what is assignment of income

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Income assignment definition

Examples of income assignment in a sentence.

Income assignment " is a provision of a support order which directs the obligor to assign a portion of the monies, income, or periodic earnings due and owing to the obligor to the person entitled to the support or to another person or entity designated by the support order or assignment for payment of support, the support debt, and/or arrearages.

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Income assignment " is a provision of a support an order which directs the obligor to assign assigns a portion of the monies, income, or periodic earnings due and owing to the obligor to the person entitled to the support or to another person or entity designated by the support order or assignment for payment of support, the support debt, and/or arrearages.

Income assignment is the most effective method for collecting child support.Colorado's statutes governing income assignment for child support collection are found in §14- 14-111.5, C.R.S. Since 1994, orders for child support are required to include provisions for income withholding.

Income assignment " is an order which assigns assignment of a portion of the monies, income, or periodic earnings due and owing to the obligor to the person entitled to the support or to another person or entity designated by the support order or assignment for payment of support, the support debt, and/orarrearages.

Income assignment by DCSS, pursuant to RSA 161-C:21, may be appealed to Superior Court pursuant to RSA 161-C:27.

Income assignment child support payments continue to be processed in a non-IV-D child support case through the Centralized Support Registry under 43 O.S.§ 413(A)(2) and OAC 340:25-5-350.3. INSTRUCTIONS TO STAFF 1.

Income assignment proceedings shall be available to collect day care and health expense arrearages as well as support alimony payments; provided, child support shall be paid prior to any alimony payments.G. E.

More Definitions of Income assignment

Related to income assignment.

Lease Assignment has the meaning set forth in Section 3.5(d).

Assignment / job means the work to be performed by the Consultant pursuant to the Contract.

Tax Law for the Closely Held Business

Legal Updates & Commentary for Tax & Estate Planning

Assignment of Income And Charitable Contributions of Closely Held Stock

But i don’t want to pay any taxes.

I was recently speaking to an older client who told me that he was contemplating the sale of a commercial rental property that he has owned for many years. The property was not used in his business, was unencumbered and, for all intents and purposes, his adjusted basis – i.e., his unrecovered investment – for the property was zero. The client was concerned about the amount of gain he would recognize on the sale, and the resulting income tax liability.

The gain would be treated as long-term capital gain, I told him, and neither he nor the property was located in a high-tax state. That didn’t alleviate his concern.

I asked if there was a pressing business reason for disposing of the property. When he asked why that was relevant, I replied that he may want to hold on to the property until he died, leaving the property to the beneficiaries of his estate. The property may be valued more “aggressively” than a liquid asset, I explained, and his beneficiaries would take the property with a basis step-up. “Death solves many problems,” I told him, jokingly. That didn’t go over too well.

Finally, I recalled that the client had a somewhat charitable bent, so I mentioned that he may want to consider a contribution to a public charity or to a charitable remainder trust. That seemed to pique his interest, so I explained the basics.

Then I asked him when he planned to list the property. “I already have a buyer,” he responded. Yes , I thought to myself, death solves many problems . After composing myself, I asked “What do you mean, you have a buyer? Have you agreed to a price? Do you have a contract? Are there any contingencies? . . . ”

“Stop with all the questions” – he interrupted me – “why does any of that matter?”

“Let me tell you about the ‘assignment of income doctrine’,” I replied.

Shortly after the above discussion with the client, I came across the decision described below ; I forwarded a copy to the client, his accountant, and his real estate lawyer.

Sale of a Business

Target was a closely held foreign corporation in which Taxpayer and others owned stock. Buyer (an S corp.) was Target’s principal customer. Virtually all of Buyer’s stock was owned by an employee stock ownership plan (ESOP). Taxpayer and other Target shareholders were among the beneficiaries of the ESOP. Target and Buyer were also related through common management, with a majority of each corporation’s board of directors serving as directors for both corporations.

Buyer offered to acquire all of Target’s stock for bona fide business reasons. It was proposed that the stock acquisition would proceed in two steps.

Buyer would first purchase 6,100 Target shares (87% of the outstanding shares) from Taxpayer and the other Target shareholders. The proposed purchase price was $4,500 per share. The consideration to be paid by Buyer for this tranche would consist of cash and interest-bearing promissory notes.

Second Step

The second step involved the remaining 900 shares (13%) of Target’s outstanding stock.

In connection with Buyer’s acquisition of the 6,100 Target shares, Taxpayer agreed to donate 900 Target shares to Charity, an organization that was exempt from Federal income tax under Sec. 501(c)(3) of the Code, and that was treated as a public charity under Sec. 509(a) of the Code. [i] Buyer agreed to purchase each share tendered by Charity for $4,500 in cash.

Taxpayer agreed, after donating their shares to Charity, “to use all reasonable efforts” to cause Charity to tender the 900 shares to Buyer. If Taxpayer failed to persuade Charity to do this, it was expected that Buyer would use a “squeeze-out merger, a reverse stock split or such other action that will result in [Buyer] owning 100% of * * * [Target].” If Buyer failed to secure ownership of Charity’s shares within 60 days of acquiring the 6,100 shares, the entire acquisition would be unwound, and Buyer would return the 6,100 shares to the tendering Target shareholders.

