Further income-tax advantage may also accrue to the residents of the community-property States in the case of losses on sales of property due to allocation on the separate returns of such losses. A substantial advantage also existed under prior laws and will exist with the passage of the revenue bill of 1934 in connection with the earned-income credit, for in community-property, States the limit to which earned income was recognized was $60,000 against $30,000 in the non-community-property States under the Revenue Act of 1928, and will be $28,000 against $14,000 under the revenue bill of 1934.

2. ESTATE-TAX ADVANTAGE

The husband and wife with substantial property in a community-property State also enjoy a great advantage over married persons in other States in that there is no estate tax imposed on one half of the property of the husband acquired after marriage and passing to the wife.

For instance, suppose we have a man, wife, and son living in a communityproperty State. Assume the man has accumulated $2,000,000. On his death $1,000,000 passes to the wife without tax and there will be a tax of $117,500 on the $1,000,000 passing to the son. If the wife now dies, there will be a tax of $117,500 on her estate passing to the son. The total estate tax, then, on $2,000,000 passing eventually to the son will be $235,000 in a community-property State. On the other hand, in a non-community-property State there will be an estate tax of $315,500 collected on the death of the husband. If the widow receives $1,000,000 of the estate and she dies after 5 years, leaving her property to the son, there will be a further tax of $117,500. Therefore the total tax in a non-community-property State in such a case is $433,000 against $235,000 in a community-property State; that is, there is 84 percent more tax collected in the non-community-property State.

The following table compares the amount of tax paid by the estate of the husband only in a non-community-property State with the amount of tax paid by both the estate of husband and wife in a community-property State:

All of the above estate taxes are computed under the rates imposed by the Revenue Acts of 1926 and 1932. The pending revenue bill of 1934 increases estate tax rates 40 percent on the average. Therefore, the existing inequalities I will be accentuated in the future.

It cannot be denied that the estate tax is a much greater burden in States not having community-property laws. It should also be observed, since the Federal estate tax applies only to estates with a net value of more than $50,000, that, as is the case with the income tax, no advantage accrues to the great mass of residents of the community-property States since obviously their estates are less than $50,000.

3. GIFT TAX ADVANTAGE

Under all our prior revenue acts except the 1924 act, the residents of noncommunity-property States were able to put themselves in the same position in regard to the estate tax as was the case in the non-community-property States, by giving one half their property to their wives before death. The 1932 act, however, takes away this opportunity by imposing a gift tax.

For instance, under existing law, if a man in a community-property State wants to turn over one half of the community property to his wife to enjoy

as she sees fit, there will be no tax. In a non-community-property State, however, there will be substantial tax, as shown by the following table:

Amount of gift (in excess of exemption of $50,000):

$100,000

$400,000__

$1,000,000.

$10,000,000__.

Gift tax

$3, 625

26, 125

92, 125

2, 312, 125 These computations are made under the rates imposed by the Revenue Act of 1932. Since gift taxes will be increased approximately 40 percent by the revenue bill of 1934, the situation will become even more inequitable.

As was the case with the Federal income and estate tax, this gift tax advantage is of no value to the average citizen of the community property State, since gifts totaling less than $50,000 are exempt from the Federal tax.

In view of the substantially greater income, estate and gift taxes paid in the non-community-property States as already outlined, it is the opinion of this office that an inequality exists which should be eliminated or at least partially offset.

PROPOSALS FOR REVISING FEDERAL TAX ON COMMUNITY PROPERTY

It appears that two proposals may be considered in connection with the inequality pointed out existing between community-property and non-communityproperty States in the case of the income tax. The first of these proposals is to attempt by law to force the inclusion of community-property income in the husband's return. The second proposal is a mathematical proposition which attempts to equalize the situation in part by an increased personal exemption on the joint return of husband and wife based on a percentage of the net income. These proposals will now be discussed.

Proposal no. 1.-In the opinion of this office, the existing law may be changed so that the husband will be required to report in his income-tax return and pay a tax on all the community-property income without incurring undue risk of having such a provision declared unconstitutional. It is believed that this could be accomplished by including in the definition of gross income a provision in substance as follows:

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Income received by any marital community shall be included in the gross income of the spouse having the management and control of the community property."

It might be argued that Congress has no power to require the husband to include in his return the wife's portion of the community income. But this question has never been passed upon by the Supreme Court. In fact, it appears from certain statements made in opinions by the Supreme Court upon the community-property situation that such a provision would be within the power of Congress. The leading case on community property is that of Poe v. Seaborn (282 U.S. 181). In that case, both the husband and wife were residents of the State of Washington and the Government sought to require the husband to include all of the community income in his separate return. The court, in denying the right of the Government to force the husband to include in his income his wife's share of the community income, based its decision upon statutory and not upon constitutional grounds. This is brought out by the following: (1) The court stated that the case required a construction of sections 210(a) and 211(a) of the Revenue Act of 1926, which lay a tax upon the net income of every individual." In this connection, the court made the following statement:

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"The act goes no farther, and furnishes no other standard or definition of what constitutes an individual's income. The use of the word 'of' denotes ownership. It would be a strained construction, which, in the absence of further definition by Congress, should impute a broader significance to the phrase."

(2) The Government argued that management and control by the husband was sufficient to permit the taxing of all the community income to him. But this contention was denied, because the court held that under the statute the test of taxability is ownership" and not management and control.

