of his property and in return for that she allows him to manage it, because, after all, there has got to be a head to the business. In one of the cases from Texas, they held that the husband could be agent for the wife's separate property and could go in and manage it for her and it would have the same results as a community agency; that it was merely inuring to her benefit, and he was merely acting for her. In the community property he is acting for her as far as her half is concerned and acting for himself as far as his half is concerned. That is the holding in the case of Warburton v. White, and in that connection, may I say that in the case of Arnett v. Reade the very thing that seemed to be a little troublesome at first glance about the right of the husband to convey without the wife's joinder was what was involved. The husband had the right under the law of New Mexico to convey without the wife joining and they decided for reasons of policy they would make the wife join, and his grantees said no, the husband conveyed to me property which he had the right to convey before the statute was passed, and that was a vested right, and you cannot take it away from him. The legislature said no, that element of control was a pure power of attorney we had conferred on the husband and he could convey it until we took it away from him; but, when we took it away and required his wife to join, then she had to join. That is no impairment of a constitutional right, but that is a pure element of control. That was the holding in Arnett v. Reade. I believe you asked that very question, and I will say that in Texas the husband can convey the property. The legislature has said that is his power, and they leave the power of attorney where it is, but it is always subject to revocation by the legislature. It is not a property right, it is a method of doing business. Further, may I say this to you: That in Texas, if the husband takes the property, even in his own name, he holds one half of it in trust for the wife, unless it is expressly provided that it is for his own separate use and benefit. In the case of the wife, if she takes a deed, she holds one half of it in trust for him unless it is expressly provided it is granted to her for her own separate use and benefit, and is a part of her own separate property, showing, therefore, that whether the title for management purposes is in the wife or in the husband, or in both, has nothing to do with the question of the right, and the legislature or the court can step in at any time and protect if it is being abused; or, as Mr. Justice Roberts, who wrote the opinion in Hopkins v. Bacon, said, that is a right she has at any time to step into court and protect herself if she needs to. Now, if it pleases the committee, in a general way, I think I have discussed the major point that pertains to the Texas situation as it is in common with or distinguished from the other community-property States. Mr. Fullbright will be here next week, and I understand the committee will indulge us by allowing him also to speak in behalf of the Texas taxpayers. I might say further, that in the opinion of the Attorney General that I quoted from, there is a brief summary of the laws of all of the community-property States, and when you run through that summary, you will find that with the exception of California before its statutory amendment, that the Attorney General in substance indicates they are all more or less the same and there is no substantial difference between the right of the wife in one and in the other. She may have a little more power over one kind of property in one State, and a little less over it in another, but in the whole series of powers, she and her husband are on the same basis in all of the community-property States. I might say to you we have prepared and would like the privilege of filing a brief which will be here Monday. It is being printed now, and I ask permission of the chairman of the committee if I may, to file that in behalf of the Texas taxpayers. Mr. SHALLENBERGER. That permission is granted. Mr. HUTCHESON. In that brief will appear the following extract which I would like to read into the record, which is on page 25 of the brief: A typical ruling as to the effect of a partnership in a common-law State is reflected by the following quotations from the above notation. (The notation referred to is vol. 1 of the Standard Federal Tax Service, published by the Commerce Clearing House, Inc., p. 1876.) An oral partnership agreement between the taxpayers and their wives domiciled in Virginia by which each taxpayer gave to his wife one half of the capital in the business was held to be a valid partnership even though the wives did not contribute services or capital to the partnership. Though the apparent object of the reorganization of the partnership was to reduce surtaxes, is immaterial. Mr. HILL. In that connection, can you supply for the record the Treasury decision holding along that line? Mr. HUTCHESON. I will give you that case right now. Proceeding with the quotation, it says: Citing Phelps v. Commissioner (13 B.T.A. 1248), acquiesced in by the Commissioner. You will find illustrated in that group about 21 or 22 States of the 40 that already have had that exact question presented and ruled on by the Treasury Department. Mr. HILL. So, the Treasury Department recognizes for tax purposes the right of the husband and wife in the non-communityproperty States to enter into partnership. Mr. HUTCHESON. Yes; and regardless of the fact it may have been done for the sole purpose of avoiding surtaxes. They must be bona fide, of course, and not in fraud. Mr. HILL. It is legal avoidance. Mr. HUTCHESON. Yes; legal avoidance, and the Supreme Court of the United States has said legal avoidance is perfectly legal. You have the right to do as you please with your property, and the fact it may benefit you in one respect while it takes away in another, if you see fit to give it up, you should not have to pay taxes on it. The same thing is applicable when you move from some other State to Texas and give one half of the property to your wife, where she can will it away, and on her death it goes to her children if she does not will it, and she can take it away in case of divorce unless inequitable or something of that kind, and that she can at all times hold you accountable for fraud on the community, and she can take the husband's estate if necessary to reimburse the community. It is inconceivable to my mind that the same right allowed in the noncommunity States where the contract is one between the parties, should not be recognized also where it is a matter of State legislation, which the Constitution of the United States has always recognized and protected in property rights. As to the theory that there can be any difference between the dueprocess clause in the fourteenth amendment which was involved in the Schlesinger case and in the Hoeper case from Wisconsin and the due-process clause of the fifth amendment of the United States Constitution, I believe there can be no one successfully maintain there is any distinction. Due process at the hands of the Federal Government must always be the same as at the hands of the State government, and you cannot change the meaning of them. Mr. HILL. The Supreme Court of the United States in the