The Appraisal

Because Buyer and Target were related parties, the ESOP – a tax-exempt qualified plan – believed that it was required to secure a fairness opinion to ensure that Buyer paid no more than “adequate consideration” for the Target stock. The ESOP trustee hired Appraiser to provide a fairness opinion supported by a valuation report.

In describing the proposed transaction, Appraiser expressed its understanding that Buyer would acquire 100% of Target’s stock “in two stages.” According to Appraiser, “The first stage” involved “the acquisition of 6,100 shares, or approximately 87.1%, of [Target’s] outstanding ordinary shares,” for cash and promissory notes. “Simultaneously with [Buyer’s] acquisition of the 6,100 shares,” Appraiser stated, “certain of [Target’s] shareholders will transfer 900 shares” to Charity. “The second stage of the [transaction] involves the acquisition of the Charity shares for $4,500 per share.”

Appraiser concluded that the fair market value of Target, “valued on a going concern basis,” was between $4,214 and $4,626 per share. Appraiser submitted its findings to the ESOP trustee in an appraisal report and a fairness opinion. Given the range of value it determined for Target, Appraiser opined that the proposed transaction was fair to the beneficiaries of Buyer’s ESOP.

The Sale and the Donation

Two days after Appraiser’s fairness opinion was issued, Buyer purchased 6,100 shares of Target stock from Taxpayer and the other Target shareholders.

It was unclear when Taxpayer donated their 900 shares to Charity; Taxpayer asserted that the donation occurred almost a week before the fairness opinion, whereas the IRS contended that it occurred no earlier than the day of the fairness opinion, allegedly after Charity had unconditionally agreed to sell the 900 shares to Buyer.

Both parties agreed that Charity formally tendered its 900 shares to Buyer on the same day on which the other Target shareholders tendered their shares. And the parties also agreed that Charity received the same per-share price that the other Target shareholders received, but that Charity was paid entirely in cash.

Off to Court

Taxpayer filed Form 1040, U.S. Individual Income Tax Return, for the year of the sale, and claimed a noncash charitable contribution deduction for the stock donated to Charity.

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 treated as having contributed to Charity the cash received in exchange for such shares.

Taxpayer timely petitioned the U.S. Tax Court for redetermination, and asked for summary judgement on the IRS’s application of the assignment of income doctrine to their donation of Target stock to Charity.

Assignment of Income

A longstanding principle of tax law is that income is taxed to the person who earns it. A taxpayer who is anticipating the receipt of income “cannot avoid taxation by entering into a contractual arrangement whereby that income is diverted to some other person.”

The Court noted that it had previously considered the assignment of income doctrine as it applied to charitable contributions. In the typical scenario, the Court explained, the taxpayer donates to a public charity stock that is about to be acquired by the issuing corporation through a redemption, or by another corporation through a merger or other form of acquisition.

In doing so, the taxpayer seeks to obtain a charitable deduction in an amount equal to the fair market value of the stock contributed, while avoiding recognition of the gain, and liability for the tax, resulting from the subsequent sale of the stock. The tax-exempt charity ends up with the proceeds from the sale, undiminished by taxes.

In determining whether the donating taxpayer has assigned income in these circumstances, one relevant question is whether the prospective sale of the donated stock is a mere expectation or a virtual certainty. “More than expectation or anticipation of income is required before the assignment of income doctrine applies,” the Court stated.

Another relevant question, the Court continued, is whether the charity is obligated, or can be compelled by one of the parties to the transaction, to surrender the donated shares to the acquirer.

Thus, the existence of an “understanding” among the parties, or the fact that the contribution and sale transactions occur simultaneously or according to prearranged steps, may be relevant in answering that question.

For example, a court will likely find there has been an assignment of income where stock was donated after a tender offer has effectively been completed and it is “most unlikely” that the offer would be rejected, or where stock is donated after the other shareholders have voted and taken steps to liquidate a corporation.

In contrast, there is probably no assignment of income where stock is transferred to a charity before the issuing corporation’s board has voted to redeem it. [ii]

No Summary Judgement

Based on the facts presented, the Court concluded that there existed genuine disputes of material fact that prevented the Court from summarily resolving the assignment of income issue.

Target and Buyer were related by common management, the interests of both companies seemed to have been aligned, and both apparently desired that the stock acquisition be completed. If so, these facts supported the conclusion that the acquisition was virtually certain to occur. In turn, this evidence would support the IRS’s contention that Charity agreed in advance to tender its shares to Buyer and that all the steps of the transaction were prearranged.

However, the parties also disputed the dates on which relevant events occurred. Taxpayer asserted that they transferred their shares to Charity one week before the sale and almost one week before the fairness opinion, and there appeared to have been documentary evidence arguably supporting that assertion. The IRS contended that Charity did not acquire ownership of its 900 shares until (at the earliest) the date of the fairness opinion, allegedly after Charity had unconditionally agreed to sell the 900 shares to Buyer. That contention derived some support from other documentary evidence, as well as from Appraiser’s description of the proposed transaction, which recited that Taxpayer would transfer 900 shares to Charity simultaneously with Buyer’s acquisition of the 6,100 shares.

