to learn more about their experience with the program. Maximum variation sampling will be used to ensure differences in race, ethnicity, and gender in our qualitative subsample. Those who are interested and agree to participate will be contacted by a research team member who has been trained in conducting qualitative interviews. Interviewers will schedule a convenient time and place to meet unless participants request a phone interview. Once an addendum consent is completed, semistructured interviews will last between 30 and 60 min and include questions about how participants view their lives, general experiences with the Miracle Friends program, and the Miracle Money program, including how they use the money and any difference it has made in their lives. Interviews will be audio recorded and transcribed verbatim.

Miracle friend volunteers

A single qualitative interview will be conducted with 20 volunteers who served as a phone buddy for at least 6 months to understand their experience of Miracle Friends. Any volunteer who has been engaged in the intervention for at least 6 months will receive an email from the Miracle Messages program that informs them of the study and refers them to the study team if they are interested in speaking about their personal experience with the program. Thirty-three volunteers have indicated that they would be interested; 20 have been purposively sampled to include volunteers who had participants in the Miracle Friends program and Miracle Money program. Phone or videoconferencing interviews have been conducted using a semistructured interview guide that included questions about how and why participants became a volunteer, experiences with the program, and whether they felt that they had an impact on their unhoused friend or if their friend has affected their life. Questions about how the program could be improved were also included. Interviews have typically lasted between 25 and 35 min and were audio recorded and transcribed verbatim. Written informed consent has been waived by the institutional review board for volunteer interviews.

Quantitative data analysis

Social isolation outcomes.

To evaluate the efficacy of the Miracle Friends intervention on social support, psychological distress, and loneliness, we will use responses to the Oslo Support Scale [ 53 ], Kessler Psychological Distress Scale [ 55 ], and UCLA Loneliness Scale [ 52 ], respectively, at the final survey (Quarter 5). Each measure will first be summed to develop a total score, then dichotomized based on cutoffs for each measure based in the literature—i.e., poor social support will be coded as 1 if the Oslo Support Scale sum score is less than 9 (indicative of poor social support) and 0 otherwise; psychological distress will be coded as 1 if the Kessler Psychological Distress Scale sum score is greater than 25 (indicative of high psychological distress) and 0 otherwise; and loneliness will be coded as 1 if the UCLA Loneliness Scale sum score is greater than or equal to 6 (indicative of high loneliness) and 0 otherwise. Each dichotomized score will be modeled as a function of treatment group (1 = Miracle Friends or Miracle Money group members who participated in at least one phone buddy intervention, 0 = waitlist group); covariates including demographic characteristics, physical and mental health, and substance use; and a random intercept for city in random intercept logistic regression models.

Housing outcomes

The association of Miracle Friends with housing outcomes will be evaluated using logistic regression with a random intercept, modeling the dichotomized outcome of exited homelessness (1 = individual responded “My own apartment or home” or “Someone else’s apartment or home,” 0 = otherwise) as a function of treatment (1 = Miracle Friends group members who participated in at least one phone buddy intervention, 0 = waitlist group), with the same covariates and random intercept.

Differences in treatment effect based on race

To evaluate if outcomes differ by race, all models will be run with the addition of an interaction between race and treatment.

Statistical power

To reach a target goal of 105 participants receiving basic income through Miracle Money, recruitment efforts have yielded more than 200 individuals in each treatment group. Assuming that each arm will have at least 105 participants, our study can detect the hypothesized 50% difference in proportion of people exiting homelessness at Quarter 5 between the Miracle Money and waitlist group (assuming 60% of the Miracle Money group exits homelessness and 10% of the waitlist group exits homelessness) using a p -value threshold of 0.05 with power exceeding 95%. When comparing the Miracle Friends group to the waitlist group, our study can detect the hypothesized 15% difference in proportion of people exiting homelessness at Quarter 5 between the Miracle Friends and waitlist group (assuming 25% of the Miracle Money group exits homelessness and 10% of the waitlist group exits homelessness) using a p -value threshold of 0.05 with power exceeding 60%. Differences in proportions of the social isolation outcomes will be detected at powers identical to the housing outcome, assuming identical differences in proportions and p -values. Regarding the effect modification of treatment by race in exiting homelessness, our study will be able to detect a difference in proportion of groups exiting homelessness of 35% with power exceeding 20%. Main effect calculations were done on unadjusted models using the WebPower R package, and the effect modification power calculations were performed via simulation.

