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to the Senate, passed the Senate and came on the floor of the Senate and was eliminated by actual vote of the Senate, due to the activity of the 16 community-property State Senators, both Republicans and Democrats, at that time.

Mr. FREAR. There were the same number of States at that time that had the community-property system?

Mr. FAUNTLEROY. There were eight, and they have not increased in number since the discussion arose. However, California was unfortunate in having a legal status which the Treasury Department recognized and which the Supreme Court recognized that prevented California community income from being divided until their Supreme Court decision of January, 1931 (U.S. v. Malcom, 282 U.S. 792). As a consequence of this decision, the rule applicable to return of community income by California taxpayers is the same after July 29, 1927, as that for taxpayers of the other community property States. I am going to introduce into the record a letter of October 27, 1921, from Commissioner D. H. Blair, Commissioner of Internal Revenue, addressed to Hon. Joseph E. Ransdell, United States Senator, who was the senior Senator at that time from Louisiana, and whose secretary, as a young man, I was. I shall not attach too much importance to the letter, but the committee can draw its own in ferences. I do not know whether you want me to read it or not.

Mr. SHALLENBERGER. What is it in reference to?

Mr. FAUNTLEROY. It is in reference to the saving involved in the community-property legislation. Do you wish it read?

Mr. HILL. Yes; please read it.

Mr. FAUNTLEROY. It is dated October 27, 1921, and is addressed to Hon. Joseph E. Ransdell, United States Senate [reading]:

Reference is made to your letter of October 24, in which you call attention to the community provision in the pending revenue act and state that in connection with your consideration of the provision you are anxious to obtain the foilowing information: The difference in total revenue from each of the community-property States, assuming similar income reported for 1920 or the last year for which statistics are available, that will be produced under the law as it now is and under the proposed amendment based: (1) On the rates of taxes contemplated in the pending bill for 1921 ; (2) for 1922 under the rates proposed in the bill as it left the House; and (3) under the rates as adopted by the Senate on Saturday last.

As indicated in my letter to you dated October 26, there are no statistics that would shed light on these questions. I have asked Mr. McCoy, the actuary for the Department, for some estimates which might be of value to you. He advises me that the percentage of separate returns by wife of total returns is:

In community States, three tenths of 1 percent.
In these States plus California, fifty-five one hundredths of 1 percent.
In the United States, eight one hundredths of 1 percent.

The percentage of separate returns by wife of joint returns by husband and wife is:

In community Stateş, seventeen one hundredths of 1 percent.
These States plus California, ninety one hundredths of 1 percent.
Total United States, 1.04 percent.

Mr. McCoy advises the answer to the query as to the gain in revenue by the amendment is that very little additional revenue will be gained possibly not over $5,000,000.” This 'Bureau and the Treasury Department do not vouch for the accuracy of the statistics or of the estimates furnished by Mr. McCoy. The percentages are not based upon statistics for the year 1920 since no statistics whatever are available with respect to those returns.

Mr. FREAR. Of course, the rates are entirely different now.

Mr. FAUNTLEROY. I think unquestionably the rates are higher for 1921. I did not have the time to do it, nor the assistance available

to go into all of the details involved. Of course, this committee, I think, should have the variation in these rates.

Mr. HILL. The war-time rates were in effect at that time.

Mr. FAUNTLEROY. The rates in 1919 were the highest of all. Then they reduced the rates some in the 1921 Revenue Act, but the surtax rates for the year 1921 were the same as the 1919 rates, and then the Mellon plan came on in 1923 reducing the rates still further.

Mr. SHALLENBERGER. If I recall, Mr. Fauntleroy, somebody gave us these figures, not only those you have given us, but figures for succeeding years.

Mr. FAUNTLEROY. But they were general statements. I am making it not hearsay as to what Mr. Mellon said would be saved in 1924. Under date of November 10, 1923, Mr. Mellon, Secretary of the Treasury, addressed a communication to Hon. William R. Green, in which he recommended, as recommendation no. 6,"tax community-property income to the spouse having control of the income and he estimated it would increase revenues by $8,000,000. As I stated, the Ways and Means Committee held public hearings and refused to adopt the recommendation of the Secretary.

Mr. SHALLENBERGER. I am quite sure that statement has been put in already.

Mr. FAUNTLEROY. I think it is in. I think it has been stated as 9 million; I do not know exactly what the correct figure is.

