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profit, that increase is capital accretion; that profit would be his separate income. All income from property except capital accretion which the husband has on marriage or acquires after marriage by gift or inheritance is income of the marital community partnership. He could have a million dollars when he married, and one half of the entire income from that million dollars that he had before marriage would belong to the wife, as the whole of the income would fall into the community partnership in which the wife has an equal interest with the husband.

Mr. FREAR. But the million dollars is his separate estate.

Mr. FAUNTLEROY. The million is his separate estate, but the income therefrom is community property, and he cannot remove himself from that burden except by making a marriage contract in advance of the marriage. While marriage contracts are common in France, they cause embarrassment in America. Also, all the income from the separate property, except capital accretions, of the wife which is administered by the husband-bear in mind I say "administered by the husband "; that is to say, if she permits him to administer it then the income from her separate property falls into the community partnership income. Likewise, the earnings from personal services of either spouse fall into the marital community, as do the profits of a business conducted by either spouse even though the capital producing the profits is separate property.

Furthermore, and unlike marital partnerships permitted by common-law States, once the marital community is established, the terms of the partnership cannot be varied by mutual agreement, but must continue until dissolution is provoked. Again, all gifts between husband and wife are revocable by the donor. Those features are stressed to illustrate the scope of the terms of the marital partnership agreement so that the committee may understand how far-reaching they are and realize the harshness of the result sought to be accomplished by the pending proposal and appreciate the inability of community property husbands and wives to acquire a property status similar to that permitted to a husband and wife of certain commonlaw States.

Think of this: you are forcing by this proposal a woman who may run a millinery shop on her own capital to put the profits from that business into the husband's return; not the husband's share only, but you are forcing her to put all of the profits into his return because under the law he has the legal right to administer and control the income which would be community property. The husband for income tax would be bound by his legal right.

Mr. SHALLENBERGER. You do not think the language which says ownership, management, and control will be the controlling factor that will protect her in her business.

Mr. FAUNTLEROY. I do not think the Treasury officials would so advise you.

Mr. SHALLENBERGER. Isn't it her actual management and control? Mr. FAUNTLEROY. I am talking about the law of the State, as distinguished from what you were talking about. There is no way to change the husband's right of administration and control in Louisiana except for the legislature to change it. I think the committee understands that in several of the community-property States ad

ministration and control have been changed from one spouse to the other. I wish to say that, as far as this bill is concerned, where it is practical to do so, and if the legislature saw fit to do so, it could practically make nugatory the very provision that you are now seeking to write into the law.

Mr. FREAR. By what procedure?

Mr. FAUNTLEROY. By passing legislation that the wife's earnings from the community property shall be placed in her.

Mr. FREAR. But the Supreme Court would decide that.

Mr. FAUNTLEROY. Of course. The Supreme Court would have the power to decide but the Supreme Court would recognize the control had been changed. The sovereignty of the States put them in position to change their laws; unless you are going to write a new kind of a tax law-one, if you will pardon my saying so, that will enable Congress to "snap its fingers" at all property rights of every kind, sort, and character as defined and determined by State law.

Mr. FREAR. It is conceivable, but this is separate property, which has been separate property, irrespective of the decision of the legislature, and it belongs to the spouses.

Mr. FAUNTLEROY. Not according to this proposal; the income from the husband's separate property is under the control of the husband and the income from the wife's separate property may be. It does not necessarily mean her personal earnings are actually demanded by him, but he has the legal control of them.

Mr. FREAR. I am speaking more particularly about the Wisconsin case.

Mr. FAUNTLEROY. I will come to that.

Mr. FREAR. We have had several witnesses dwell on that.

Mr. FAUNTLEROY. I am going to dwell on what the Treasury Department said about it.

A striking instance of the extent to which the proposals incorporated in the pending bill will lead is found in the following example which while similar to one heretofore given to the committee, is a more forceful illustration of the complication that will arise when a change of residence is made from Louisiana to a commonlaw State. Suppose a husband and wife have accumulated $500,000 of community property which is invested in stocks and taxable bonds. In Louisiana the husband would have to report all of the income therefrom, but in the common-law State each of the spouses would be permitted to return for income tax one half of the income received from this identical property.