Qualitative data analysis

In keeping with qualitative analytic procedures, each interview has been transcribed verbatim by the research team member who conducted the interview. Transcripts have been distributed and shared with the larger team for review. A team approach will occur in data analyses, where instruction in coding will be supplemented with test cases in which two researchers read and code a transcript and then meet to discuss discrepancies and arrive at consensus. Given the focused nature of the inquiry, the resulting codebook will be a reflection of the questions that were asked. At the same time, interviewees often have shared greater depth or alternative descriptions that will “earn their way” into the analyses and interpretation [ 56 ]. In the final stage of analysis, broader interpretation will be sought to identify recurrent themes agreed on by consensus and recorded as memos.

Between May 2022 and July 2023, when recruitment ended, the Miracle Friends program referred 1087 unhoused individuals to the study team and 760 enrolled in the study. As depicted in Fig. 3 , among those who enrolled, 256 were randomized to Miracle Friends only, 267 were randomized to Miracle Money, and 233 were randomized to the Miracle Friends waitlist control group. Thus far, 360 unhoused individuals have been matched to a phone buddy from across the two intervention groups (169 in Miracle Friends only and 191 in the Miracle Money group), with 56 people still not matched. We have been unable to contact 103 people after they were assigned to a treatment group. Of the 191 study participants in the Miracle Money group who were initially matched to a volunteer phone buddy, 103 were verified as participating in Miracle Friends and began receiving monthly income and 70 people were not selected because they were not participating in Miracle Friends. One person withdrew from the study and we were unable to contact 17 others in the Miracle Money group who had been initially matched with a Miracle Friend.

Consort diagram

This randomized controlled trial was designed to evaluate the effectiveness of the Miracle Friends and Miracle Money interventions as compared a control group that received neither intervention. Although 760 unhoused individuals have enrolled in the study, the study team has been unable to contact more than 30% of the individuals who initially expressed an interest in the Miracle Friends phone buddy program and were referred to the study. This may reflect the general lack of stability in the lives of PEH or limitations in the appeal of such a program to some portion of the unhoused population. Future analysis will compare those who engaged in the intervention versus those who did not to provide some insight into potential differences. It is also unclear how increased transparency about the prospect of basic income would have changed engagement and retention in the program or study. Another factor that may have contributed to attrition is a delay in the matching process that sometimes occurred when not enough volunteers were available to meet the demand, which could have discouraged unhoused people who signed up for the program from participating. Future analyses will attempt to understand who ended up volunteering for this program and why they volunteered, as well as how long it takes to match participants and under what circumstances a match is successful.

Trial status

This version of the study protocols (2.1) includes two amendments to the initial protocols approved by the institutional review board on April 21, 2022. Recruitment began on May 30, 2022, and ended July 10, 2023. Final enrollment into the Miracle Money intervention was delayed until August 2023 to give study participants an opportunity to meet the criterion for receiving basic income (i.e., participating in the Miracle Friends program).

Limitations

This study is unique in that it represents the first known experiment of interventions that provide social support and guaranteed income for PEH. Challenges include study retention, given that participants have been recruited while experiencing homelessness, either sheltered or unsheltered. There may also be differential retention rates because people receiving basic income may be more likely to complete follow-up surveys as compared to the waitlist or Miracle Friends only groups. The likelihood that unhoused participants continue with the program may depend on the type of volunteer match they receive, including concordance between the two parties based on factors such as race, ethnicity, age, or gender, which this study will not examine because we have not captured dyadic information. The study also will not follow people after the basic income funding has ended. It should also be noted that this intervention primarily focused on individuals who had a cell phone, which research suggests is much of the homeless population [ 57 ].

