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Mr. TREADWAY. I should prefer not to. I am so intimately associated with you gentlemen on the committee that I have absolute and implicit confidence in your method and in your findings. I have no personal interest in this matter other than as a taxpayer in the State of Massachusetts.

Mr. HILL. I make the suggestion only in the interest of orderly procedure.

Mr. TREADWAY. I have made no arrangements with anyone to appear. I have asked nobody to come here. I did suggest to the chairman that the various State officials of those States other than the eight community property States, be notified of this hearing so that they might be represented. I understand that that has been done.

Mr. SHALLENBERGER. I will say, Mr. Treadway, that I had the clerk of the committee notify the secretary of state of every State of the Union.

Mr. TREADWAY. Then it is up to them to take such action as they may see fit. I have urged no one to appear as a witness.

May I say this, Mr. Chairman, that this subject has been before us for quite some time. It has been reported, I believe, in one or two measures. It is just a question of equity between States; whether by manipulation of local legislative enactments one State can take advantage in the matter of taxation over another, is all the question that is involved.

Eight States, a minority of the 48 States in the Union have a very distinct advantage over 40 other States. If that is fair and equitable, we should not legislate as proposed. If it is not fair and equitable, we should.

Of course, it is perfectly evident—and I think it is right and proper I should think they were derelict in their duty to their home communities, if they did not do so—that the representatives from those 8 community property States act as a body in opposition to the interests of the other 40 States. Whether you can interest the other 40 States to protect themselves, I do not know. As I have just said, I am not going to urge them to do so.

The amount of money involved here is something like $50,000,000 that other States are paying for the benefit of these eight. That is the whole story, gentlemen. There are 3 lawyers on your committee of 5. I should be presumptuous if Í undertook to talk law to this committee. I have no desire to do so. Let me say that when our subcommittee started work last October on the subject of tax avoidance, this was one of the items that came up. We had the testimony and the opinion of our expert. Of course, he had to be discreet, as he is very capable of being. But in his honest judgment, it would appear that he feels that we are losing $50,000,000 that other States have to make up for the benefit of these eight States.

The treasury, through Mr. Magill, in an official statement on behalf of the Secretary of the Treasury, reiterated the statement that there should be legislation looking to an equalization of this amount of money.

You have the expert's opinion. You have a legal opinion from the counsel of the joint committee. You have the statement of the

Secretary of the Treasury. Mr. Parker and Mr. Bartholow are here today to give you further details if you need them.

As far as I am concerned, I do not think there is anything further I have to say. I would ask permission to insert a table showing just how this affects the various States, to be made part of my remarks with perhaps any other slight extension as is usually accorded permission to do to any other witness appearing before the committee.

Mr. SHALLENBERGER. Without objection, the gentleman may extend his remarks as he has suggested.

Mr. TREADWAY. I want, perhaps, to add in closing that I was opposed to two features relating to the consideration of this proposed legislation. First I was opposed to not including this item in our general tax revision. I think it should have been in there, but I was voted down, and that is all part of the game. Originally, I believe, it was expected to include it in some way, but there was a change of sentiment in the Ways and Means Committee and it was then understood that it would be brought up as a separate measure. That is being done now. Later I opposed its being heard by a subcommittee. I felt that it was a matter of such great interest that it ought not to go to a subcommittee. But I am glad that it is in the hands of such a competent subcommittee as the one now having it in hand.

Of course, it is very unfortunate that anything as important as this is to the country, and particularly to the 40 other States, should come up so late in the session. It may be that it is not too late to correct such an apparent injustice, as I consider this to be. But even so, even if it is too late to bring it up now, so far as any action on it is concerned, the work of the subcommittee will not be lost service. While, with the change of political fortunes we may not all be here in the Seventy-fourth Congress, I have no doubt that the gentlemen who compose the subcommittee will return and, therefore, even though no definite results obtain from your labors at this time, it is desirable, I think, as a matter of record, that this hearing be conducted.

I thank you very much for your courtesy, gentlemen.

Mr. Hill. Before Mr. Treadway retires I should like to ask him a question.

Aside from the legal aspects of the question involved, which to my mind are conclusively against the legislation proposed, the matter of fairness and equity has been suggested by Mr. Treadway. I should like to make this observation in that connection, without going into detail, that the community property laws of these eight States in effect constitute the marital community a partnership; and it is decreed by law that the earnings of the marital community shall be owned equally by the two spouses.