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(3) In regard to the legislative history, the court made the following comment:

"On the whole, we feel that, were the matter less clear than we think it is, on the words of the income-tax law as applied to the situation in Washington, we should be constrained to follow the long and unbroken line of executive

construction, applicable to words which Congress repeatedly reemployed in acts passed subsequent to such construction (citing authorities), reenforced, as it is, by Congress' refusal to change the wording of the acts to make community income in States whose law is like that of Washington returnable as the husband's income."

(4) In distinguishing the Corliss case from the case of Poe v. Seaborn, the court made the following comment:

"The Corliss case raised no issue as to the intent of Congress, but as to its power.

In view of the legislative history of the community-property situation, it is not believed that the court could have held otherwise. It appears that in the

1921 revenue bill the House inserted a provision reading as follows: "Income received by any community shall be included in the gross income of the spouse having the management and control of the community property." This provision was contained in the bill as it passed the House, but was stricken out by the Senate, as shown by the following statement contained in the conference report:

"Amendment no. 134: The House bill provided that income received by any marital community shall be included in the gross income of the spouse having the management and control of the community property. The Senate amendment strikes out this provision; and the House recedes."

When the 1924 act was introduced, it contained a similar provision, which was stricken out by the Ways and Means Committee. This legislative history clearly shows that Congress did not intend to require the wife's portion of the community income to be returned by the husband.

It is believed that a careful reading of the Poe v. Seaborn Case will show that the court in that case was not dealing with the power of Congress to tax community income to the husband, but with the question of whether Congress intended to tax such income to the husband. As pointed out above, the legislative history indicates that Congress had no such intention under existing law. While the case of Poe v. Seaborn related to the community property situation in the State of Washington, similar conclusions were reached by the Supreme Court in the case of the community property situation in Arizona, California, Louisiana, and Texas. (See Goodell v. Koch, 282 U.S. 118; United States v. Malcolm, 282 U.S. 792; Bender v. Pfaff, 282 U. S. 127; and Hopkins v. Bacon, 282 U.S. 122.)

It is accordingly the opinion of this office that there is a strong possibility that the Supreme Court will uphold a provision taxing all community income to the spouse having control and management of the property.

Proposal no. 2.-By a mathematical device in connection with the personal exemption, the inequality in tax between married persons in the community and noncommunity property States can be considerably reduced.

For instance, a fixed personal exemption of $1,000 might be allowed on all separate returns, but on the joint return of a husband and wife, in which the income of both is taxed as a unit, an exemption of $2,250 plus 10 percent of the amount of the net income might be allowed. These exemptions should be allowed for both normal and surtax purposes and the present rate schedules adjusted in order not to affect the revenue too greatly.

In order to illustrate what can be done in this direction, the writer has used the exemptions above stated and with an adjusted rate schedule has computed the following table showing present and proposed taxes in the noncommunity and community property States:

In the above table, column 1 represents the net income of the husband in the non-community-property States and the combined community-property income of the husband and wife in the community-property States. Column 2 represents the present tax on a married man with no dependents on such income in a non-community-property State. Column 3 represents the present tax on a married man with no dependents on such income in a community-property State where separate returns are filed, as, of course, they uniformly are where there is a tax advantage. Column 4 represents the proposed tax in the case of joint return in a non-community-property State, or, for that matter, in a communityproperty State if a joint return is used. Column 5 represents the proposed tax in the community-property States in the case of separate returns.

The following facts should be noted from the data given in the table: First. The tax on the joint returns under the proposed method somewhat reduces the present tax in the non-community-property States.

Second. The tax on the separate returns under the proposed method somewhat increases the present tax in the community-property States except in the case of incomes of more than $500,000. (So few returns exist of over $500,000 that this exception is not important from a revenue standpoint.)

Third. It results from the first and second propositions above that the existing inequalities in tax between the community- and non-community-property States are considerably reduced.

Fourth. The fact that the total proposed tax on the separate returns in the community-property States is greater than the total tax on the joint returns in the other States, in certain instances, is not important, since the residents of the community-property States have the privilege of filing point returns and reducing their tax to the same amount as paid by residents of the other States.

The result of this system would reduce the present inequality in tax, as shown in the following table:

It can be seen from the above that existing inequalities are reduced more than 50 percent on the average.

It is true that the particular rates selected reduce the tax on the married man in the noncommunity States. This might have some effect on the revenue It is also true that the adjustment of rates would slightly increase the tax of single persons in all the States, as shown by the following figures:

It will be noted that there is no increase in the taxes of the single persons except in the case of the larger incomes. It is believed that in these cases the slightly larger tax can be readily borne. In this connection, it might be pointed out that the present difference in the tax on married and single persons with like income is negligible under present law.

For instance, under present law, a single man with a net income of $100,000 pays $30,220 in tax, while the married man pays $30,100-a difference of only $120. This is the maximum difference no matter how great the income. As a practical matter, it seems obvious that this slight difference in tax does not conform to the principle of "ability to pay." Under the tentative rates proposed, a single man with $100,000 net income would pay a tax of $31,690 and a married man with a like income, $25,615. From many considerations, this difference of $6,000 in tax does not seem unreasonable, although, of course, the question is a matter of judgment. It seems probable that many will be of the opinion that a single man, who has $68,310 left after payment of taxes is better off than a married man who has $74,385 left after payment of taxes. The particular rates selected for the explanation of this proposal can, of course, be revised to secure results in keeping with the desires of the Congress. The important question is whether or not this method is worthy of consideration.

PROPOSALS IN THE CASE OF THE ESTATE AND GIFT TAXES

Similar propositions can be advanced for remedying the community-property situation in the case of the estate and gift taxes, although it might be wise to leave these revisions until after some income-tax proposal has been actually tried out.