The Miracle Friends and Miracle Money programs in California offer an innovative approach to addressing the needs of PEH. This randomized controlled trial will help determine whether these programs reduce social isolation and loneliness and lead to better housing outcomes. The results will likely be of interest to policymakers, who have struggled to find appropriate system-based responses to the growing problem of homelessness in California and elsewhere. Results of the trial will be shared through peer-reviewed publications and other public dissemination efforts (e.g., policy briefs and presentations).

Protocol version

2.1 on 3/24/24.

Trial oversight

This study is being conducted at the Center for Homelessness, Housing, and Health Equity Research at the University of Southern California (USC) Suzanne Dworak-Peck School of Social Work and in collaboration with Miracle Messages, which is a U.S. 501(c)(3) nonprofit organization, EIN# 82–4,179,328. Throughout study recruitment, these two organizations met weekly since Miracle Messages identified potential candidates for the study and referred people to the study team at USC, which enrolled and obtained informed consent from participants. All interventions were implemented by Miracle Messages and all data collection was conducted by USC. Ethical oversight of the study was done through the USC Human Research Protection Program. USC research team members will continue to meet weekly throughout the study with oversight provided by the director of the Center for Homelessness, Housing and Health Equity Research.

Trial results

Results of this trial will be posted on ClinicalTrials.gov and disseminated through peer-reviewed publications.

Availability of data and materials

All data from this research will be deidentified and made available in a public data repository (TBD).

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Acknowledgements

In addition to our study participants, we would like to thank those who helped implement the programs at Miracle Messages, including Colette Lay, Jenni Taylor, John Ma, Nelly Stastny, Lindsay Pfeiffer, Rosalie Silva, and Ashley Dockendorf. We would also like to thank those who participated on the research team, including Steve Quezada, Larry Posey, Erick Guadron, Jeffrey Levita, Safina Sahil Suratwala, Elene Trujillo, Norma Guzman Hernandez, Raquel Flores, Cinthia Lazcano, Victoria Carretero, Vaibhav Vijaykar, Niki Esfandiari, Enehi Ameh, Allan Sandoval, Julia Barton, Sara Semborski, Tyler Martin, Keenan Leary, Jefferson Hall, Corinne Zachary, and Olga Koumoundouros.

Funding for this study was provided by Google.org and the Homeless Policy Research Institute, along with individuals Kimberly Lynch and Scott Layne. These funding sources had no role in the design of this study and will not have any role during its execution, analyses, interpretation of the data, or decision to submit results.

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Department of Population and Public Health Sciences, Keck School of Medicine, University of Southern California, Los Angeles, CA, USA

Himal Suthar

Miracle Messages, San Francisco, USA

Kevin F. Adler & Madeline Mazzocchi

Silver School of Social Work, New York University, New York, USA

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Authorship was based on guidelines set forth by the U.S. National Institutes of Health. Henwood and Adler initially designed the study that secured funding. Henwood, Kim, Stein, Corletto, Suthar, Adler, Mazzocchi, Ip, and Padgett all contributed to data collection and study implementation. Henwood, Adler, and Padgett initially drafted the manuscript and all authors critically reviewed and provided edits to revise the manuscript. Henwood, Stein, Corletto, and Suthar had full access to all recruitment data in the study and take responsibility for the integrity of the data and the accuracy of the data presentation.

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This human subjects research has been performed in accordance with the Declaration of Helsinki and approved by the University of Southern California’s Institutional Review Board (UP-22–00242). All human subject participants provided informed consent.

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Not applicable—no identifying images or other personal or clinical details of participants are presented here or will be presented in reports of the trial results. The participant information materials and informed consent form are attached.

Competing interests

Kevin F. Adler is the founder and CEO of Miracle Messages; he has not had access to study data.