Under this proposed legislation, the spouses in these communityproperty States would be denied the right of making returns on their individual incomes. In the State of Massachusetts, which is not a community-property State, and in many other States of the Union which are not community-property States, the laws of those States permit the husband and wife through voluntary contracts to enter into a partnership as to the earnings of their community or marital enterprises and to take advantage for tax purposes of that

arrangement, to make separate returns of their incomes. So that they get the benefit of a partnership enterprise which it is sought to deny to the spouses in community-property States, through this kind of legislation.

Mr. COCHRAN. Will the gentleman yield?
Mr. Hill. I yield.

Mr. COCHRAN. Is that the situation in all the 40 States that do not have community-property laws? Mr. Hill. I am not sure as to how many States, but


information is probably 27 or 28 States. But all of the States could effect that kind of legislation and for the purpose of tax benefits in a number of States they have resorted to that kind of arrangement. And yet you would deny to our people, absolutely, by decree of a Federal statute, the opportunity that you give to these other States in that respect.

Mr. TREADWAY. I think that is all subject to very serious comment and exception. I certainly know something about returns in Massachusetts. I do not agree with my distinguished colleague on the method that he describes of making returns in that State. I am not familiar with methods in many other States, I will say.

Mr. HILL. I am not saying that they all do that. I am saying that they can do it and some do do it.

Mr. TREADWAY. There is another way. The 40 States, of course, could come to the 8 States and have the same type of legislation that the 8 States have, if that is proper. If that is the solution of the question, then it is simply another instance of the minority ruling again. You are asking the 40 States to arrange their legislation to correspond to that of the 8 States.

Mr. Hill. No; you misunderstand me. I am not asking it, I am not even suggesting it.

Mr. TREADWAY. That has been suggested.
Mr. HILL. Oh, it has been suggested.
Mr. TREADWAY. I think the Treasury suggested that very idea.

Mr. HILL. The fact that the other 40 States have not come to the community-property status would rather indicate that there are certain disadvantages in the community-property status which may offset any assumed advantages.

Mr. TREADWAY. I do not think that I agree with that, Mr. Hill. I think the fact that it has been nobody's business to pursue this idea accounts for the difference in the laws. In all of the States we are an entity to ourselves and legislate accordingly. It is simply because the individual States have had such a diversity of legislation. As Mr. Cochran just asked Mr. Hill whether the line of argument that Mr. Hill was making applied to all the States, there is such a diversity of legislation in the respective States that that accounts for the distinction that your 8 States are able to make and separate themselves from the other 40 in this matter of a return on incomes.

Of course, we can get into an interminable argument on this, Mr. Chairman, and that is just what I was trying to avoid.

Mr. Hill. There is just one other suggestion I want to make in connection with your statement, Mr. Treadway. The gentleman says that we are losing $50,000,000 by not enacting legislation as is proposed here; that if this legislation is enacted we would collect $50,000,000 from the eight community-property States. But there is nothing in the record that has been made heretofore, and no suggestion by the sponsors of this legislation as to how much tax money is being lost to the Government through arrangements between the spouses in States other than community-property States, whereby the spouses make separate returns instead of joint returns.

Mr. TREADWAY. I thank you, Mr. Chairman, for your courtesy.

Mr. SHALLENBERGER. We thank you for the information you have given us.

(Mr. Treadway submitted the following extension of his remarks:)


Mr. TREADWAY. Mr. Chairman and colleagues, you are all familiar with the problem which is under consideration today, namely, the taxation of incomes of husbands and wives living in the eight States of the Union having the so-called system of community property", under which all property acquired after marriage by either spouse becomes one half that of the husband and one half that of the wife. The States having this system are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.

In these States, though all the income of the marital community earned by the husband, each spouse may file a return of one half the income and thereby pay substantially less tax than married persons similarly situated in the other 40 States. It is estimated that approximately $50,000,000 of Federal income tax is legally avoided in this way. The bill which I have introduced seeks to correct this injustice by providing that, for the purpose of determining the income-tax liability of a taxpayer, property of a marital community shall be considered as the property of, and income of a marital community shall be considered as the income of, the spouse having the management and control thereof under the law of the jurisdiction in which the marital community exists.

