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Mr. STAM. It required a joint return of husband and wife and it required the husband to pay the tax.

Mr. FREAR. Irrespective of the particular ownership?
Mr. Stam. Irrespective of the particular ownership.

The Wells case (289 U.S. 67) involved an irrevocable trust. In that case the husband assigned certain insurance policies, put them in trust, and the income from that trust was used to pay the premium on the insurance policies, and the Supreme Court held that we had a right under the Federal statute to tax that income to the husband, for the reason that it was for his benefit; that is, the payment of these premiums on this policy on his own life was for his own benefit. While that case is not exactly in point, yet the court makes some statements in that case which are helpful in indicating what they might do.

Mr. Hill. You do not contend that a husband in a communityproperty State has such control as is involved in the Reineke case, the last case to which you referred?

Mr. STAM. In the Wells case the husband had no control over the trust; it was irrevocable. He was getting a benefit out of the income which was applied to the payment of the premium on the insurance property.

Mr. Hull. He created the trust and he directed how the income should go?

Mr. STAM. Yes; but he could not direct to whom the income could go after the trust was created—that was fixed by the trust.

Mr. Hill. He directed how the income should be applied ?
Mr. STAM. Yes; but he had no control over it.

Mr. Hill. In the case of community-property income, the husband has no such control; he cannot dispose of the income as he sees fit. He has no right under the community-property law to dispose of the income and disregard the wife's right, so the analogy does not hold up as between the two cases.

Mr. Stam. In some respects, but there is some analogy there, because in a lot of these community-property States, the husband has control and the wife cannot call him into account except where he disposes of the property; he has all the economic benefits.

Mr. Hill. He cannot dissipate it; he cannot use it for his own devices. So long as he uses it for the benefit of the community, it is all right.

Mr. STAM. He can use it.

Mr. Hill. It is open for the wife to come in and say that it is not being properly used.

Mr. Sram. She has a hard time to call him to account. Mr. HILL. She has the right. Mr. Sram. I want to read a short statement from that case: But taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed, the actual benefit for which the tax is paid. Refinements of title have at times supplied the rule when the question has been one of construction and nothing more. Refinements of title are without controlling force when a statute, unmistakable in meaning, is assailed by a taxpayer as overpassing the bounds of reason, an exercise by the lawmakers of arbitrary power. In such circumstances the question is no longer whether the concept of ownership reflected in the statute is to be squared with the concept embodied, more or less vaguely, in common-law traditions. The question is whether it is one that an enlightened legislator might act upon without affront to justice.

They said we could ignore the common-law concept of legal titles if to do so would promote justice. That is, if the economic enjoyment was in the husband, the mere fact that the legal title was in someone else would not be sufficient to overturn the statute.

I think that is about the crop of cases that I have, except I notice that somebody made a reference to the partnership situation in the noncommunity States. I would like to call your attention to the case of Burnet v. Leinenger (285 U.S. 136), in which the husband tried to assign to the wife a part of his interest in a partnership, and the court pointed out that the wife had contributed no capital or rendered no services to the partnership, and they held the assignment invalid, and that the profits of the partnership were all taxable to the husband. That case seems to me to indicate that it would be

very

difficult in a noncommunity State for the husband to divide his partnership interest with the wife, unless she actually contributed something tangible, like capital or services.

Mr. HILL. In that case the wife contributed nothing and she was not a member of the partnership?

Mr. STAM. Yes.

Mr. HILL. The husband sought to assign to her a part of his income?

Mr. Sram. He claimed it was part of his interest in the partnership.

Mr. HILL. Was it income or his interest?

Mr. STAM. The Supreme Court held it was nothing but an assignment of his profits, although he contended that he was assigning a part of his interest.

Mr. SHALLENBERGER. You are clarifying something I have been trying to understand. Take a State like Washington. I understand if this bill would become law that the marital property would make one return. In the State of Nebraska I am making one return and my wife makes a return. If the law passes, in that State will we still be permitted to make separate returns!