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Henwood, B.F., Kim, BK.E., Stein, A. et al. Miracle friends and miracle money in California: a mixed-methods experiment of social support and guaranteed income for people experiencing homelessness. Trials 25 , 290 (2024). https://doi.org/10.1186/s13063-024-08109-6

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Received : 25 August 2023

Accepted : 10 April 2024

Published : 29 April 2024

DOI : https://doi.org/10.1186/s13063-024-08109-6

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Homelessness
Guaranteed income
Basic income
Cash transfers
Social support
Community integration
Relational poverty
Randomized controlled trial

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IMAGES

Assignment of income
IRC 860
Fillable Form Cift-401w
IRC Section 42 Low Income Housing Tax Credits and IRC Section 47
ASSIGNMENT OF INCOME (Income, Fees, Funds)
Demystifying IRC Section 965 Math

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COMMENTS

Publication 525 (2023), Taxable and Nontaxable Income
Assignment of income. ... The IRS will process your order for forms and publications as soon as possible. Don't resubmit requests you've already sent us. You can get forms and publications faster online. Useful Items You may want to see: Publication. 334 Tax Guide for Small Business. 523 Selling Your Home. 527 Residential Rental Property ...
26 U.S. Code § 61
26 U.S. Code § 61 - Gross income defined. Income from an interest in an estate or trust. For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following). (Aug. 16, 1954, ch. 736, 68A Stat. 17; Pub. L. 98-369, div.
Recognizing when the IRS can reallocate income
The IRS may attempt to reallocate income between a closely held corporation and its shareholders based on several sets of rules, including the following: Assignment-of-income rules that have been developed through the courts; The allocation-of-income theory of Sec. 482; and
26 CFR § 1.451-2
In this case, such credited portion is income to the depositor or shareholder in the year in which the plan matures. However, in the case of certain deposits made after December 31, 1970, in banks, domestic building and loan associations, and similar financial institutions, the ratable inclusion rules of section 1232(a)(3) apply.
PDF Internal Revenue Service
its income under the anticipatory assignment of income doctrine. LAW AND ANALYSIS Section 61 of the Internal Revenue Code provides that, except as otherwise provided by law, gross income means all income from whatever source derived. Section 451(a) provides that items of gross income shall be included in gross
What is "Assignment of Income" Under the Tax Law?
The doctrine is frequently applied to assignments to creditors, controlled entities, family trusts and charities. A taxpayer cannot, for tax purposes, assign income that has already accrued from property the taxpayer owns. This aspect of the assignment of income doctrine is often applied to interest, dividends, rents, royalties, and trust income.
Internal Revenue Bulletin: 2005-15
The rationale for the so-called anticipatory assignment of income doctrine is the principle that gains should be taxed "to those who earn them," Lucas, supra, at 114, a maxim we have called "the first principle of income taxation," Commissioner v. Culbertson, 337 U.S. 733, 739-740 (1949). The anticipatory assignment doctrine is meant to ...
Battling Uphill Against the Assignment of Income Doctrine:
The wide applicability of the assignment of income doctrine was demonstrated in Ryder, in which the court applied the doctrine to several different transactions that occurred between 1996 and 2011. Ryder founded his professional law corporation R&A in 1996 and used his accounting background, law degree, and graduate degree in taxation for the ...
Assignment of income doctrine
The assignment of income doctrine is a judicial doctrine developed in United States case law by courts trying to limit tax evasion. The assignment of income doctrine seeks to "preserve the progressive rate structure of the Code by prohibiting the splitting of income among taxable entities."
Clear Reflection of Income
The case was remanded for the Tax Court to reconsider the IRS method. IRC section 446(a) requires taxpayers to compute their taxable income based on the accounting methods used in their books and records. Under section 446(b), the IRS can impose a different method if a taxpayer's selected method does not clearly reflect income.
A Tax Planning Cautionary Tale: Timing Is Critical
The assignment of income doctrine is a long-standing "first principle of income taxation" that recognizes that income is taxed to those "who earn or otherwise create the right to receive it ...
constructive receipt of income
Constructive receipt of income occurs when a party obtains income that is not yet physically received but has been credited to the taxpayer's account and over which they have immediate control. The taxpayer is liable to pay taxes on all income constructively received. As per 26 Code of Federal Regulations § 1.451-2, any income received which ...