There were also genuine disputes of material fact concerning the extent to which Charity, having received the 900 shares, was obligated to tender them to Buyer. Appraiser stated in its report that Taxpayer would use “all reasonable efforts to cause * * * [Charity] to agree to sell the shares to [Buyer].” The record included little evidence concerning Taxpayer’s ability to influence Charity’s actions or Charity’s negotiations with Buyer. The IRS contended that Charity had no meaningful discussions with Buyer, but was “simply informed by” Taxpayer that the 900 shares should be tendered at once. The Court pointed out that a trial would be necessary to determine whose version of the facts was correct.

One fact potentially relevant to this question, the Court noted, concerned Buyer’s fiduciary duties as a custodian of charitable assets. If Charity tendered its Target shares, it would immediately receive a significant amount of cash. If it refused to tender its shares and the entire transaction were scuttled, Charity would apparently be left holding a 13% minority interest in a closely held corporation.

In sum, viewing the facts and the inferences that might be drawn therefrom in the light most favorable to the IRS as the nonmoving party, the Court found that there existed genuine disputes of material fact that prevented summary judgement on the assignment of income issue.

Thus, the Court denied Taxpayer’s motion.

Insofar as charitable giving is concerned, there are generally three kinds of taxpayer-donors: (i) those who genuinely believe in the mission of a particular charity and seek to support it, (ii) those who support the charity, or charitable works generally, but who want to use their charitable gift to generate some private economic benefit, [iii] and (iii) those who are not necessarily charitably inclined but who do not want to see their wealth pass to the government. [iv]

Most donors fall into the first category. This is fortunate, in part because the tax benefit that the donation generates for the donor-taxpayer will not compensate the taxpayer for the “lost” economic value represented by the property donated – the gift is being made for the right reason.

That is not say that such donors do not engage in any tax planning with respect to their charitable giving; for example, a donor would generally be better off donating a low basis asset rather than an identical asset with a high basis.

In the case of the closely held business, the donor’s tax planning almost always implicates the assignment of income doctrine. After all, would an owner’s fellow shareholders willingly accept a charity into their fold as an owner? Would the charity accept equity in a closely held business in which it will hold a minority interest, where the interest cannot readily be sold, and which cannot compel cash distributions from the business? Each of these questions has to be answered in the negative.

It is a fact that most charities prefer donations of liquid assets. Under what circumstances, then, may a donation of an interest in a close business ever find its way into the hands of a charity?

In last week’s post [v] , we saw how the “excess business holdings” and other rules operate to prevent a private foundation from holding equity in a closely held business. These rules do not apply to public charities, but that does not give such charities carte blanche, nor does it change their preference for gifts of cash or cash equivalents.

A charity will be most open to accepting a gift of an interest in a closely held business where the charity is “assured” that the interest will be redeemed by the business or sold to a third party for cash shortly thereafter.

Unfortunately for the donor-taxpayer, these are also the circumstances in which the IRS will raise the assignment of income doctrine in order to tax the donor-taxpayer on the gain recognized in the redemption or sale of the interest donated to the charity.

As illustrated by the decision discussed above, the application of the doctrine will often be a close call, especially for a business owner who is unaware of its existence.

[i] See last week’s post , for a brief discussion of the distinction between private foundations and public charities.

[ii] Toujours les “facts and circumstances.” Apologies to Napoleon and Patton.

[iii] For example, contributing property to a charitable remainder – split-interest – trust, generating an immediate tax deduction, having the trust sell the property without tax liability, then investing the entire proceeds to generate the cash flow necessary for paying out the annuity or unitrust amount.

[iv] The latter typically name a charity, any charity, as the beneficiary of last resort in the so-called “Armageddon clauses” of their wills and revocable trusts.

[v] But do you remember NYU Law School’s pasta business? Mueller’s anyone?

Income Statement

Income, expenses, and profit/loss

What is the Income Statement?

The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.

The income statement is one of three statements used in both corporate finance (including financial modeling ) and accounting. The statement displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner.

Image: CFI’s Free Accounting Fundamentals Course .

The statement is divided into time periods that logically follow the company’s operations. The most common periodic division is monthly (for internal reporting), although certain companies may use a thirteen-period cycle. These periodic statements are aggregated into total values for quarterly and annual results.

This statement is a great place to begin a financial model , as it requires the least amount of information from the balance sheet and cash flow statement. Thus, in terms of information, the income statement is a predecessor to the other two core statements.

Simple income statement from a financial model

Image: CFI’s Financial Modeling Courses .

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Income Statement Template

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Components of an Income Statement

The income statement may have minor variations between different companies, as expenses and income will be dependent on the type of operations or business conducted. However, there are several generic line items that are commonly seen in any income statement.

The most common income statement items include:

Revenue/Sales

Sales Revenue is the company’s revenue from sales or services, displayed at the very top of the statement. This value will be the gross of the costs associated with creating the goods sold or in providing services. Some companies have multiple revenue streams that add to a total revenue line.

