|Date||10-18 June 1941|
|Title||Legislative history of the Treasury's position with respect to compulsory joint returns and community property income|
|Description||Staff memo, Division of Tax Research, Treasury Department|
|Location||Box 54; Married Couples; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.|
MEMORANDUM To: Mr. Sullivan From: Mr. Tarlean June 10, 1941.
Re: Legislative History of Compulsory Joint Returns
In 1933 Acting Secretary of the Treasury Morgenthau, sent to a Subcommittee of the Committee on Ways and Means a memorandum which appears in the preliminary report of the Subcommittee, commenting on the Subcommittee's report, pointing out that provision taxing a husband and wife as an entity had long been in force in either countries. In Item 10-a of the Subcommittee's report Acting Secretary Morgenthau recommended the consideration of the whole proposition of taxing a husband and wife as a single entity. Mr. Wells, who has checked the 1934 reports of the Ways and Means Committee and the Senate Finance Committee, stated that nothing further was done until 1937 on this matter. A copy of the statement of the Acting Secretary of the Treasury is attached hereto.
In 1934 Mr. Treadway introduced a bill, H.R. 6396, for the taxation of community property, and hearings were held on it before a Subcommittee of the Committee on Ways and Means. Statements in those hearings were made by Mr. Parker, Chief of Staff of the Joint Committee on Internal Revenue Taxation, by Mr. Stan, as Counsel of the Joint Committee, and Mr. Bartholow, Special Assistant to the Secretary of the Treasury. Mr. Bartholow pointed out in his statement that in December 1933 the Acting Secretary of the Treasury had presented a statement to the effect that a discrimination was in force because of the method of taxing community income, and that the Acting Secretary had recommended to the Committee "That the Committee consider whether a husband or wife living together should not be required to file a single joint return, each to pay the tax attributable to their share of the income." Mr. Bartholow pointed out to the Committee that the Secretary's recommendation in December was made largely because of the existence of the community property question and in the hope of possibly effectuating certain remedies in other States to make it impossible for those husband-and-wife transactions seriously to reduce the revenues. Mr. Bartholow pointed out that Congress has recognized that situation by a provision in the pending bill which would disallow losses resulting from the sale of property between husband and wife. It was thought that a single provision could effectuate a remedy in all of these transactions. Mr. Bartholow noted that since the recommendation was made considerable study and been given to that provision and the conclusion reached that it prevented numerous complications which would involve a long and complicated provision to accomplish its objective and for that reason the Treasury now felt that it would be adequate as the present time to adopt an amendment such as that proposed in the Treadway bill in lieu of the Treasury's recommendations in December. He stated that the Treasury concurred generally in the views expressed by Mr. Parker and Mr. Stan, namely that discriminations result from the present law in favor of the community property States and that the provision proposed to remedy that situation would probably be sustained as a matter of law. Mr. Bartholow (page 32 of the Hearings on H. R. 8396) stated that the Treasury is disposed to prefer the new proposal (Treadway) to its December proposal were on the ground of avoidance of administrative difficulties and the fact that the pending proposal "is as likely to receive judicial sanction as any other proposal that has come to the attention of the Department. This is said with a full realization of the fact that the Supreme Court in the Hosner case has laid down the proposition that any attempt to measure the tax on one person's property or income by reference to the property or income of another is contrary to due process of law as guaranteed by the Fourteenth Amendment."
In the President's Message to Congress on June 1, 1937, on tax avoidance, the President quoted in full a letter to him from the Secretary of the Treasury, pointing out the loss of revenue resulting from community property. The President's letter appears in Document #260 of the 75th Congress, 1st Session.
As a result of the President's letter a Joint Committee on Tax Avoidance and Evasion was set up under Public Resolution #40 of the 75th Congress, 1st Session. Page 7 of the Report of the Subcommittee to Congress stated that due to the shortage of time the Subcommittee had ignored the problem but that it would be given further consideration. In the Hearings before the Ways and Means Committee, Mr. McCormack asked Mr. Nagill if he expected action to be taken upon the proposal and Mr. Nagill replied in the affirmative. Nothing further however was done on the matter.
