/1/ Commissioner vs. Dean, 102 F (2d) 699 (1939)

A. H. Eustis, 30 BTA 820 (1964)

/2/ Carleton H. Palmer, 40 BTA 1001, aff'd by the Circuit Court of Appeals for the Second Circuit.

/3/ Robinson, 4 BTA 47. Burns, 13 BTA 579. Levy, 19 BTA 605. Margaret A. Holmes, 27 BTA 660. Julius E. Lilienfeld, 35 BTA 291 (1937). Young vs. Gnichtel, 28 F (2d) 789 (1928). Knapp vs. Hoey, 104 F (2d) 99 (1939). Commissioner vs. Dean, 102 F (2d) 699 (1939).

/4/ Tanney, BTA memo op., Dec. 10, 961-E.

/5/ Hamilton vs. Commissioner, 24F (2d) 668.

/6/ Helvering vs. Gerlach, 68 F (2d) 996; and Bowden, 26 BTA 1410.


3. PARTNERSHIPS: A husband and wife by forming a partnership can divide the income of a business or profession equally between them for tax purposes. /1/

4. LOANS: Whether a Joint return or separate returns are filed, a bad debt loss sustained by one spouse in a transaction with the other spouse is allowed. /2/ Interest paid on an indebtedness by a taxpayer to his wife is deductible, /3/ and under separate returns can reduce the tax.

5. CAPITAL TRANSACTIONS: Whether a joint return or separate returns are filed, husband and wife are treated as individual taxpayers under the wash sales provision. That is, a husband can establish a capital loss for tax purposes by selling stock on an exchange, even though on the same day his wife purchases an equal number of shares of the same stock. /4/

Shares of ownership in a closely-held corporation may be sold to members of a family at far less than market price (for example, sale for $10 of a share earning $100 per year). It has been held that although such sales are heavily tainted with sham and unreality, the earnings due on the shares of ownership sold to the family members are not taxable to the original owners, since the transfer of title was actual and absolute. /5/

6. MISCELLANEOUS DEVICES: A salary paid by a wife to the husband to act as her agent may be deducted by the wife. /6/ A salary paid by the owner of a sole proprietorship to his wife for services rendered is a deductible business expense. /7/ By such salary arrangements, the combined tax on husband and wife can, under separate returns, be reduced.


/1/ H. S. Tuthill, 22 BTA 887. Humphreys vs. Commissioner, 88 F (2d) 430 (1937). Burnet vs. Leininger, 285 U.S. 136 (1932). On the other hand, in California, a community property State, husband and wife may enter into partnership, thus changing their community property to separate property.

(If 1744, II-2 Cum. Bull. 179. Kammerdiner, 25 BTA 495. COBB, 9 BTA 547.)

/2/ Hetherington, 20 BTA 806. W. M. Fleitman, JR., 22 BTA 1291 (1931), acquiesced in by the Commissioner, X-2, Cum. Bull. 214.

/3/ Samuel Shapiro, 29 BTA 1012 (1934). R. Fred Vogel, 34 BTA 580 (1936) D. S. Devan, 34 BTA 580 (1936).

/4/ F. B. Gummey, 26 BTA 894 (1932). B. T. Burton, 28 BTA 1242.

/5/ Peterson, 42 BTA 102.

/6/ Anna E. Riley, 29 BTA 160 (1933), 70 F (2d) 1013 (CCA 1st, 1934).

/7/ Friend, 8 BTA 712.


Under the law of many States, including Missouri, Maryland, Florida, and New York, the income derived from property held by husband and wife as tenants by the entirety is taxable one-half to the husband and one-half to the wife. /1/


/1/ IT 2381, VI-2 Cum. Bull. 118. George E. Saulsbury, 27 BTA 744. GCM 3111, VII-1 Cum. Bull. 112. Mollie Shaffman, 18 BTA 91.



The present option of husband and wife living together to file either joint or separate returns makes for unequal taxation both between single as compared with married persons and among married couples themselves.