Coming down to the 1934 revenue revision hearings, with which you are all familiar, I am going to quote from a statement submitted to the Ways and Means Committee by the Secretary of the Treasury, appearing at pages 112 and 113, Mr. Magill being the representative of the Department. Mr. Magill quoted Secretary Morganthau as follows:

Under the present law, a husband and wife living together may, at their own option, make separate returns, or may make a single joint return. If each has an income of any considerable size, each will ordinarily make a separate return, in order to reduce the normal tax, and, more particularly, the surtaxes. which would otherwise be payable. The family income is, in fact, frequently extended and otherwise treated as a unit.

I wonder what he means by that, unless he means the husband is the head of the family and runs the family.

Nevertheless, if the husband and wife can so arrange their affairs that the wife is in receipt of a portion of the family income, income taxes can be considerably reduced. In other words, the present privilege of filing separate returns operates to that extent to defeat the progressive rate schedule, particularly in the case of the larger taxpayers.

It is evident that this situation is the direct cause of numerous transfers, sales, assignments, and other arrangements between husbands and wives which have no real basis and are made because of a desire to avoid income taxes otherwise due.

He then made a reference to the marital community-property laws of the 8 States affected.

Mr. HILL. You say, “8 States affected”; affected by what? Mr. FAUNTLEROY. The 8 States which have community property. Mr. HILL. Affected by this bill? Mr. FAUNTLEROY. That is correct. Mr. HILL. Mr. Magill was talking about all of the 48 States in his statement which you have just read.

Mr. FAUNTLEROY. I think that is clear. He also made a reference, after talking about what was happening in all of the noncommunity-property States, to the savings which were being obtained in community-property States by reason of dividing community property. Here is the recommendation:

The Treasury Department, therefore, recommends that the committee consider whether a husband and wife living together should not be required to file a single joint return, each to pay the tax attributable to his share of the income. Such a provision has long been in force in other countries. Our estimates indicate that, on the present rates, the suggested change would directly account for an additional $40,000,000 of revenue, besides discouraging innumerable colorable transactions and eliminating present inequities.

Mr. COCHRAN. What is your opinion as to the advisability of that proposal ?

Mr. FAUNTLEROY. Of what?
Mr. COCHRAN. Of the proposal which you have read.

Mr. FAUNTLEROY. I think, as a layman, if it can be legally done, which I doubt, by reason of this Wisconsin case, that you would have at least what would be called uniform taxation. I do not think it is necessary to do it, because ever since 1913, when the income-tax law came into effect, it now being 1934, the people have become accustomed to another basis, and unless you can support it with a very detailed estimate it should not be done. I would not advise doing it on some such estimate of $40,000,000 saving. It has to be gone into carefully, and estimates should be presented that will show the exact figures by States. The Statistical Bureau of the Treasury can assemble that information; it can be done and it is important to be done, if you are seriously thinking of changing the present basis of taxation.

Mr. SHALLEN BERGER. I would like to interject a statement at this time. Mr. Hill has referred to the fact that certain testimony of the Secretary was directed toward all of the States. I raise the question with you here, whether or not this bill would not apply in fact, if enacted into law, to the 40 other States as well as the community-property States? I raised that question in the first part of the discussion and the representative of the Treasury Department agreed with my friend, Mr. Hill, that it was only intended to affect the eight States. That is the judgment of the Treasury Department, as I understand it, and I was raising the question whether or not we would have to go further to include the other States.

Mr. FAUNTLEROY. I think it applies to the eight communityproperty States. If there is any interpretation to the contrary, it seems to me the Department of Justice ought to give a ruling on that point before we assume it applies to other States.

In speaking of the Wisconsin case and the constitutional right to adopt this exclusive joint-return bass, or mandatory joint-return basis, Mr. Morgenthau said, after speaking of the Wisconsin case :

The case is not, however, conclusive for two reasons. In the first place, the Wisconsin law was evidently interpreted by the court as requiring that the husband should pay the tax on his wife's income. This objection can be eliminated by proper draftsmanship specifying otherwise. In the second place, the Federal Government is not under the same constitutional restrictions as the States in this respect.

I have read the hearings where that discussion came up, and I am free to confess that I got the idea that the Federal Government was under the same constitutional restrictions. Perhaps the author of this memorandum can show why it can be done.

Mr. HILL. I will say that the decision in Heiner v. Donnan (285 United States Reports) says that the Federal Government is under this same restriction.


Mr. SHALLENBERGER. You have taken about 20 minutes on these matters.

Mr. FAUNTLEROY. I am coming to the end.

Mr. SHALLENBERGER. These matters to which you are referring we have already had presented.