Mr. Treadway stated in connection with his proposed bill (H. R. 6396) that the amendment proposed by him was almost identical with that which appeared in the revenue bill of 1921. He observed that the House acted favorably upon the matter at that time but that the amendment was eliminated in the Senate and that in Conference the House conferees yielded in favor of the Senate action. He noted that 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 the action of the Committee. He further stated that in connection with the bill, which became the Revenue Act of 1934, the Ways and Means Committee tentatively approved an amendment requiring husbands and wives in all States to file a joint return, and that such proposal was later dropped because of drafting difficulties and the so-called "Parker Proposal" which followed the Treadway bill in principle was adopted, but at the last minute by a bare majority vote the amendment was also eliminated due to the opposition of members of the Committee from community property States and the apprehension of other members of the Committee 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 that the hearing before the Subcommittee was the result of that assurance.
Mr. Parker filed a brief with the Committee pointing out the advantages which citizens residing in the community property States had over residents of other States with respect to income, estate, and gift taxes and submitted two alternative proposals for revising Federal tax on community property. The first being a change which would require the husband to report in his income tax and pay a tax on all the community property income (to be effected by a provision requiring the inclusion of income received by any marital community in the gross income of the spouse having the management and control of the community property), and second, by a mathematical device in connection with the personal exemption to reduce inequities in tax between married persons in the community and the non-community property States. He also made proposals for the treatment of estate and gift tax problems arising from community property. Mr. Prettyman, General Counsel of the Bureau of Internal Revenue, in a letter dated December 15, 1933 (appearing at page 22 of the Hearings on H. H. 8396) stated that his office was in complete agreement with Mr. Parker's conclusion that efforts should be made during the coming session of Congress to remove the inequities resulting from community property. Mr. Prettyman set forth objections to the second proposal of Mr. Parker, but indicated approval of the first. Mr. Stan a statement was directed toward up-holding the constitutionality of the proposed amendments providing for the taxation of income derived from community property.
MEMORANDUM Re: Hearings before the Joint Committee on Tax Evasion and Avoidance of the 75th Congress, 1st Session, on the subject of compulsory joint returns.
In the hearings before the Joint Committee on Tax Evasion and Avoidance for 1937, Under Secretary Nagill approved the statement by Mr. Cooper that one of two things would have to be done in order to eliminate the inequities existing because of community property. The first, either to have a joint return for husbands and wives or, second, if they file separate returns to compute them together and assess the tax as if it were a joint return. Certain Supreme Court cases at that time caused apprehension about the legality of such provisions. However, Under Secretary Nagill expressed a preference for compulsory joint returns in order to deal with the situation for the entire country rather than the community property States alone. Nevertheless, at a later stage of the hearings, Mr. Daniel A. Reed, Number of the Committee, referred to the "so-called tax evasion practices," and pointed out that no recommendation on this matter was included in the Report of the Joint Committee. The Chairman, Mr. Doughton, indicated that consideration was delayed because of inadequate time for study but said that further consideration would be given before the Committee was discharged.
Legislative history of the Treasury's position with respect to compulsory joint returns and community property income SUMMARY
The Treasury's official position with respect to compulsory joint returns and community property income has changed three times. In 1924 Secretary Mellon recommended that the income of a marital community be taxed to the spouse having management and control. In 1933, Acting Secretary Morgenthau recommended that compulsory joint returns be required of husband and wife in all forty-eight States. Later in 1933, General Counsel Prettyman of the Bureau of Internal Revenue and, in 1934, Special Assistant to the Secretary Bartholow expressed approval of the Parker and Treadway proposals which were in substance the same as the Mellon proposals. In 1937, Under Secretary Nagill recommended that compulsory joint returns be required in all forty-eight States.
I. REVENUE ACT OF 1921
The Revenue Bill of 1921, as passed by the House, required that community income be included in the gross income of the spouse having the management and control of the community property. What evidence is available indicates that this provision may have been sponsored by the Treasury Department. The Senate eliminated this provision and in conference the House conferees yielded in favor of the Senate action.
2. REVENUE ACT OF 1924
The Secretary of the Treasury recommended that a provision be enacted in the Revenue Act of 1924 requiring that the income received by any marital community be included in the gross income of the spouse having the management and control of the community property. Such a provision was reported favorably to the House, but was eliminated on the floor of the House by action of the committee.
