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time they want, because they are entitled to as much time as anybody else.
Mr. FULBRIGHT. I appreciate the patience and courtesy of the committee.
Mr. Hill. I would like to say in this connection that Mr. Dunbar, Mr. Fulbright, and Mr. Hutcheson, of Texas, devoted most of their time on the question of the so-called “inequities” of this situation, in response to what they understood and we understood to be the main consideration of some of the members, at least, on this committee.
Mr. FULBRIGHT. That was the subject entirely of my discussion on Monday.
Mr. HILL. I regret very much that the gentleman from Wisconsin could not be here to hear that discussion. Some of the questions that he asked this morning and some that he asked of Judge Donworth the other day after he completed his statement indicated that he would have gotten the answers to those questions and the very information he desired if he had been present to hear those arguments.
Mr. FULBRIGHT. Mr. Chairman, I appreciate the courtesy and patience of the committee, and I assure the gentleman that I have taken no offense because of his criticism.
Mr. FREAR. Certainly, no discourtesy was intended. The gentleman will realize the situation that confronts us.
STATEMENT OF J. Y. FAUNTLEROY, NEW ORLEANS, LA.
Mr. FAUNTLEROY. I desire to make a brief statement and then I want to trace some of the information I have received jointly with Mr. Bartholow, the Treasury representative here, which I wish to present to the committee, because of the misinformation that appears to exist about the amount of saving of taxes that would result from the enactment of this legislation.
Mr. SHALLENBERGER. Please identify yourself.
Mr. FAUNTLEROY. My name is J. Y. Fauntleroy, of J. Y. Fauntleroy & Co., practicing taxation and accounting in New Orleans. I represent the same committee which Mr. Dunbar represents, which is a taxpayers' committee, of which Mr. C. S. Williams, of New Orleans, is chairman.
Mr. SHALLENBERGER. We have Mr. Lanham from Texas and Mr. Buck from California here, and we have promised to hear these members this morning.
Mr. FAUNTLEROY. I will not require very much time.
Mr. FAUNTLEROY. I am not an attorney; but I studied law at both Georgetown University and George Washington University, and I therefore know something about the common law. I have been familiar with the subject of community-property taxation before the first bill was introduced in 1921. I have appeared at every session of Congress or attempt of the committee to change the law since that time. Thus far no committee that has ever considered this matter has ever got a bill out of the committee; the only time it was got out of a committee was in 1921, when the taxpayers from these States
were refused the opportunity to appear before the committees, either the Ways and Means Committee of the House or the Finance Committee of the Senate, when a similar proposal to the one pending was before Congress.
Mr. FREAR. Your firm is a firm of lawyers?
Mr. FAUNTLEROY. My firm is a firm of accountants and tax con-sultants. I am admitted to practice before the Treasury Department. However, I am not going to make my statement too technical, though I have some familiarity with the technical legal side of the situation.
I wish, at the request of Mr. Dunbar, to ask the privilege of introducing the case of Bender v. Pfaff (282 U.S. 127). He failed to introduce it, and as it is the test case of Louisiana, and the test case for the other States have been introduced, we would like to introduce that case in the record.
Mr. SHALLENBERGER. Without objection, it may be put in. (The case referred to follows:)
BENDER, COLLECTOR OF INTERNAL REVENUE, 1. PFAFF (282 U.S. 1273. CERTIORARI
TO THE CIRCUIT COURT OF APPEALS FOR THE FIFTH CIRCUIT. No. 86. ARGUED OCTOBER 22, 23, 1930. DECIDED NOVEMBER 24, 1930.
Under the law of the State of Louisiana the wife has a present vested interest in community property equal to that of her husband, and under sections 210 (a). and 211 (a) of the Revenue Act of 1926, the spouses are entitled to file separate income-tax returns, each of one half of the community income. Following Poe v. Seaborn (q. V., ante, p. 101; p. 131). 38 F. (20) 649, affirmed.
Mr. Justice Roberts delivered the opinion of the court.
The question presented in this case is the same as that dealt with in Poe v. Seaborn (ante, p. 101), Goodell v. Koch (ante, p. 118), and Hopkins v. Bacon (ante, p. 122). The only variant is that here we are concerned with the community-property law of Louisiana. The case comes here on certiorari to the fifth circuit court of appeals, which affirmed (38 Fed. (20) 649) a judgment of the district court (38 Fed. (20) 642) in favor of the respondent, whereby respondent recovered the amount of an additional assessment paid under protest. As in the other cases the Commissioner made this additional assessment on the theory that under the law of Louisiana the whole community income is to be treated as the income of the husband.