In other words, a situation would be created by the Federal income-tax law which would encourage an exodus of very prosperous couples from Louisiana or other community-property States. And the anomaly would exist of the Federal Government's recognizing for Federal income tax the rights acquired under the communityproperty States law of former residents of such States who had removed to common-law States, while at the same time overriding the community-property law for residents of the community-property States. Surely the creation of such result does not produce an equitable and uniform basis of taxation. You could take two couples identically in the same position, one having removed to New York. The one that removed would get the tax advantage and the one that stayed in Louisiana would be penalized.

Mr. HILL. In Louisiana, the husband and wife, under the example you cited of $500,000 accumulation of stocks and bonds, the income from that $500,000, under the provisions of the bill, would be taxable to the husband.

Mr. FAUNTLEROY. That is right.

Mr. HILL. Although one half of that accumulation belonged to the wife and the other half to the husband. If this married couple with that property should move to the State of New York, the State of New York would recognize the one-half interest of the wife and the one-half interest of the husband, and the Federal Government would recognize that one half belonged to the wife and one half to the husband and would tax to each of them his or her share of the income, whereas in Louisiana, under this bill, it would all be taxed to the husband.

Mr. FAUNTLEROY. Yes.

Mr. SHALLENBERGER. I asked the very distinguished Senator from Texas that question, and, if I understood him rightly, his judgment was that the same rule would apply in the State of New York, as far as the Federal taxes were concerned, for the reason that management and control, being of sufficient degree, was the warrant for the Government requiring a single return. Why should not that apply in New York as in every other State, for if the management and control were sufficiently definite, that rule of law would not apply.

Mr. FAUNTLEROY. Property rights are recognized in the commonlaw States; the community property is recognized there as absolutely vesting the wife's rights in her to one half thereof. And the tax on it, under numerous decisions, has been just as I stated.

Another complication that follows from the adoption of the pending income-tax proposal will arise in Louisiana in connection with the receipt of the wife of her share of the community property on the dissolution of the marital community partnership. She acquires the community property neither as a gift or a devise; she has been assessed and has paid no income tax thereon while it was being accumulated and the question is raised, does she receive it free of tax by reason of the husband's having annually included her share of the community-property income in his return and paying such tax as was due by him, and, of course, he would be required to add the community income to any annual separate income he may have received. Now, that may be a fictitious assumption in the sense that the question has not yet arisen, but it is very practical, when you start letting my income tax be paid by somebody else, unless I am bound by law of some kind, to have a part in the liability. Therefore, when I get the property which does not come to me as a gift, or by inheritance, does not a hiatus arise. I know of no other situation in law where that is allowed. Perhaps some of these lawyers can differentiate it.

Relative to the Ohio case, which held that because the wife was not known to the other partners, that fact made the husband liable for the whole tax; I do not know just what happened after that; whether if she had gone in and enforced her right to the control of the property it would be ruled that for income-tax purposes it was tantamount to being a gift.

Mr. HILL. In that case the decision was that there was not any partnership and that she was not a member of the partnership. It

requires the consent of the members for the admission of a new partner.

Mr. FAUNTLEROY. If she had a legal right to get her share, the question is, when she gets it, does she have to pay a tax on such profit as she makes from the contract?

Additional complications will follow in those cases in which management and control of certain of the community property is in one or the other of the spouses. No complications arise now under the present basis in connection with the income of the marital community, as its profits or income are accounted for and rendered for income tax on the basis applied to common-law State marital partnerships or ordinary commercial partnerships everywhere.

I suppose the committee understands the basis of a commercial partnership, that the various partners render, in their income-tax returns, their share of the profits from that partnership, whether actually distributed or not. That is very similar to some situations that can arise in this community-property partnership, but for ordinary partnerships, whether they be marital partnerships in noncommunity States, or ordinary commercial partnerships, every partner must include his share of the annual partnership profits in his return.

Mr. COCHRAN. Can this marital partnership of which you speak be created in all the 40 noncommunity States?