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is a line-item that aggregates the direct costs associated with selling products to generate revenue. This line item can also be called Cost of Sales if the company is a service business. Direct costs can include labor, parts, materials, and an allocation of other expenses such as depreciation (see an explanation of depreciation below).

Gross Profit

Gross Profit Gross profit is calculated by subtracting Cost of Goods Sold (or Cost of Sales) from Sales Revenue.

Marketing, Advertising, and Promotion Expenses

Most businesses have some expenses related to selling goods and/or services. Marketing, advertising, and promotion expenses are often grouped together as they are similar expenses, all related to selling.

General and Administrative (G&A) Expenses

SG&A Expenses include the selling, general, and administrative section that contains all other indirect costs associated with running the business. This includes salaries and wages, rent and office expenses, insurance, travel expenses, and sometimes depreciation and amortization, along with other operational expenses. Entities may, however, elect to separate depreciation and amortization in their own section.

While not present in all income statements, EBITDA stands for Earnings before Interest, Tax, Depreciation, and Amortization. It is calculated by subtracting SG&A expenses (excluding amortization and depreciation) from gross profit.

Depreciation & Amortization Expense

Depreciation and amortization are non-cash expenses that are created by accountants to spread out the cost of capital assets such as Property, Plant, and Equipment ( PP&E ).

Operating Income (or EBIT)

Operating Income represents what’s earned from regular business operations. In other words, it’s the profit before any non-operating income, non-operating expenses, interest, or taxes are subtracted from revenues. EBIT is a term commonly used in finance and stands for Earnings Before Interest and Taxes.

Interest Expense . It is common for companies to split out interest expense and interest income as a separate line item in the income statement. This is done in order to reconcile the difference between EBIT and EBT. Interest expense is determined by the debt schedule.

Other Expenses

Businesses often have other expenses that are unique to their industry. Other expenses may include fulfillment, technology, research and development (R&D), stock-based compensation (SBC), impairment charges , gains/losses on the sale of investments, foreign exchange impacts, and many other expenses that are industry or company-specific.

EBT (Pre-Tax Income)

EBT stands for Earnings Before Tax, also known as pre-tax income, and is found by subtracting interest expense from Operating Income. This is the final subtotal before arriving at net income.

Income Taxes

Income Taxes refer to the relevant taxes charged on pre-tax income. The total tax expense can consist of both current taxes and future taxes.

Net Income is calculated by deducting income taxes from pre-tax income. This is the amount that flows into retained earnings on the balance sheet, after deductions for any dividends.

A Real Example of an Income Statement

Below is an example of Amazon’s consolidated statement of operations, or income statement, for the years ended December 31, 2015 – 2017. Take a look at the P&L and then read a breakdown of it below.

Learn to analyze an income statement in CFI’s Financial Analysis Fundamentals Course .

Starting at the top, we see that Amazon has two different revenue streams – products and services – which combine to form total revenue.

There is no gross profit subtotal, as the cost of sales is grouped with all other expenses, which include fulfillment, marketing, technology, content, general and administration (G&A), and other expenses.

After deducting all the above expenses, we finally arrive at the first subtotal on the income statement, Operating Income (also known as EBIT or Earnings Before Interest and Taxes).

Everything below Operating Income is not related to the ongoing operation of the business – such as non-operating expenses, provision for income taxes (i.e., future taxes), and equity-method investment activity (profits or losses from minority investments), net of tax.

Finally, we arrive at the net income (or net loss), which is then divided by the weighted average shares outstanding to determine the Earnings Per Share (EPS).

How to Build an Income Statement in a Financial Model

After preparing the skeleton of an income statement as such, it can then be integrated into a proper financial model to forecast future performance.

First, input historical data for any available time periods into the income statement template in Excel . Format historical data input using a specific format in order to be able to differentiate between hard-coded data and calculated data. As a reminder, a common method of formatting such data is to color any hard-coded input in blue while coloring calculated data or linking data in black.

Doing so enables the user and reader to know where changes in inputs can be made and which cells contain formulae and, as such, should not be changed or tampered with. Regardless of the formatting method chosen, however, remember to maintain consistent usage in order to avoid confusion.

Next, analyze the trend in the available historical data to create drivers and assumptions for future forecasting. For example, analyze the trend in sales to forecast sales growth, analyzing the COGS as a percentage of sales to forecast future COGS. Learn more about forecasting methods .

Finally, using the drivers and assumptions prepared in the previous step, forecast future values for all the line items within the income statement. Forecast specific line items, and use these to calculate subtotals. For example, for future gross profit, it is better to forecast COGS and revenue and subtract them from each other, rather than to forecast future gross profit directly.

Please download CFI’s free income statement template to produce a year-over-year income statement with your own data.

The above template is from CFI’s Financial Analysis Fundamentals Course .

What are Common Drivers for Each Income Statement Item?

While these drivers are commonly used, they are just general guidelines. There are situations where intuition must be exercised to determine the proper driver or assumption to use. For example, a specific entity may have zero revenue. As such, the percentage of sales drivers cannot be used for COGS. Instead, an analyst may have to rely on examining the past trend of COGS to determine assumptions for forecasting COGS into the future.