If the test be, as we have held it is, ownership of the community income, this case is probably the strongest of those presented to us, in favor of the wife's. ownership of one half of that income. The relevant statutes of Louisiana are noted in the margin. So-called “common property” includes all propertyacquired in any manner by husband and wife during marriage except donations made to one of the spouses, and except the wife's earnings and actions: for damages when she is living apart from her husband, or carrying on a separate business or trade. The statutes speak of a marriage superinducing as a matter of right, “ partnership or community” of acquets or gains. Repeatedly the statutes refer to the relation as a “partnership or community.” The decisions of the Supreme Court of Louisiana clearly recognize the wife's ownership of one half of all the community income. They unequivocally declare that the wife's half interest in such community property “is not a mere expectancy during the marriage” (Phillips v. Phillips, 160 La. 813).
As in the case of other States, whose law we have discussed in connection with this matter in the Poe, Goodell and Hopkins cases; supra, each spouse may by will dispose of only his or her one half of the community and is powerless to affect the other's half. In case of death intestate one half descends to the heirs of the decedent, and the other spouse is powerless to prevent this.
While the husband is the manager of the affairs of the marital partnership, the limitations upon the wrongful exercise of his power over community property are more stringent than in many States which have a community sysłemi, In Louisiana, if the husband proves, by reason of financial difficulties or the.
like, an unfit manager, the wife may bring about an immediate dissolution and liquidation of the community property (Wolf & Clark v. Lowry, 10 La. Ann. 272; Well v. Bell, 24 La. Ann. 75; Brown & Learned v. Smythe, 40 La. Ann. 325). And when the wife sues for a separation of the property she is entitled to an accounting from the husband for community income or property in his hands and to reimbursement and retribution for any act done by him in fraud of her rights (Hill v. Hill, 115 La. 489; White v. White, 159 La. 1065).
In conclusion it may be noted that the Supreme Court of Louisiana has cited our own decisions in Warburton v. White (176 U.S. 484), and Arnet v. Reade (220 U.S. 311), indicating that the exposition of the wife's rights and of the nature of the community therein contained correctly states the Louisiana doctrine.
Inasmuch, therefore, as, in Louisiana, the wife has a present vested interest in community property equal to that of her husband, we hold that the spouses are entitled to file separate returns, each treating one half of the community income as income of each “of” them as an individual” as those words are used in sections 210 (a) and 211 (a) of the Revenue Act of 1926.
The judgment of the circuit court of appeals is affirmed.
The Chief Justice and Mr. Justice Stone took no part in the consideration or decision of this case.
Mr. FAUNTLEROY. As I see, confusion in administration by the Treasury Department will result if the pending bill (H.R. 8396) is made law, and it is my hope in setting forth and stressing some of the complications involved, the committee will be able to get a clearer understanding of the inequities and difficulties which will follow.
It is to be noted the bill relates solely to individual income-tax liability, and it is assumed there is no intention to disturb the present basis of taxing the decedent spouse's half of community property for estate-tax purposes. However, as in every estate-tax return the question of the decedent's individual income-tax liability is involved, the pending proposal would appear to create a contingent liability in Louisiana when the husband survives the wife and in other States when either surviving spouse has the administration or control of any community property.
In the foregoing cases although the marital community will have ceased, the contingent liability for the deceased spouse will not be determined until the surviving spouse's individual income-tax liability is established and such liability will be merged and dependent on the surviving spouse's separate income, if there be any. Moreover, in Louisiana a similar complication will occur in connection with divorce or other dissolution of the community property partnership during the lives of the spouses. Indeed, a situation will be created which will raise technical and extremely difficult legal questions and possibly require for solution decisions of the highest courts relative to the settlement of the marital community partnership. And so far as I am informed no similar hiatus occurs under the Federal laws involved. Such questions are now avoided by recognition by the Treasury Department of State law in its application to property rights.
It is to be borne in mind that the marital community partnership comes into being at marriage with no capital and possessed of no income but with the presumption that certainly income will accrue and capital be created. And it is contemplated that the terms of the partnership contract which are clear and definite may be applied at any time to require an accounting statement of the financial condition of the partnership and that for every marriage to which community property is attached a final accounting is to be had at dis
solution of the partnership, which takes place at the death of either spouse or on divorce or separation of bed and board, or merely on separation of property, in which latter case the marital relation continues.
