see fit to report a bill to the House which will have the effect of equalizing taxation throughout the United States by requiring husbands and wives in community property States to pay their fair share of the Federal income-tax burden. If this is done, the matter can be taken up again at the next session of Congress without further study.

Mr. SHALLENBERGER. Let me say a word about the calendar. I am arranging it to permit the experts from the departments to testify first. A number of Members of Congress have indicated they wanted to appear, but I do not think we can reach them this morning. We shall be glad to hear them tomorrow, however. Mr. Fulbright, who is located in Washington, is listed to appear, and we expect to hear from him tomorrow. My purpose is, in other words, to give those who have come a long distance an opportunity to be heard first, if it is of any convenience to them.

Mr. SUMNERS of Texas. Mr. Chairman, may I make an inquiry? Mr. SHALLENBERGER. Certainly.

Mr. SUMNERS of Texas. Those who are opposing the bill have asked that I make some brief observations with reference to the constitutional questions involved. My own committee is meeting this morning. I assume from the chairman's statement that it probably will not be necessary for me to remain this morning.

Mr. SHALLENBERGER. We can hear the gentleman tomorrow, of

course.

Mr. SUMNERS of Texas. I intend to be very brief in my remarks. As I understand it, the opponents would like me to make my remarks at the beginning of the presentation of the opposition to this proposed legislation. From what the chairman has just said, I assume that that will not come on until tomorrow, anyway.

Mr. SHALLENBERGER. That is correct.

Mr. SUMNERS of Texas. Then if I may be excused

Mr. SHALLENBERGER. Yes; and we shall be glad to hear from you tomorrow.

I will call first Mr. Parker, from the Joint Committee on Internal Revenue Taxation.

STATEMENT OF LOVELL H. PARKER, CHIEF OF STAFF, JOINT COMMITTEE ON INTERNAL REVENUE TAXATION

Mr. PARKER. Mr. Chairman and gentlemen of the committee, I have only a very brief statement to make on this subject.

I should like to ask permission, however, to file with these brief remarks a memorandum prepared for the subcommittee of the Committee on Ways and Means which studied tax avoidance last fall, and also a letter from Mr. Prettyman, fomer general counsel of the Bureau of Internal Revenue. I think that those documents will be helpful to the committee.

Mr. SHALLENBERGER. We shall be glad to have those in the record, Mr. Parker.

(The documents referred to will be found at the conclusion of Mr. Parker's statement.)

Mr. PARKER. The bill which the committee is considering raises two questions. The first is whether it is proper as a matter of justice to tax income to the spouse having the management and control of the community property.

The second question is whether it is possible under the Constitution and the laws, to tax community income in that manner. Of course, both of those questions must be answered in the affirmative if anything is to be done with this matter.

The facts, I think, are fairly well known to the committee. There are eight community-property States, as Mr. Treadway has pointed out. There are three advantages to the residents of these community-property States: One, an income-tax advantage; second, an estate-tax advantage; and third, a gift-tax advantage.

As to the income-tax advantage, it only applies to taxpayers in the community-property States who have sufficient income to reach the surtax brackets. The small taxpayers, who simply pay the normal tax in community-property States, get no benefit. It does not make any difference whether they file separate or joint returns, because there is no difference in tax on account of the flat rate.

In the case of the estate tax and the gift tax, the rates are graduated all the way up. They do not have a flat normal tax plus a graduated system, so there is an advantage on those two types of taxes in practically all cases.

By advantage, I mean the tax benefit which results when you take a man in a non-community-property State and compare him with a man in a community-property State similarly situated from a practical standpoint. Mr. Hill might say that it is hard to bring about a similar situation, because under the community-property laws there is really a partnership existing. On that point I think it is important to bear in mind that there was great force to that argument prior to the Revenue Act of 1932, because in the non-communityproperty State, when we had no gift tax, a man, as far as the income from property is concerned, could put himself in the same position as a man in the community-property States, by giving his wife half of his property. That was not true prior to 1932 in respect to salaries. Of course, a man's salary in the non-community-property States never could be split between husband and wife, but the larger incomes, coming from investments, could be split.