Assignment of Income Dilemma
Assignment of Income Dilemma By Richard I. Newmark and Ted D. EnglebrechtIn Brief Reap What You Sow ... Under IRC section 61, gross income includes all compensation and commissions, which are includable in income in the year recognized by the taxpayer based on the taxpayer's accounting method. According to Reg. section 1.446-3(c), cash basis ...
Assignment Of Income Doctrine- Section 61 IRS Code
Section 61 of the Internal Revenue Code provides that gross income means all income earned from whatever source derived, and then lists several examples such as wages, services rendered, gains from the sales of property, and several other examples. In 1930, the U. S. Supreme Court summarized when addressing who earned income that "The fruits ...
Section 1202 Planning: When Might the Assignment of Income Doctrine
Thus, while there are some tax cases where the assignment of income doctrine has been successfully asserted by the IRS in connection with transfers between spouses incident to divorce, Section 1041 and tax authorities interpreting its application do provide divorcing taxpayers an additional argument against application of the doctrine, perhaps ...
Strategies for Minimizing the Impact of Income in Respect of a Decedent
In Chief Counsel Advice 200644016, the IRS noted that the assignment of rights to receive IRD to a beneficiary by a trust or estate is governed by different rules than the receipt of actual payments by the trust or estate, followed by a distribution of cash to the beneficiaries.
PDF Part I Section 61.--Gross Income Defined
26 CFR 1.61-1: Gross income. (Also: § 83, 1041; 1.83-7, 1.1041-1T.) Rev. Rul. 2002-22 ... Section 1041 and the assignment of income doctrine Section 1041(a) provides that no gain or loss is recognized on a transfer of property from an individual to or for the benefit of a spouse or, if the transfer is incident ...
Assignment of Income And Charitable Contributions of Closely Held Stock
The IRS examined Taxpayer's return and subsequently issued a notice of deficiency to Taxpayer determining that they were liable for tax under the "anticipatory assignment of income doctrine" on their transfer of shares to Charity; in other words, Taxpayer should have reported the gain from the sale of the 900 shares to Buyer and should be ...
FAQ: What Is the Assignment of Income?
The assignment of income doctrine states that the taxpayer who earns the income must pay the tax on that income, even if he gave the right to collect the income to another person. The doctrine is quite clear: taxpayers must pay their own taxes. However, that doesn't stop many people from thinking they can avoid paying taxes or minimize their ...
Assignment of Income Lawyers
This guideline is known as the "assignment of income doctrine." ... Therefore, if you have any questions about taxable income streams or are involved in a dispute over taxable income with the IRS, then it may be in your best interest to contact an accountant or a local tax attorney to provide further guidance on the matter. An experienced ...
Tax Train Wreck: US IRS Derails Private Wealth Tax Planning
The IRS argued that there was an anticipatory assignment of the proceeds of the redemption. The Tax Court disagreed and held that the anticipatory assignment of income doctrine was not applicable because there was no binding, legally enforceable commitment that would force the foundation to submit the shares for redemption.
Anticipatory Assignment Of Income, Charitable Contribution Deduction
Anticipatory Assignment of Income. The anticipatory assignment of income doctrine is a longstanding "first principle of income taxation." Commissioner v. Banks, 543 U.S. 426, 434 (2005). The doctrine recognizes that income is taxed "to those who earn or otherwise create the right to receive it," Helvering v.
PDF Internal Revenue Service Department of the Treasury 201232024 [Third
the receipt of income is insufficient to conclude that a fixed right to income exists. S.C. Johnson & Son, Inc. v. Commissioner, 63 T.C. 778, 787-88 (1975). With respect to the assignment of claims in litigation, a review of the case law shows that anticipatory assignment of income principles require the transferee to include the
ACC 330 Module Two Income Assignment Template(3)
Criteria Example Case #1 Case #2 Case #3 Nontaxable) Confidence Level (Low/Medium /High) Medium Medium Medium Medium Interpretation The IRC Section 61(a)(6) identifies that "Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items" and includes royalties as one of those items.
Miracle friends and miracle money in California: a mixed-methods
Upon enrollment in the study and regardless of group assignment, the participants complete a baseline survey that takes approximately 45 min and includes questions about demographic characteristics, homelessness history, physical and mental health status, health service utilization, employment, substance use, socioeconomic status, and income.