Schneer v. Commissioner: Continuing Confusion Over the Assignment of Income Doctrine and Personal Service Income

Abstract

More than sixty years have elapsed since Justice Holmes first enunciated in Lucas v. Earl the principle that income from personal services "must be taxed to him who earns it" and that assignments of such income "however skilfully devised" will not be respected for tax purposes. The Supreme Court has described this principle-now known as the assignment of income doctrine-as the "first principle of income taxation." Yet despite its venerable lineage and importance, the doctrine remains today beset by confusion and uncertainty. This was vividly demonstrated in Schneer v. Commissioner where the Tax Court agonized over the application of the doctrine to a simple, indeed pedestrian, set of facts. The twenty-page majority opinion brought forth a concurrence, based on an entirely different theory, and two vigorous dissents, one of which attacked the court's decision as "unprincipled." The decision has given rise to considerable comment, some of it heated. One commentator described the decision as not only wrong but "exquisitely wrong, so misguided at every turn, that it becomes a wayward sort of achievement," while another described the first commentator's analysis as "wrong, although not exquisitely wrong."' All commentators, however, have recognized the case's significance. The Tax Lawyer, the official publication of the American Bar Association Section of Taxation, designated the case as one of the important tax decisions of 1992, while a publication of the Section on Taxation of the Association of American Law Schools recommended its use in the classroom as the "practically perfect case" for teaching the assignment of income doctrine. The Schneer case therefore presents an opportune occasion to reexamine the assignment of income doctrine as applied to personal service income.