The core statements used in financial modeling are the same core statements used in accounting. There are three: the Income Statement, the Balance Sheet , and the Cash Flow Statement . In a financial model , each of these statements will impact the values of the other statements.

Income Statement Video Explanation

Below is a video explanation of how the income statement works, the various items that make it up, and why it matters so much to investors and company management teams.

We hope this video has helped you understand what many people consider to be the most important financial statement in accounting!

Additional Resources

Through financial modeling courses, training, and exercises, anyone in the world can become a great analyst. To keep advancing your career, the additional CFI resources below will be useful:

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FAQ: What is “assignment of income” under the tax law?

Author's Bio

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.

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Tax treatment of royalty monetization transactions – sale or loan?

A life science company that holds the right to receive a stream of future royalties may want to monetize the royalty stream. The monetization transaction would involve a significant upfront cash payment to the company from another party (the Financing Party) in exchange for some or all of the company’s rights to receive the royalty stream over time.

For tax purposes, is the royalty stream monetization a sale of property rights, or is it a loan? If the transaction constitutes a sale for tax purposes, generally:

If the transaction is instead treated as a loan for tax purposes, generally:

Note that the federal tax treatment may differ from the company’s financial reporting of the monetization transaction. Additionally, the transaction’s tax treatment may differ from descriptions set out in the governing legal documents.

Example of a royalty monetization transaction

CureCo is dedicated to finding a cure for a rare disease. CureCo has developed a pharmaceutical drug approved in a number of countries to treat the rare disease. CureCo manufactures, markets, and distributes the drug in the United States. CureCo has entered into a licensing agreement with an established European drug distributor that can market and distribute the drug in Europe (the European License Agreement). The distributor acquires exclusive rights to distribute the drug in Europe for 10 years and CureCo receives annual royalty payments based on the level of European sales of the drug.

The partnership with the distributor is a success, generating annual royalty payments averaging $30 million from 2018 – 2021. Assuming continuing viability of the drug, CureCo expects to receive annual royalty payments of $30 – $40 million from the European distributor for the next 10 years.

In 2021, CureCo would like to invest in additional new drug development, which will require a large amount of cash. A Financing Party offers to purchase the next five years’ worth of European License Agreement royalty payments for a single $100 million up-front payment. CureCo accepts the offer, and enters into a Royalty Purchase Agreement with the Financing Party.

Royalty monetization – sale or loan?

How is the royalty monetization transaction viewed from a tax perspective? Is the sale truly a sale? Or is it a loan? If it is a sale, does it result in capital gain, or ordinary income?

A transaction’s tax treatment typically is determined in accordance with its substance, not merely by its form.1 The question of substance over form may arise in regard to a taxpayer’s receipt of cash in exchange for an obligation that could be viewed as debt or as something else from a tax perspective. For example, there are many tax cases addressing whether an advance to a corporation from its shareholder should be treated as debt or equity for tax purposes. Courts generally have ruled that an advance constitutes debt if there are firm rights to and expectation of repayment,2 and not debt if firm rights to repayment or expectation of repayment is not present.3 In differentiating between debt and equity, the case law generally requires an examination of numerous factors,4 including the right to repayment of a fixed or ascertainable sum, at a fixed or ascertainable maturity date, with repayment not heavily dependent upon the borrower’s profits or revenues.5

In the case of royalty monetization transactions, the issue is whether the cash advance constitutes sale proceeds or loan proceeds. Courts have on numerous occasions addressed whether a transaction involving an upfront payment to an owner of property constitutes a sale or a loan for federal tax purposes. A key differentiating factor courts look to is whether the risk of loss and opportunity for gain with respect to the property has been shifted.6 Some cases of this type have resulted in courts holding that a transaction documented as a sale was treated as a loan for federal tax purposes,7 while others resulted in courts holding that the transaction was treated as a sale.8The chief distinguishing factor generally was whether there was certainty of repayment, or whether the purchasing or financing party instead bore the risk of loss with respect to the subject property.9

One court has succinctly summarized the tax law in this area:

For disbursements to constitute true loans there must have been, at the time the funds were transferred, an unconditional obligation on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment. In the absence of direct evidence of intent, the nature of the transaction may be inferred from its objective characteristics....10

Accordingly, the case law’s principal focus in determining whether a sale of property rights should be treated as a loan is not the form of the transaction but whether the seller has an unconditional obligation to repay the money advanced or whether the risk of loss with respect to the subject property has instead shifted to the buyer (i.e., to the Financing Party).11 A royalty monetization transaction where the Financing Party’s rights to future repayment are not fixed or ascertainable repayment but are instead contingent on whether the property produces sufficient income would often be viewed for tax purposes as a sale rather than a loan. However, each transaction should be analyzed on its own facts.

Income from royalty monetization transactions – ordinary income or capital gain?

If a royalty stream monetization transaction is treated for federal income tax purposes as a sale and not loan, the income that the company realizes in the transaction often is characterized as ordinary income under the substantial rights test and/or the assignment of income doctrine.