Mr. COCHRAN. Simply by splitting the securities themselves?

Mr. PARKER. There was no gift tax, and the husband could give his wife half his securities, and that put him in the same position as in a non-community-property State. Now, we have a gift tax and the pending bill provides for a very heavy gift tax.

Therefore, that method of equalizing the situation is no longer available.

Mr. HILL. Do you mind an interruption?

Mr. PARKER. I am glad to be interrupted, Mr. Hill.

Mr. HILL. You say that he cannot form a partnership so far as the salary is concerned, but he could make a gift of property outside of salary to compensate for that, so that the income in the future would really be divided; there would be the separate income of the wife and she would get the advantage of that in future years.

Mr. PARKER. He can get that advantage, but if it is a large amount he would pay for that advantage by paying a gift tax on the transfer.

Mr. HILL. If he gave her up to $5,000 a year, he would not pay a gift tax on it?

Mr. PARKER. That is true. I was speaking of the large incomes which are particularly important to this matter on account of the

surtax rates.

Mr. SHALLENBERGER. Do I understand that under the present laws of these community-property States the salary of the husband cannot be divided?

Mr. PARKER. The salary is divided in the community-property States, but it cannot be divided in the other States.

Mr. SHALLENBERGER. I understand.

Mr. COCHRAN. I would like to ask you a question. This was brought up by Mr. Hill in his statement a moment ago in connection with the formation of partnerships between husband and wife in the non-community-property States. As I understood Mr. Hill, he did not go so far as to say that it could be done in every non-community-property State. What is your opinion as to that?

Mr. PARKER. The husband and wife now, in most States-not all, but in most States can go into partnership. If they both put in an equal amount of capital they can split the income from that partnership. But that is no advantage if they have the income anyway, for income-tax purposes.

Certain cases have been drawn to my attention where a husband has a business and has brought the wife into partnership and his wife does not put any money in. I know of one specific case where the Department would not permit that. They said that it looked colorable; that it was a case of tax avoidance. This man's wife had not contributed anything to the partnership, and just because he called her a partner, that did not give them the right to split that partnership income for tax purposes.

I remember another case on that point where a number of gentlemen brought their wives into partnership for the purpose of distributing the income. The Treasury ruled against that and would not permit it for tax purposes.

There is only one other point in the matter of income tax. It is not of great importance, but still it raises a question. We had in the 1928 act an earned-income provision that permitted a certain relief from taxation in the case of earned income. The income was recognized as earned income only up to $30,000.

In a community-property State, if a man got a salary of $60,000, the man and his wife both were allowed $30,000 of earned income each. Under the Revenue Act of 1934, which is now pending, income is recognized as earned up to $14,000. If it is allowed on two returns, it would come up to $28,000 in the case of community-property States.

Mr. HILL. On that point, Mr. Parker, that is subject of proof, as to whether it is earned income above $3,000.

Mr. PARKER. Yes; that is true. But I am assuming that if a man in New York, for instance, received a salary of $28,000, he would be permitted to recognize only $14,000 of that as earned income on his income-tax return. If a man in California received a $28,000 salary, you take up $14,000 of that on his return and the whole $14,000 would be recognized as earned. His wife would take up $14,000 and that $14,000 would also be recognized as earned.

So that in California the whole $28,000 is recognized as earned.

Mr. HILL. That is, if the spouse were able to establish the fact that $14,000 of it was earned income.

Mr. PARKER. Well, there would not be any question about it on a straight salary, I presume.

Mr. FREAR. How would the wife be getting the salary? Would she have to get it from an employer, or would it just be simply a provision of law whereby half of the husband's income was regarded as hers?

Mr. PARKER. No. The law contemplates, as I understand the community-property law, that the husband and wife both earn that money and have an equal right in that salary. Therefore, as far as they are concerned, it is salary to both of them.

Mr. FREAR. You are speaking now of community-property States? Mr. PARKER. Yes, Mr. Frear.

Mr. FREAR. Even though the salary is all paid to the husband? Mr. PARKER. It does not make any difference.

