Question

Mr. Gates is the president of an established and successful company. The company pays Mr. Gates $1,000,000 in salary each year. Mr. Gates, a renowned philanthropist, has directed the board of directors to pay him nothing for the year and instead use the $1,000,000 to which he is otherwise entitled to create a scholarship fund. The fund, which he would help oversee, would be used to create scholarships for worthy high school students otherwise unable to afford college.

What are the tax ramifications to Mr. Gates and to the company? Please cite all resources in your research. One keyword term to start your search is “assignment of income.”

Answer 1

ANSWER:

Facts:

Mr. Gates is the President of an established and successful company. The company pays Mr. Gates $1,000,000 in salary each year. Mr. Gates, a renowned philanthropist, has directed the Board of Directors to pay him nothing for the year and instead use the $1,000,000 to which he is otherwise entitled to create a scholarship fund. The fund, which he would help oversee, would be used to create scholarships to worthy high school students otherwise unable to afford college.

Issue:

IRC §61 specifically includes into gross income for tax purposes compensation income. By redirecting his salary towards a scholarship fund, can Mr. Gates avoid recognizing the $1 million as compensation income?

Conclusion and Reasoning:

Applying the case law found and the “assignment of income” doctrine, Mr.Gates may be required to recognize into income the $1 million. And, unless the foundation is a qualified charity for purposes of IRC §170, he will not be entitled to a charitable deduction for the amount. Even if the foundation is a qualified charity, Mr. Gates will be subject to the contribution limitations found in IRC §170, although the exact that will be deductible depends on other income he may have. The case of Lucas v. Earl, 2 USTC ¶496 holds that the person who earns a salary must recognize it as income, and cannot assign the income to another (for tax purposes). They may find one case, however, Giannini v. Commissioner, 129 F.2d 638 (1942) that did allow the taxpayer to not recognize salary income to which he was entitled but which he redirected.