Capital gains and losses are generated by the sale or exchange of a capital assets. Capital assets are defined to include all property, other than specifically enumerated types of property.12 Intangible assets are frequently licensed or leased in exchange for royalties. The owner’s receipt of royalty income is taxed as ordinary income, not as capital gain.13 The owner (licensor) must generally include any advance royalty or rental payments in gross income for the year in which the owner receives the payments, regardless of the period covered or the method of accounting the owner uses.14

License versus sale of IP

The distinction between capital gain and ordinary income15 is one of the principal reasons why it is important to characterize intangible asset transfers as sales or licenses for tax purposes.16 To distinguish a license from a sale, the courts and the IRS typically apply a “substantial rights” test, which looks to whether the transferor retained a substantial right in the asset.17 For example, a patent holder’s transfer of a nonexclusive right to use a patent asset typically would not qualify for sale treatment because it is not a transfer of all substantial rights.18

An intangible asset transfer generally is treated as a license and not sale of the underlying asset if it consists of only a right to use the asset for a period less than the estimated useful life of the asset.19 In Pickren , for example, the court determined that the transfer of a formula for liquid wax products for a 25-year period was a license and not sale of the underlying asset because the useful life of the formula extended beyond the 25-year period.20 The transfer was not a sale because the remainder interest retained by the transferor comprised a substantial right in the asset.21

Assignment of income doctrine

Property that produces ordinary income may generate capital gain when it is sold. Examples include a sale of real property that generates ordinary rental income or a sale of stock or bonds that yields ordinary dividend or interest income. Taxpayers’ ability to treat the sale of an ordinary income stream as generating capital gain is subject to various limitations besides the substantial rights test discussed above; one of these limitations is the assignment of income doctrine.22

For example, in the seminal P.G. Lake case, the Supreme Court ruled that proceeds received by the transferors in exchange for the assignments of oil payment rights represented assignments of the transferors’ rights to receive future income and were therefore taxable as ordinary income.23 In several cases, taxpayers assigned rights to compensation for service they rendered and pointed to contingencies or valuation difficulties, hoping their transactions would not fall within the scope of the assignment of income doctrine. However, courts generally rejected these attempts and treated these transactions as assignments of the right to receive ordinary income.24

Accordingly, if a royalty stream monetization transaction is treated for federal income tax purposes as a sale, the income that the company realizes in the transaction often is characterized as ordinary income. Each monetization transaction, however, should be analyzed on its specific facts.

Royalty stream monetization transactions often are treated as sales and not loans for federal income tax purposes. However, each transaction must be judged based on its particular facts and circumstances. The transaction’s characterization under tax rules may differ from its characterization in legal document or its characterization for financial accounting purposes. Due to the complexities surrounding royalty monetization transactions, taxpayers entering into them should consult with their tax advisors.