A marital community partnership also comes into being when nonresidents establish a residence in Louisiana, unless advantage is taken of the privilege granted by law of entering into an agreement within 1 year of the establishing of such residence not to have a community partnership of acquets and gains. And, similarly, this privilege is given on marriage to residents of Louisiana should they see fit to enter into a marriage contract abolishing or varying the terms of the marital community partnership provided by law.
It, therefore, appears inequitable for Congress by legislation to treat differently the community partnership entity clearly defined by the law of the eight States involved from marital partnership entities created and permitted under the laws of the remaining forty States of the Union.
Mr. FREAR. Would it disturb you if I asked a question?
Mr. FREAR. If I understood you correctly, the parties, that is, the husband and the wife, can vary the terms of the marital community partnership
Mr. FAUNTLEROY. Only before contracting marriage. After mar. riage is contracted there can be no variation in the slightest particular.
Mr. FREAR. They can change the law prior to marriage ?
Mr. Hill. That does not obtain in all of the community-property States?
Mr. FAUNTLEROY. No. I wish to say this, interpolating, that if I get into too deep water legally and I make any misstatement of the law, I want to ask Mr. Dunbar to correct any such misstatement I
Mr. FREAR. The statement relative to varying the terms of the contract is very interesting.
Mr. COCHRAN. With reference to your statement, Mr. Hill, that some of the community-property States do not permit husband and wife to refuse to be bound by the community-property law, in such States could they not accomplish the same purpose by a prenuptial contract?
Mr. HILL. No; they could not in my State. I cannot speak with respect to all the other States, but they can in Louisiana. They fix it before marriage, but after the marriage is consummated, then the law operates and they are powerless to modify it.
Mr. FAUNTLEROY. Common-law or noncommunity States marital partnerships are frequently designed to secure income-tax advantage, and have inherent in them all of the complications for administration of income taxation claimed to exist in the marital community property partnership. Nor is it just to set aside the laws of the community-property States which define property rights therein for husband and wife, while Congress recognizes the laws of the common
law States defining property rights of husband and wife of those States. Example after example, if need be, can be furnished of the recognition by the Treasury Department and the courts of various legal devices and agreements adopted to lower individual income taxes by married couples in all of the noncommunity-property States of the Union.
Mr. FREAR. That is one of the things we have tried to cure.
Mr. FAUNTLEROY. It has not been cured except to a degree. I think I can show that you are chiefly curing the Mitchell case proposition, but in many other instances tax manipulation has not been touched. You can read the opinions of the Board of Tax Appeals, and case after case comes up where the principle is tested and the State law survives if the agreements or transactions are legal.
It is taken for granted that the committee has in mind that the present basis of community-property taxation may at times produce a greater tax rather than a less tax, depending on the amount of separate income which either spouse may have. Under the present basis of reporting income from a marital community partnership, if a separate return is filed by the wife, she is compelled to add half of the community income to the amount of her separate income, and in cases where her separate income is much larger than the husband's, a larger combined tax results for the spouses by reason of the present basis being applied to require each spouse to report one half of the community income. Also, the proposal in the pending bill in the case of the couple cited would cause the combined taxes to be less if the separate income of the wife were sufficiently great.
Again, it can be urged with equal fairness if husbands and wives in the community-property States are to be penalized by a special amendment relating only to them, similarly it would be fair for provision to be made to penalize husbands and wifes of common-law States who pay less income tax by taking advantage of the legal devices permitted by the law of their State. In other words, a joint return is now filed by married taxpayers of considerable income only when they save income tax by so doing. A husband may
have had a loss in his business. He may be in the red. He may have a wife who has considerable income. In that instance they would file a joint return and the Treasury would lose the income tax it would have received on the wife's income. And a similar privilege exists if the husband has income and the wife has suffered a loss of income.
Mr. SHALLENBERGER. Is that permitted by the administration in the Treasury Department ?
Mr. FAUNTLEROY. It is.
Mr. SHALLENBERGER. Is there any way in which such a practice can be stopped ?
Mr. FAUNTLEROY. That is the provision that Mr. Morgenthau brought to this committee, of requiring a mandatory joint return for the spouses in all of the 48 States, and I am going to discuss it later.
Another point is that in Louisiana all income from separate property-and listen to this, please—except capital accretions; that means, if a man had a plantation or a piece of real estate when he married and it afterward increased in value and he sold it at a