Following the decision of the United States Supreme Court in U.S.V. Robbins, 269 U.S. 315 (1926), which decision sustained the Bureau in taxing the whole community income to the husband under the California law in effect at that time, the Treasury Department prepared to issue an administrative ruling denying the right of husband and wife to divide community income in making Federal income tax returns. Representatives in Congress from the community property States persuaded the Treasury Department not to issue such a ruling until test cases with respect to the community property issue had been litigated through the Supreme Court. In accordance with this procedure, the Treasury Department requested the Congress to extend the period of limitation in cases involving community income for the years 1927 and 1928, in order that these cases would remain open until such time as the Supreme Court had rendered a final decision in the test cases. This request (H.J. Res. 340, 71st Cong., 2d sess.) was reported favorably by the Ways and Means Committee to the House. (House Report No. 1608, 71st Cong., 2d sess.) The Supreme Court, on the basis of a statutory interpretation of the Federal income tax, decided that community income may be divided between husband and wife for purposes of the Federal income tax.
Poe v. Seaborn, 282 U. S. 101 (1930) Goodell v. Koch, 282 U. S. 118 (1930) Hopkins v. Bacon, 282 U. S. 122 (1930) Bender v. Pfaff, 282 U. S. 127 (1930) U. S. v. Malcolm, 282 U. S. 792 (1930)
In the face of the Supreme Court decisions that Congress did not intend to deny husband and wife the right to divide community income in reporting for Federal income tax purposes, the Treasury returned to its attempt to secure a statutory provision.
A subcommittee of the Ways and Means Committee, appointed to study methods of preventing avoidance of the internal revenue laws, in a preliminary report written in 1933, stated that no recommendation with respect to community income was made "in view of the legal difficulties involved."
Acting Secretary of the Treasury Morgenthau, in a statement regarding this preliminary report of the subcommittee, recommended 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." This appears to be the first time that the Treasury, in a published statement, advocated compulsory joint returns. The Ways and Means Committee tentatively approved an amendment requiring husband and wife to file a joint return, but this amendment was dropped because of drafting difficulties.
In 1934, Hearings were held before a subcommittee of the Ways and Means Committee on E.R. 8396, a bill sponsored by Representative Treadway. This bill proposed that the income of a marital community be taxed to the spouse having management and control. Mr. Bartholow, a Special Assistant to the Secretary of the Treasury, appeared as a witness in favor of the bill. Speaking of the Treasury recommendation, made only five months before, that a single joint return be required of husband and wife in all States, he said:
"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 require 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. Prettyman, General Counsel of the Bureau of Internal Revenue, in a letter dated December 15, 1933, written to L.H. Parker, Chief of Staff of the Joint Committee on Internal Revenue Taxation, approved a proposal to tax the income received by a marital community to the spouse having management and control of the community property. (This letter appears in the Hearings on H. R. 8396, conducted by the subcommittee of the Ways and Means Committee, 1934, at pp. 22-25.)
The President of the United States, in a message to the Congress concerning tax evasions and evaders (House Doc. 260, 75th Cong., 1st sess., June 1, 1937), transmitted a letter from the Secretary of the Treasury outlining some of the principle avoidance devices. This listed the division of income between husband and wife in the community property States as a major cause of revenue loss.
As a result of the President's message on tax evasion, a Joint Committee on Tax Evasion and Avoidance was established. In the Hearings before the Joint Committee, Under Secretary Nagill expressed a preference for a provision that would require compulsory joint returns of husband and wife in all of the States, rather than a provision aimed only at residents of the community property States. (Hearings before the Joint Committee on Tax Evasion and Avoidance, pp. 309-312.) The Joint Committee made no recommendation on this point. In its report to Congress, the Joint Committee stated that due to a shortage of time the problem of community property and compulsory joint returns had been ignored, but that this problem would be given further consideration by the Joint Committee. (Letter from Chairman of Joint Committee on Tax Evasion and Avoidance transmitting Report of the Joint Committee, House Doc. 337, 75th Cong., 1st sess., pp. 6-7.)