Lucas v. Earl
281 U.S. 111 (1930)

  • Earl was looking to lower the amount he was required to pay in taxes. He signed a contract with his wife that said that any property or income either of them acquired in any way would be split between the two of them equally.
    • Earl worked, while his wife didn't (so her income was $0). By splitting his income, he hoped to basically pay two low tax bills instead of one high tax bill.
      • Due to progressive tax rates, the last dollar a person earns in a year is taxed at a significantly higher tax rate than the first dollar they earn. Earl wanted to take the top half of his income and give it to his wife, so they'd both get the advantage of having the majority of their income taxed a low rate.
  • The IRS determined that Earl should be taxed on his entire salary, regardless of any deals he made with his wife. Earl appealed.
  • The Tax Court found for the IRS. Earl appealed.
  • The Appellate Court reversed. The IRS appealed.
  • The US Supreme Court reversed and found for the IRS.
    • The US Supreme Court found that since Earl earned the income, he was the one who should be taxed on his entire earnings.
      • The Court found that there was "no doubt that the statute required salaries to be taxed by those who earned them and provided that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it."
    • The Court found that "the fruits cannot be attributed to a different tree from that on which they grew."
      • The Court distinguished Earl's case from Poe v. Seaborn (281 U.S. 101 (1930)). In this case, the husband and wife signed a voluntary contract given each other rights to their property. Seaborn was different because he didn't sign a contract, he was just following the property laws of his State, which held that all property between spouses is community property and is equally owned by each spouse.
  • This case established the Assignment of Interest Doctrine, which basically says that a taxpayer cannot evade taxes by giving (assigning) his income to someone else in a lower tax bracket.