1 See , e.g., Frank Lyon v. United States , 435 U.S. 561, 573 (1978) (“[t]he Court has never regarded the simple expedient of drawing up papers as controlling for tax purposes when the objective economic realities are to the contrary.”) (internal quotation marks and citations omitted); Higgins v. Smith , 308 U.S. 473 (1940); Gregory v. Helvering , 293 U.S. 465 (1935). 2 See, e.g., Gilbert v. Comm’r , 248 F.2d 399 (2d Cir. 1957), on remand , 17 T.C.M. 29 (1958), aff'd , 262 F.2d 512 (2d Cir.), cert. denied , 359 U.S. 1002 (1959). 3 See, e.g., United States v. Title Guarantee & Trust Co., 133 F.2d 990 (6th Cir. 1943). See also Slappey Drive Indus. Park v. United States , 561 F.2d 572 (5th Cir. 1977). 4 See, e.g., Bauer v. Comm’r , 748 F.2d 1365 (9th Cir. 1984); Estate of Mixon v. United States , 464 F.2d 394 (5th Cir. 1972). 5 See Gilbert, supra. See generally Plumb, The Federal Income Tax Significance of Corporate Debt: A Critical Analysis and a Proposal , 26 Tax L. Rev. 369 (1971) (“when money is advanced ... not for the return of the principal, but for payment of a percentage of profits or sales, indefinitely or for a specified period, the arrangement lacks even the form of debt ...”) 6 See United Surgical Steel Co. v. Comm'r , 54 T.C. 1229-1230 (1970); Town & Country Food Co. v. Comm'r , 51 T.C. 1057 (1969); Grodt McKay Realty Inc. v. Comm'r , 77 T.C. 1221 (1981). See also Illinois Power Co. v. Comm'r , 87 T.C. 1417 (1986); Coleman v. Comm'r , 87 T.C. 178 (1986), aff’d , 833 F. 2d 303 (3d Cir. 1987). 7An interesting application of the question of sale versus loan involves taxpayers with expiring tax net operating losses (NOLs) who arrange to sell future income in an effort to utilize the benefits of the losses in the current year. In Hydrometals , for example, a taxpayer with an expiring NOL took the following steps: The company sold a fixed amount of its receivables to a buyer (who had borrowed cash from a bank to finance the purchase), purchased certificates of deposit with the sale proceeds, deposited these certificates with the bank that had loaned funds to the buyer, and agreed to maintain these certificates until the buyer received the revenue it had purchased. Because the buyer’s repayment was virtually guaranteed, the court concluded that the “sale” was in substance a loan. Hydrometals, Inc. v. Comm’r , T.C. Memo. 1972-254, aff’d per curiam , 485 F.2d 1236 (5th Cir. 1973). See also Mapco, Inc. v. United States , 556 F.2d 1107 (Ct. Cl. 1977). 8 In Stranahan , for example, the court concluded that a tax-motivated sale of future dividends was actually a sale and not a loan. The taxpayer, who desired to generate taxable gain to offset a large interest deduction, sold the right to receive future stock dividends. The court held that although the sale was motivated solely by tax savings, the transaction could not be recharacterized as a loan, because a genuine risk did exist that enough dividends might not be declared in the future to fully repay the buyer for his cash outlay. Stranahan v. Comm'r , 472 F.2d 867 (6th Cir. 1973). See also Cotlow v. Comm’r , 228 F.2d 186 (2d Cir.1955) (assignment of life insurance policy renewal commissions treated as a sale and not a loan because buyer bore the risk that the policies would not be renewed) . 9 See, e.g., Stranahan, supra; Cotlow, supra; Mapco, supra. The issue of sale versus loan characterization can similarly arise in the context of factoring. Factoring refers to where a company sells its receivables to a financing party, called a factor. Generally, if the sale to the factor is at arms-length and the factor assumes risk of loss with respect to the receivables, the sale is respected for tax purposes. See , e.g ., CCA 200519048 (Jan. 27, 2005) (risk of loss had shifted to factor and taxpayer must therefore include as income the factor’s lump sum payment). 10 Geftman v. Comm'r , 154 F.3d 61 (3d Cir. 1998) (internal quotation marks omitted). 11In various contexts, courts have emphasized that ownership of property for tax purposes does not depend merely on legal title. See , e.g. , Grodt McKay Realty Inc. v. Comm'r , 77 T.C. 1221 (1981). 12Sections 1222(1). Section 1221(a)(3) excludes certain patents and other intangible property from capital asset treatment. The exclusion applies to certain property created by the holder's personal efforts (or property received in exchange for such property). This article does not further discuss the section 1221(a)(3) exclusion. 13Section 61(a)(6). 14Reg. sections 1.61-8(a) and -8(b). 15Capital gain treatment generally is more advantageous for taxpayers than ordinary income treatment, for reasons that differ for differently situated taxpayers and that this article does not discuss. 16We have used the terms “sale” and “license” for the sale of colloquial clarity here. We note also that the substantial rights test authorities discussed below generally hold that a transfer that fails to transfer all substantial rights results in ordinary income treatment without concluding whether the transfer is or is not treated as a sale for federal income tax purposes. Aside from its relevance to the capital versus ordinary character question, another reason that treatment of a transaction as a sale may be important is that sale transactions generally permit the seller to recover the tax basis of the property sold. See generally Section 1001. Since life science companies engaging in royalty stream monetization transactions generally have little if any tax basis in their monetized royalty rights, this article does not address basis recovery. 17 See Section 1235(a) and Reg. section 1.1235-2 (regarding transfer of substantial rights to a patent); Pickren v. United States , 378 F.2d 595 (5th Cir. 1967) (right to terminate transfer agreement at will is retention of substantial right when trade secret's useful life extends beyond term of agreement); Cubic Corp. v. United States , 72-1 U.S.T.C. ¶ 9165 (S.D. Cal. 1971) (license agreement because owner transferred less than all of substantial rights); Rev. Rul. 64-56, 1964-1 C.B. 133, amplified by Rev. Rul. 71-564, 1971-2 C.B. 179. Transfer of all substantial rights within a specified jurisdiction or territory may receive sale treatment even if rights in other jurisdictions or territories are retained. See Glen O’Brien Partition Co. v. Comm’r , 70 T.C. 492 (1978); Rev. Rul. 64-56, supra, amplified by Rev. Rul. 71-564, supra. 18 See generally Reg. section 1.1235-2. 19 See Reg. section 1.1235-2(b)(1)(i) (patents). 20 Pickren , supra . 21 Id. See also Rev. Rul. 64-56, supra (transfer of know-how is a sale only if the transfer is exclusive and perpetual). 22 See, e.g., Hort v. Comm’r , 313 U.S. 28 (1941); Comm’r v. P.G. Lake, Inc ., 356 U.S. 260 (1958). See also Rev. Rul. 69-471, 1969-2 C.B. 10 (wife’s receipt of a lump sum, pursuant to a divorce degree, in exchange for relinquishment of rights with respect to husband's retirement pay is ordinary income under the assignment of income doctrine). 23 P.G. Lake, supra (the “... substance of what was assigned was the right to receive future income”). 24 See , e.g. , O'Neill v. Comm’r , 23 T.C.M. 7(1964) (“[p]etitioner argues that where a taxpayer sells a right to receive income which has not accrued or which cannot be ascertained with accuracy, then the gain realized from such sale is a capital gain. We cannot agree.”); Turner v. Comm’r , 38 T.C. 304 (1962) (sale of rights to receive future commissions on renewal of insurance policies).

