## Facts

- In 1901, Guy C. Earl and his wife executed a contract providing that each spouse’s present and future property and earnings, including salaries and fees, would be jointly owned as joint tenants with survivorship.
- In 1920 and 1921, Earl earned salary and attorney’s fees from personal services.
- Relying on the 1901 agreement, Earl treated the earnings as jointly owned and reported only half as his income, intending the other half to be treated as his wife’s income.
- The Commissioner of Internal Revenue determined, under the Revenue Act of 1918, that Earl was taxable on all of the salary and fees he earned.
- The Board of Tax Appeals sustained the Commissioner’s assessment.
- The Ninth Circuit reversed, reasoning that the contract made the earnings jointly owned under state law.
- The Supreme Court granted certiorari to review whether the contract could reduce Earl’s federal income tax liability.

## Issues

1. Whether a taxpayer may avoid federal income tax on part of salary and fees by a prior contract assigning a joint interest in all future earnings to a spouse.
2. Whether the federal income tax on compensation for personal services turns on state-law ownership arrangements created by private contract.

## Decision

- The Supreme Court unanimously reversed the Ninth Circuit.
- The Court held that Earl was taxable on the entire amount of salary and attorney’s fees he earned in 1920 and 1921, notwithstanding the spousal contract.
- The Court treated the arrangement as an anticipatory assignment of income that could not defeat Congress’s allocation of tax liability to the earner.
- The Court rejected a formal distinction between (a) receiving income and then sharing it and (b) arranging in advance that the income be shared at the moment of payment.
- The Court assumed, without deciding, that the contract was valid under state law, but held that its validity did not control federal tax consequences.

## Legal Principles

- Income from personal services is taxed to the person who earns it.
- Anticipatory arrangements and contracts designed to redirect future compensation do not shift federal tax liability from the earner.
- Federal tax liability follows the substance of who produces the income, not private contractual forms dividing the proceeds (“fruit” cannot be attributed to a different “tree”).
- State-law characterizations of ownership created to split earnings do not determine who is taxed on compensation for services under federal law.

## Conclusion

The Court held that compensation for personal services is taxable in full to the individual who performed the services, and that a preexisting spousal contract purporting to make future earnings jointly owned cannot reassign the federal income tax burden.


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