Mr. FAUNTLEROY. My impression is it cannot, but it can be created in a great many more States that is now the case and perhaps in all by proper legislative enactment.

Let me give an illustration of an apartment house owned in New York, acquired in this manner: The wife happens to inherit $50,000. The husband happens to have saved $50,000. They see an apartment house that they wish to buy as an investment. The trade is made, the husband manages and controls the property, talks to the real-estate man about it, collects the rent, and, in fact, is the administrator, not necessarily the legal administrator. In that case the rents and profits from that apartment house would, in New York, go half and half in the return of each, because they would be the joint owners of the apartment house. In Louisiana, under the identical situation-you do not need to change the facts at all-under the present communityproperty basis, half of the profits would go in each of the spouse's return, while under this law, if passed, all the profits would go in the husband's return.

Mr. FREAR. Let me understand; if the husband and wife in Louisiana, each having $50,000 of which you speak

Mr. FAUNTLEROY (interposing). I am assuming it is separate property in both cases.

Mr. FREAR. I am trying to follow you. Each has $50,000 in their own separate property, coming to them, not from the operation of community laws but from

Mr. FAUNTLEROY (interposing). Inheritance.

Mr. FREAR. That comes in and the husband then makes a joint return and is responsible for all.

Mr. FAUNTLEROY. Under the proposal, the husband has to. In Louisiana he would be the administrator.

Mr. FREAR. He does not now?

Mr. FAUNTLEROY. He does not now, but you are leaving the husband alone in New York, and as far as the practicalities go there is no difference in the two situations.

Mr. FREAR. I am wondering if you are correct in your inference of what that would carry.

Mr. FAUNTLEROY. I ask the Treasury representative to correct me if I am wrong.

Mr. FREAR. We have your explanation of it; I do not suppose they would undertake to pass upon that.

Mr. FAUNTLEROY. If you want the illustration confused a little more, I would be glad to confuse it for you. It can be confused by the husband having $50,000 in community property. In that case, the wife would have three quarters of the property in fact, and the husband only one quarter, but all the income from the property would have to go in the husband's return, under the pending proposal.

Mr. HILL. That is, under the proposed bill?

Mr. FAUNTLEROY. Under the proposed bill; yes, sir. I do not think it is constitutional; I am not a lawyer; I am not talking as a lawyer, except I have some conception of legal principles.

Mr. SHALLENBERGER. You know the courts by experience?

Mr. FAUNTLEROY. To some extent. Now, as to the need for this legislation, and I am trying to simpify some of the discussion so that we can find out what is involved in dollars and cents, as far as revenue in the Treasury is concerned.

Mr. SHALLENBERGER. You are going to analyze as to what would be the result in revenue to the Treasury Department if this law is put into effect?

Mr. FAUNTLEROY. I am going to question, and give my reason for doing so, the exaggerated estimates of 50 million and 60 million which have appeared in this record. That was in the minds, apparently, of all parties when the discussion began, and it has, for the time being, been reduced to $18,000,000 in normal times, and possibly $28,000,000 under some theories that are not explained. It is accordingly in the air, whether there are $28,000,000 involved or $18,000,000... Mr. FREAR. There was an effort to explain that.

Mr. FAUNTLEROY. You lost rapidly 42 millions, and then with equal rapidity, you ran up the $18,000,000 to 28 millions.

Mr. SHALLENBERGER. You would not dispute that the income to this Government might increase twice as much as it is now, and then the amount would be doubled.

Mr. FAUNTLEROY. I am going to come to that. I will take 1929; I am also going to take a poor year.

Mr. FREAR. Is it very material whether it is 1 million or 28 million? Mr. FAUNTLEROY. It might be.

Mr. FREAR. I do not believe you or I can analyze it.

Mr. FAUNTLEROY. I am going to attempt to give my interpretation of the relative merits of the original Treasury Department proposition involving 40 millions.

Mr. FREAR. That is considered somewhat overdrawn.

Mr. FAUNTLEROY. In 1921 we had no hearings on the part of taxpayers on a provision similar to this before the Ways and Means Committee, and the provision was inserted in the law. It went over

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