Opinion ID: 3050656
Heading Depth: 2
Heading Rank: 4

Heading: Attribution of HECO Payments

Text: Among the parties’ pre-trial stipulations was the following: 8. For the year 1999, Hawaiian Electric Company (HECO) issued a Form 1099, Non-Employee Com- pensation, to Mercury Solar in the amount of $195,275. The statutory notices issued to Sparkman and Mercury Solar both contain an adjustment in the amount of $195,275 labeled “1099 NEC” that is based on the Form 1099 issued by HECO. At trial, Sparkman contradicted this stipulation and claimed that he never received the form. He conceded, however, that HECO did make those payments, and contended only that $113,354 of those payments should be attributed to HEH, not to Mercury Solar PTO. He renews his objection on appeal. Sparkman argues that the Tax Court incorrectly treated the stipulation as an admission that the HECO payments were attributable to Sparkman. But the Tax Court based its attribution of the payments not on an admission in the stipulation, but rather on basic assignment-of-income principles and Sparkman’s own admission in testimony. Whether assignment-of-income principles apply is a mixed question of 16182 SPARKMAN v. CIR fact and law. Mixed questions are reviewed de novo unless the question is primarily factual. Hood v. Encinitas Union Sch. Dist., 486 F.3d 1099, 1104 (9th Cir. 2007). [9] Under assignment-of-income principles, “income must be taxed to him who earns it.” Comm’r v. Culbertson, 337 U.S. 733, 739-40 (1940); see also Lucas v. Earl, 281 U.S. 111 (1930). Sparkman was clear in his testimony that it was Mercury Solar, as the installing contractor, which earned the money, even if HEH received some of it. He stated that “I do know that Mercury Solar in its transaction with [HECO] wanted to be paid faster” and that “Mercury submitted invoices that it was owed by [HECO] to” the factor for payment (emphases added). Instead, “apparently mid-1999 . . . the funds [were] directed into the Hawaii Environmental Holdings account instead of the Mercury Solar account.” Sparkman has pointed to no evidence in the record that contradicts this interpretation of his testimony—that the money was earned by Mercury Solar, and the proceeds merely directed to HEH. [10] No matter where the funds are “directed,” they are taxed where they are earned. Kochansky v. Comm’r, 92 F.3d 957, 958 (9th Cir. 1996). Any attempt to reattribute income through redirection of payments by a factor can only be described as an “arrangement by which the fruits are attributed to a different tree from that on which they grew,” and disregarded for income tax purposes. Lucas, 281 U.S. at 114.7 For this reason, we affirm the Tax Court’s holding that the entire HECO payment should be attributed to Mercury Solar PTO, and hence to Sparkman. 7 Sparkman now contends that his assignment of the income from the HECO rebates constituted a “transfer of property rights.” Such an arrangement also makes assignment-of-income principles no less relevant: one can no more escape taxation by assigning the gain from the sale of property than one can by assigning income from services. SPARKMAN v. CIR 16183