Mr. Stam. Yes; because you have no control over your wife's income.

Mr. SHALLENBERGER. Otherwise, I may be required to do it? In the community-property States, would you be required to do it?

Mr. STAM. In the community-property States you would be, because the husband has the management and control over the community property.

Mr. FREAR. If the wife had independent interests, that would put them in the same class?

Mr. STAM. That would put her in the same class as the husband and wife in a noncommunity State.

Mr. FREAR. I was going to ask this question. Of course the main committee may be a supreme court here. The subcommittee does not assume that province. I was going to ask what would be the difficulty in presenting this case to the Supreme Court for clarification on this question?

Mr. Sram. The Supreme Court would never pass on this question unless they had an actual case before them. Of course, they would never have an actual case before them unless we put something in the statute, because they have already held that the present statute

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does not tax community income. We would have to put something in the law.

Mr. FREAR. That is the purpose of the argument which you have just been making?

Mr. STAM. Yes.

Mr. Hill. You referred to the case of Poe v. Seaborn, involving property rights and the rights of taxpayers in the State of Washington to make separate returns. In that case it was held that such agency of the husband was neither a contract nor a property right vested in him, and that it was competent to the legislature to confer the agency

on the wife alone or to confer a joint agency as it saw fit. In other words, the mere fact that the husband has the control of the community estate does not give him any vested right in the community estate other than that fixed by law—his one-half interestand that it gives him no property right as the manager or the controller. The legislature may change that at any time.

Mr. STAM. The trouble about that case was that the court held, in the first place, that the test of taxability was ownership, and to determine who owned the property we had to go back to the State law. Now, they pointed out clearly that the husband did not own it; that ownership involves legal title. They pointed out clearly that the husband did not own the wife's portion of the community income, because under the State law the wife had a vested interest; but if the statute had made the test not ownership but management and control, then the court would have had a different question.

Mr. HILL. What are you going to do with the sixteenth amendment?

Mr. Stam. The sixteenth amendment says we can tax income; it does not say to whom we can tax it.

Mr. HILL. It might tax your income to me or my income to you?

Mr. Sram. If they tax your income to me, it would depend on what command I had over your income. If I had a practical command, which the court could say was equivalent to ownership, they might.

Mr. HILL. Suppose you should be appointed my guardian; the income tax would be paid out of my property?

Mr. STAM. That is true. You have the legal title. The guardian does not get the same beneficial enjoyment out of the ward's property that the husband gets out of his own salary and the use of his wife's income.

Mr. Hill. What beneficial enjoyment in the community property does the husband get out of the wife's income in the communityproperty States that he does not get in the non-community-property States?

Mr. STAM. The husband in a non-community-property State in many cases never sees his wife's income.

Mr. HILL. But the idea of the marriage relation being a mutual beneficial relationship, not only as to sociability and companionship but also as to property involved, would probably be as potent an argument as to the relationships in the noncommunity States as in the community States.

Mr. STAM. That is the question.

Mr. Hill. We have those dominating feminine characters in the community States as well as in the noncommunity States.

Mr. Sram. That is true.

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Mr. FREAR. I was going to suggest this: That, if possible, Mr. Stam remain here, because many of these cases are quite involved, and those of us who are not accustomed to following the close distinctions might receive aid from him.

Mr. SHALLENBERGER. I was going to make this announcement: That Mr. Hill has to be on the floor of the House when it convenes, because the tax bill comes up at that time, and we are going to adjourn a little before 12. We will not reach the Members of Congress this morning anyway.

Mr. Hill. I was going to suggest that we have a number of witnesses who are Members of Congress, and a number of them, no doubt, have made as thorough a legal study of the question as their time has permitted; we have here Judge Sumners of Texas, and some of the Representatives from the community-property States, who have made a very deep and thorough study of the subject. For the benefit of the record I would like, if compatible with your plan, to have the testimony of those men in the early part of the record, and the Members of Congress generally can come on at a later time. I will say frankly that we want to get a récord here that Members of Congress will read. You know, if you get a whole volume of matter in the record before the real gist of the subject is presented, they might overlook the best arguments in the whole record. My thought is we might hear the representative of the Treasury Department, Mr. Bartholow, and then hear the attorneys representing the community-property States.