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Options and Derivatives

Strategy & Education

Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

Key Takeaways

Property Rights Assignment

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, etc. to another entity through a written agreement. For example, a payee assigns rights for collecting note payments to a bank. A trademark owner transfers, sells, or gives another person interest in the trademark. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

Trading Instruments

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DCFS-SESIA - SES Income Assignment

Course description, prerequisites, session time-out, privacy policy, cookie policy.

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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 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.

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Online lecture State and Local Budgeting
2 4 school finance sources of income and item of expenditure school budget by Dr. Tandra Sharma
Lecture 53 Chapter 4 Heads of Income, Unit 3 Profits and Gains of Business or Profession 07 03 2022
Types Of Income!

COMMENTS

What is "Assignment of Income" Under the Tax Law?
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.
Recognizing when the IRS can reallocate income
Assigning income to the entity that earns or controls the income Income reallocation under the assignment - of - income doctrine is dependent on determining who earns or controls the income.
Publication 525 (2022), Taxable and Nontaxable Income
Gross income doesn't include any amount arising from the forgiveness of a Paycheck Protection Program (PPP) loan, effective for taxable years ending after March 27, 2020. ... Assignment of income. Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third ...
What Is Wage Assignment?
A wage assignment is a voluntary agreement to let a lender take a portion of your paycheck each month to repay a debt. This process allows lenders to take a portion of your wages without taking you to court first. 1 Note Borrowers may agree to allow a lender to use wage assignments, for example, when they take out payday loans.
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.
FAQ: What is assignment of income under the tax law?
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 ...
Assignment of Income Lawyers
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.
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
Section 1202 Planning: When Might the Assignment of Income Doctrine
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.
Assignment of Income Dilemma
First is a review and summary of the statutory, judicial, and administrative interpretations relating to the assignment of contingent fees. Second is a delineation and analysis of the critical elements in determining when contingent fees can be assigned without incurring tax liability.
Individual Tax Chapt 3 Flashcards
The assignment of income doctrine requires income to be taxed to the taxpayer that actually earns the income. Merely assigning income (e.g., someone's paycheck or dividend) to another taxpayer does not transfer the tax liability associated with the income. The implication of the assignment of
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." [1] History [ edit]
Income assignment Definition
Income assignment or " Income withholding " means the process by which the income due or to be paid or credited to an employee or other recipient of income is, for the purpose of paying child or spousal support, directed by an Income Withholding for Support Order to be withheld by the employer or other payer of income pursuant to an original or …
Assignment of Income And Charitable Contributions of Closely Held Stock
Assignment of Income A longstanding principle of tax law is that income is taxed to the person who earns it. A taxpayer who is anticipating the receipt of income "cannot avoid taxation by entering into a contractual arrangement whereby that income is diverted to some other person."
Income Statement
The income statement is one of three statements used in both corporate finance (including financial modeling) and accounting. The statement displays the company's revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner.
Income Definition: Types, Examples, and Taxes
Income is money that an individual or business receives in exchange for providing a good or service or through investing capital. Income is used to fund day-to-day expenditures. People aged 65 and ...
FAQ: What is "assignment of income" under the tax law?
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 ...
Tax treatment of royalty monetization transactions
Assignment of income doctrine. Property that produces ordinary income may generate capital gain when it is sold. Examples include a sale of real property that generates ordinary rental income or a sale of stock or bonds that yields ordinary dividend or interest income.
Assignment: Definition in Finance, How It Works, and ...
Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, etc. to another entity through a written agreement. For example, a...
DOC ASSIGNMENT OF INCOME
interest to the income listed in Section 2. Section 2. Description of the Income. This Assignment is in. the amount and applies to the following income, rentals, revenues, profits, or monies: Section 3. Governing Law. The laws of the State of _____ shall govern this Agreement Section 4.
DCFS-SESIA SES Income Assignment
Income assignment is the most effective enforcement tool available to CSE. Approximately 70% of all child support collected by CSE is collected through income assignment. The total child support collected by CSE for the Federal Fiscal Year 2019 was $437,995,084. The total amount collected through Income Assignment for the State Fiscal Year 2019 ...
Assignment of Income
Another possible legal theory involves the assignment of income doctrine. It is a long-standing principle that gross income includes all income from whatever source derived. I.R.C. § 61 (a).This includes compensation an individual receives for services. Fundamental to this principle is that income is taxable to the person who earned it.
Data Assignment 2 Inequality
Econ 345 Data Assignment 2: Income Inequality and Poverty. Put together a snapshot of the state of income inequality for your country and your reference developed country. Your assignment should be able to answer the following: What is the state of income inequality today (most recent year data was collected) and over time as measured by the ...
Strategies for Minimizing the Impact of Income in Respect of a Decedent
The income right had not matured sufficiently to have been properly included in the decedent's final income tax return; ... 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, ...