Mr. FREAR. I am trying to find out about the matter of earned income, so far as the wife is concerned. It is counted as earned income of the wife notwithstanding that the money is paid to the husband?

Mr. PARKER. The law says that she earns it. She does her necessary part at home. That is the community-property theoryand there is no quarrel with it-it is an old theory and goes back a good many centuries. France followed such a system, as did Spain. I believe it originated with the Goths in Germany. And the theory was that the wife was recognized as equally important in the earning of the community income though her duties were performed at home.

Now, as to the estate tax, there again the revenue bill of 1934 provides increases which average about 40 percent in the estate-tax burden. Of course, as we have a graduated scale of rates, that makes a very considerable difference in the total estate tax in the non-community-property States in comparison with the communityproperty States.

However, it should not be overlooked, in fairness to the community-property side of the question, that if the husband in a non-community-property State has all the property and dies, his tax will be considerably more, of course, than a man that has accumulated that wealth in a community-property State where it is divided in half. However, we get the tax on both halves in the community-property Sates. That is to say, when the husband dies in a community-property State, we get an estate tax. When his wife dies, we will get another tax from her. Whereas in the non-community-property States, if the husband and wife die within 5 years of each other, there will be only one tax.

Mr. FREAR. It does not reach the same high bracket?

Mr. PARKER. It does not reach the same high bracket. It is offset, though, because of the fact that both of them are taxed. It is unnecessary to comment on the gift tax as exactly the same situation exists and the rates of that tax will also be substantially increased on the passage of the pending revenue bill.

Able

As to the legal questions, there is a great deal of controversy. lawyers believe that it is possible to tax this community income. Other able lawyers believe it is not possible to do so. My personal

opinion is that if we could bring that question to the Supreme Court without jeopardizing our revenue, it might be well. What I mean is, we must watch the statute of limitations. If we are going to try to tax community-property income, it will become very necessary to do something about the statute of limitations, because we will require these people to include the income on one return. They will probably include it in their return under protest and pay the tax under protest. The case will go up and be decided. Let us say the Government loses. Then the statute of limitations may have run against collecting the tax on the separate returns and we will lose half of the tax we get under existing law.

I would suggest, therefore, that the committee, if they consider reporting this bill, also consider that question, as it might properly be included in the legislation.

Mr. FREAR. Would you be willing to place in the record at this point such a proposed amendment to this bill, so that we may understand the scope of it?

Mr. PARKER. I could possibly in a couple of days offer such an amendment.

Mr. FREAR. Will you do that?

Mr. PARKER. Yes, sir.

(The amendment is as follows:)

Add at the end of the bill a new sentence reading as follows:

For the first taxable year beginning after December 31, 1933, the periods of limitation for assessment, credit, or refund of income taxes shall be extended for a period of 1 additional year in the case of any individual having such management and control or in the case of his or her spouse.

Mr. SHALLENBERGER. Mr. Parker, when you said that some thought it was possible and some thought it was not possible to enact this legislation, you were referring to the question of constitutionality that might be involved?

Mr. PARKER. That is right. That brings me to the legal side of this question, and on that point, with the permission of the committee, I should like to have Mr. Stam, counsel of the joint committee, make a statement, as he has the cases much better in mind than I.

Mr. FREAR. Before you leave the stand, I would like to get clear in the record, if I can, this matter of the $50,000,000 that has been referred to first on one side and then on the other as being involved. If I remember correctly, the Treasury Department estimated as high as $60,000,000. I do not remember where that statement came from, but I think it came before one of the subcommittees. Can you give us for the record so that we may have it clearly here, where that loss comes about, if it is a loss, or where that discrimination comes about, if it is a discrimination?

Mr. PARKER. The estimate is of an amount which we would gain by taxing the community-property income to the spouse having the management and control of the property. Various estimates have been made on that, and quite properly so, because the estimate depends on the prosperity of the country, on the income of the country. Our income tax is very unstable. We have had fluctuations of 50 and 75 percent. Therefore you must expect, if you want a general view of the situation, fluctuations in the estimates. I believe that the gain in revenue under this bill would be somewhere between 30