case of Heiner v. Donnan, in the two hundred and eighty-fifth United States report so held it specifically. Mr. HUTCHESON. Yes; and I am glad you called my attention to that. In that case, they said that the language of the two amendments, insofar as they related to due process had exactly the same effect, and it is only the impairment of the obligation of contract which is written into the one controlling the State, which is not written into the one controlling the Federal Government. I think you gentlemen very much for the patience you have shown. We feel we have had our fair day in court, and we are very much indebted to you. Mr. DUNBAR. Mr. Chairman, I forgot to make one statement which I would like to insert here if I may. Mr. SHALLENBERGER. We will hear you. Mr. DUNBAR. In Louisiana a man and woman who are about to marry may make a contract that the community shall not apply, but if they marry without making the prenuptial agreement, the statute creates the partnership, so that there is a voluntary acquiescence in the application of the law by their failure to prevent its operation, which shows how close the law of contract and partnership is to the community-property law. Mr. SHALLENBERGER. The hearing will be resumed on Monday, and the first witness I have on my list is Mr. Fulbright, then there are others to follow. I am informed, Senator Connally, of Texas, wants to appear briefly before the committee, so that on Monday I will hear Senator Connally first, and then we will hear Mr. Fulbright and the other witnesses, following the program on the calendar. We stand adjourned until Monday at 10 o'clock. (Thereupon the subcommittee adjourned until Monday, May 7, 1934, at 10 a.m.) COMMUNITY PROPERTY INCOME MONDAY, MAY 7, 1934 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE OF THE COMMITTEE ON WAYS AND MEANS, The subcommittee met at 10 a.m., Hon. Ashton C. Shallenberger (chairman) presiding. Mr. SHALLENBERGER. The committee will be in order. The first witness this morning is the Hon. William E. Evans, a Representative from California. STATEMENT OF HON. WILLIAM E. EVANS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA AND A MEMBER OF THE COMMITTEE ON WAYS AND MEANS Mr. EVANS. Mr. Chairman and gentlemen of the committee: It would be presumptuous on my part to undertake to cover this question, in the light of the very able statements and arguments that have been made by the eminent gentlemen who have already spoken, and also those who will follow me. In my limited experience of 8 years here, I think I can very consistently and truthfully say that I have not known of an issue that has been so adequately and fully explored and expounded as has this, and I am sure that whatever the views of any member of the committee may have been on the issues involved in this proposed legislation, the members have been very profoundly impressed with what has been already said in connection with this proposed legislation. I do feel, however, that it would be proper for me to put in the record the exact status of the California community-property law. California has had a community-property law throughout its existence as a State, and even before California was admitted into the union, like the other community-property States, it has a system of community property holding. True, in California, as ultimately determined by the Supreme Court of the United States, the interest of the wife was held an interest in expectancy rather than a vested right; and, as has been pointed out to the committee on several occasions during these hearings, the legislature of the State of California, in 1927, amended our community-property law so as to create in the wife a vested, present, actual interest, equal to that of the husband, with the control in the husband. I shall read for the purpose of the record that section of the law as amended in 1927 and as at present exists. Section 161 (a) of the Civil Code of the State of California establishes and fixes the right of the spouse in community property. It is as follows: The respective interests of the husband and wife in community property during continuance of the marraige relation are present, existing, and equal interests under the management and control of the husband as is provided in sections 172 and 172 (a) of the Civil Code. This section shall be construed as defining the prospective interests and rights of husband and wife in community property. May it please the committee, the Supreme Court of the State of California has construed that section, subsequent to 1927, when it was enacted; and it has held in several cases, particularly in the case of Siberell v. Siberell (214 Calif. 767), that under that section of the code the wife in California acquired a full, unqualified half interest in the community property; that that interest was the highest quality of ownership known to the law. It is conceded here by the proponents of this legislation that the basis of taxation of income is ownership of the property. If that is the criterion, then our courts have said unqualifiedly and without equivocation that the interest which the wife holds in community property in California is the highest quality of ownership known to the law. The purpose of this bill, however, is, by legislative enactment of the United States Congress to say that is not true, that there is a so-called "handicap" in favor of the wife to the extent that she is not the unqualified owner, that she does not hold the highest quality of ownership known to the law, but she has a sort of ownership by which the husband can be compelled, through legislative enactment, to pay the tax on her property. The author of the bill, in his opening statement here, said that through a sort of manipulation the husband and wife in the community-property States were given an unfair advantage over those husbands and wives in the non-community-property States. Why, nothing could be further from the actual facts of the situation. Here is a system of ownership that even antedates the admission of any of these States into the Union, fifty or a hundred years, in some cases, before we ever heard of an income tax in this country. It is a sort of ownership fixed by statute of the various States, and no one questions the right of the States to fix the character of ownership of property in those States. Mr. SHALLENBERGER. If I do not disturb your line of argument, Mr. Evans, may I ask a question? Do all of these States have a provision in their constitution that recognizes this principle of community property? Mr. EVANS. May it please the Chairman, I cannot say as to all the States; in fact, I do not know whether I can say as to any State. But I do not think we have any in our California constitution regarding this. I cannot be positive as to that, however. My impression is that we have not, that it is merely a statutory regulation. There may be something in the constitutions of some of the other States. This section 161 (a), to which I have referred, says that the ownership is held according to the terms of sections 172 and 172 (a). Section 172 says [reading]: The husband has the management and control of the community personal property, with like absolute power of disposition, other than testamentary, as he has of his separate estate: Provided, however, That he cannot make a gift of such |