Mr. SHALLENBERGER. I was going to start off with Mr. Sumners, of the Congressmen, and I think he will not be reached before we have to adjourn. We will hear Mr. Bartholow next.

STATEMENT OF BENJAMIN H. BARTHOLOW, SPECIAL ASSISTANT

TO THE SECRETARY OF THE TREASURY

Mr. SHALLENBERGER. I have been asked about the number of witnesses here. I will say that in addition to Mr. Bartholow. we have Mr. Monarch and Miss Helen Carloss, of the Department of Justice, and then we will take up the Members of Congress.

Mr. BARTHOLOW. I suppose that the most important thing is to bring down to date the position of the Treasury Department on the question of the taxation of community income. You will remember that in December the Acting Secretary of the Treasury, now the Secretary, presented a statement on this subject in which he pointed out that, in the opinion of the Department, a discrimination was now in force, due to the method of taxing community income. In that connection he recommended to the committee, quoting from his statement, " 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.”

Mr. FREAR. That was the present Secretary?

Mr. BARTHOLOW. Yes. The Secretary's recommendation in December was made largely because of the existence of this communityproperty question, and was also made in the hope of possibly effectuating certain remedies in other States to make it impossible for these husband-and-wife transactions seriously to reduce the

revenues.

Mr. HILL. That was a recognition of the fact that they are doing that in other States; that husband and wife transactions are taking place that actually reduce the revenues.

Mr. BARTHOLOW. Congress has recognized that situation by a provision in the pending bill which would disallow any loss resulting from the sale of property between husband and wife. That, of course, was the principal trouble aimed at in the non-communityproperty States. It was thought that a single provision could effectuate a remedy in all of these transactions.

However, since that recommendation was made, considerable study was given to that provision, and the conclusion was reached that it presented numerous complications which would involve a long and complicated provision in order to accomplish its object. For that reason the Treasury Department now feels that it would be adequate, at the present time, to adopt some such amendment as is proposed in the Treadway bill, in lieu of that contained in the Secretary's recommendation in December.

Mr. Parker and Mr. Stam have outlined, first, the reasons why it is felt that some remedy should be enacted into law, and, secondly the legal aspects and difficulties which must be overcome if that provision is to be sustained. I shall not go into all of those questions in detail. The Treasury Department concurs generally in the views which have been expressed, both as to the fact that discriminations do result from the present law in favor of the community-property States, and on the point that the provision which has been proposed to remedy that situation would probably be sustained as a matter of law.

Mr. Hill. Do I understand you are giving your own opinion?

Mr. BARTHOLOW. I am giving the opinion of the Treasury Department.

Of course, the principal objective is to make effective the graduated rate schedules of our law. Since the first income-tax law of 1913, we have followed the principle of a graduated rate on large incomes. That principle was attacked at the very threshold and was held to be constitutional by the Supreme Court. As time went on, it was felt that the right of husband and wife in these community-property States to divide the income which, in the usual case, is earned by the husband as the breadwinner, ran counter to the principle of imposing graduated rates on large incomes. As a result, in 1921 the House passed a provision which would have accomplished much the same result as would result from the enactment of the pending

bill. Mr. FREAR. May I ask right there, have you anything to show the vote that was had, or who offered it, or the details of that bill that passed?

Mr. BARTHOLOW. No; I have no information as to those details. The history shows that the provision was incorporated in the 1921 bill as passed by the House.

Mr. T REAR. In 1921 ?

Mr. BARTHOLOW. In 1921, and that provision was deleted by the Senate and the House receded in the conference. Again, in 1924, a similar provision was incorporated in the revenue bill of that year but was thrown out before the bill was passed by the House.

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