Mr. FAUNTLEROY. I do not think you have had these matters which I am going to point out now.

Mr. SHALLENBERGER. I mean the references to the former decisions and the quotations. In the interest of these other gentlemen here, who desire to be heard

Mr. FAUNTLEROY (interposing). I am sorry to occupy so much time.

Mr. HILL. I am sure the gentlemen would be glad to defer to the wishes of the members, in order that the witness might make the presentation of the points he is coming to.

Mr. FAUNTLEROY. It is to be noted that the estimate of 40 millions applies to the entire 48 States. When I realized that that was the case, for I heard the committee members and Mr. Treadway speaking of 50 millions and Mr. Frear of 60 millions, it occurred to me that somehow these eight community-property States, by reason of this special provision, would pay a great deal more than they would on the joint-return basis, because the 40 millions was the entire estimate made for the 48 States.

I, therefore, discussed the matter with Mr. Bartholow and he very kindly made it possible for me to see Dr. Burr, of the section of financial and economic research, and Mr. Bartholow was present at this conference. Dr. Burr explained that the Treasury estimate for the 8 community-property States involved in the total estimate of $40,000,000 for the entire 48 States is but $10,000,000, or one fourth of the entire amount. The estimate was based on actual statistical data within the Department, and it is my view that the matter is of such importance if there is a disposition on the part of anyone to seek to raise the estimate on an unexplained basis the committee would be warranted in calling for detailed

Mr. SHALLENBERGER (interposing). This is your statement; that is not made by the Treasury Department?

Mr. FAUNTLEROY. Mr. Bartholow was present.

Mr. SHALLENBERGER. That observation about what the committee should do is your observation?

Mr. FAUNTLEROY. I am speaking for the citizens of my State, and the attitude they would take. It seems to me if you are going to change the basis of taxation affecting millions of taxpayers in the United States on the assumption you are going to save 40 millions, that there should be accurate information.

Mr. SHALLENBERGER. That is the point I wanted to bring out. That was not the statement of the Treasury Department, that they thought we ought to get the real facts.

Mr. FAUNTLEROY. Not at all. I think the Treasury Department has the actual estimates, though I did not see them. I do want to call attention to this fact, though, that if a joint-return basis from all the eight community-property States would produce only $10,000,000, or one quarter of the whole, it is to be presumed that this present proposal will produce a less amount than that, unless the rates of tax for surtax have been materially increased, because in the State of California and other States where large amounts of separate income can be returned by the spouses, there would be less income to be subject to tax on the pending proposal than would be the case from the joint-return basis. I have some tables here that I can just introduce.

Mr. HILL. If it is not too long, read it, because we do not always read the record.

Mr. FAUNTLEROY. The only report I have found in my examination of the statistics indicated by the Treasury Department in which the actual amount of community-property tax is set forth is in the report of the Treasury Department, United States Internal Revenue, statistics on the income for 1921.

Mr. SHALLENBERGER. Haven't you reports for later than 1921 ?

Mr. FAUNTLEROY. This is the only one fixing the amount of tax. Community-property income is reported but the statistics show the tax thereon only for 1921. Let me explain that.

Mr. Hill. Here we have a date which probably more nearly compares in the rate of tax with the rate which we now have, than if you took some subsequent years. We had the war-time tax in 1921.

Mr. SHALLENBERGER. May I interject to say that I thought we had the figures for 1931.

Mr. FAUNTLEROY. I have some figures for 1931. I have as complete figures as the public statistics reveal.

In 1921 this report showed that there were 24,094 communityproperty returns filed, which were 0.36 percent of the total number of returns filed; that the amount of income subject to tax was $175,684,785; that it was 0.90 percent of the whole amount of income reported for that year, and the tax was $11,629,922, or 1.62 percent of the total amount of taxes collected.

I draw attention to that figure for the purpose of comparing it with the estimate of $5,000,000 of Mr. McCoy as to the amount of revenue that would be lost by application of the community ruling for that year.

A 35 percent increase for the entire $11,629,922 would be under the amount estimated by Mr. McCoy.

For 1921 the Treasury statistics show a community income of $175,662,785; and total amount of net income $19,577,212,528.

The 1925 community income was shown to be $261,209,721, or 1.19 percent of the whole amount, which was $21,894,576,403.

In 1928 there was $660,106,741 of community-property income, which was 2.61 percent of the total amount of the income, which was $25,226,326,912.

In 1929 the total amount of community-property income was $647,799,247, or 2.61 percent of the total amount of the income, which was $24,800,735,564.

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