The Supreme Court of the United States has held that as the income-tax liability of a taxpayer under the Federal revenue law is based upon ownership, it is proper for each spouse in a community-property State to return one half the community income. My bill makes the income-tax liability in these States depend not upon legal ownership but upon management and control. While we must concede that the Federal Government is bound by the property laws of the several States, and must therefore recognize that legal ownership of community property rests one half in each spouse, yet the fact is that the income in most cases is earned entirely by the husband, and he has entire dominion and control of the income and does not in fact share it equally with the wife. It is my contention that the legal fiction in the communityproperty States that the wife owns one half the husband's income should not be allowed to defeat the Federal income-tax laws.

Those representing community-property States will say that my bill is unconstitutional because it taxes one person on income that “ legally ” belongs to another. That, however, is a question which has not yet been directly passed upon by the Supreme Court. No Federal tax law has ever required community income to be included in a single return. It is true that the Court has nullified an attempt by the Bureau of Internal Revenue to require this by regulation, without specific authority of law, but it has never answered the direct question whether the Federal Government can look beyond the legal fiction laid down by State law and assess the income tax according to fact.

However, I do not wish to enter into a legal discussion of the matter, as I am not a lawyer. I would rather discuss only the practical aspects, leaving the legal phases to others.

I have stated that the Federal Government loses some $50,000,000 annually as a result of the community-property laws in the eight States referred to. If this money were collected from the taxpayers living in these States, the burden on taxpayers in the other 40 States could be lowered by this amount. All the States therefore have an interest in this matter.

It is plain that if the income tax were levied at a flat rate, there would be no saving by dividing an income into two portions for taxation purposes. However, under our graduated surtax, the rates progress by brackets as the income increases. Let us suppose, for example, that John Doe and his wife, living in Massachusetts, have an income of $50,000, all earned by the husband. Under the present income tax law, their tax would be $8,600. If, on the other hand, their income were double this amount, or $100,000, they would pay $30,100, or three and one half times as much. Thus it would be to their advantage if the $100,000 income could be taxed as two separate incomes.

Now, what is the situation in the community-property States? We will again suppose that the husband has an income of $100,000. Instead of reporting the entire income as his own, and paying a tax of $30,100, he and his wife each report $50,000, divide the exemption, and pay a combined tax of only $17,400. The saving by virtue of having their domicile in a community-property State is thus $12,700, or more than 40 percent of the basic tax. These amounts will, of course, be changed somewhat by the new revenue bill, but the proportionate saving will be substantially the same.

With the permission of the committee, I shall insert at this point a table showing the savings resulting to married persons living in community-property States, according to the amount of the net income. It will be noted that there is no saving at all where the income is $6,000 or less. This is because the graduated rates do not apply below this amount. However, beginning with incomes of $7,000, there is a substantial saving to all classes of taxpayers.

(The table is as follows :)

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I will say frankly that I was very much disappointed when the Ways and Means Committee failed to include in the revenue bill a provision relating to community incomes. That bill was for the avowed purpose of preventing tax avoidance, and it seems to me that it would have been particularly appropriate to have dealt with the subject at that time.

The members of the committee will all recall that we did tentatively approve of an amendment requiring husbands and wives in all States to file a joint return, and that this proposal was later dropped because of drafting difficulties and the so-called “Parker proposal ”, which my bill follows in principle, was then adopted. At the last minute, however, by a bare majority vote, this amendment was also eliminated, due to the opposition of members of the committee from community-property States and the apprehension of other Members that such controversial item might delay the passage of the revenue bill. At that time it was stated by the chairman that the community-property question would be taken up later as a separate bill, and this hearing is the result of that assurance.

The amendment which I propose to the revenue law is almost identical with that which appeared in the revenue bill of 1921. The House acted favorably upon the matter at that time, but the amendment was eliminated in the Senate and in conference the House conferees yielded in favor of the Senate action. A similar provision was favorably reported to the House in connection with the revenue bill of 1924, but was eliminated on the floor of the House by action of the committee.

Although during the present session consideration of the matter has been delayed until it is now almost too late to secure the enactment of any legislation, it is my hope that after full discussion of the subject the committee will

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