1. SINGLE VS. MARRIED PERSONS: Quite aside from differences due to unlike personal exemptions, a single person may be subject to a higher tax than a married person having the same income, because the latter is allowed to deduct on a Joint return losses of a spouse who has no net income, or to use net short-term capital losses of a spouse as an offset against capital gains, or to take a deduction for charitable contributions exceeding 15 percent of his own income but not exceeding 15 percent the combined income. In these instances, the family income is viewed as a unit to the disadvantage of the single person.

Again, a single person with income of surtax size may be subject to a higher tax than a married couple having the same aggregate income because the husband and wife file separate returns and thus reduce their combined tax. The more steeply graduated are the surtax rates and the more nearly equal the division of income between husband and wife, the greater the reduction in tax to the married couple. In these cases the family income is viewed as that of two units, to the disadvantage of the single person.


Similarly, married couples with the same aggregate income may not be liable to the same Federal income tax. If in one case husband and wife both have income and in the other the husband alone has income, the latter family will generally pay a higher tax than the former (if the aggregate income exceeds $3,500) because of the option of the other husband and wife to make separate returns. Except for the uniform personal exemption of the two couples, the situation is like that mentioned above of the single person contrasted with the husband and wife filing separate returns.

Even if in both families husband and wife both have income, but one family prefers to file a Joint return, it must pay a higher tax than the family electing to file separate returns. /1/

Among married couples making separate returns, however, the Federal income tax is not likely to be equal though the aggregate income may be equal. The size of the combined tax varies according to the relative size of the two separate incomes. As noted in section IIB2 above, the husband and wife whose legal incomes are equal secure the largest tax reduction. This result occurs even though the wife in such case may have less actual command over the income than the wife in a family whose whole income belongs legally to the husband.



1. THE GENERAL PROPOSAL: In place of the present option to file joint or separate returns, it has frequently been proposed that a husband and wife living together should be required to file a single joint return, each to pay the tax attributable to his share of the income. Separate returns might be required also but only to facilitate apportionment of tax liability between the spouses.

The revenue bill of 1941 (H.R. 5417) as reported cut by the Ways and Means Committee July 24, 1941 incorporated a provision for mandatory joint returns along these general lines. /2/ It provided that husband and wife living together at any time during the joint taxable year must file a single return including the income of each; that the tax should be computed on the aggregate income; and that the liability with respect to the tax should either be joint and several, or at the election of husband or wife should be apportioned between them in the same ratio as two taxes computed upon their separate incomes.


/1/ Putting aside certain cases in which the joining of the incomes permits offsets that reduce the tax below the combined tax liability on the separate incomes. (See section IIB1 above.)

/2/ 77th Congress, let Session, H.R. 5417, committed to the Committee of the Whole House July 24, 1941 (Union Calendar No. 350) Sec. 111. At the hearings on revenue revision, 1941, Congressman Jerry Voorhis of California and Leon Henderson both suggested that joint returns by husband and wife should be required. Ralph Hetzel (apparently reading a statement by President Murray of the Congress of Industrial Organizations) also pointed to separate returns as a tax loophole. (Revenue Revision of 1941, Hearings before the Committee on Ways and Means, 77th Congress, 1st Session, Volume 1, revised, pages 597, 646, and 450 respectively.


The Committee bill did not treat earned income differently from other income except to provide that "For the purpose of computing the normal tax upon the aggregate income of the husband and wife in the case of a single return made by them jointly, the earned net income shall be the sum of the earned net incomes of the spouses computed separately." /1/ This section had the purpose of allowing in general on a joint return the same earned income credit for purposes of the normal tax as would be allowed under two separate returns, though it would not in all cases have accomplished such a result. (See Appendix A, cases 8 and 9.)

The entire mandatory joint returns provision in H.R. 5417 was rejected by the House.

2. THE TREASURY PROPOSAL (1941): In connection with the 1941 bill the Treasury "indicated to the Ways and Means Committee its conditional approval of mandatory joint-tax returns, the condition being that substantial relief is simultaneously granted to earned income of both husband and wife"; and held that the bill as reported out by the Committee was inconsistent with the Treasury suggestion since it afforded "no substantial relief . . . from the resulting increased tax in those cases where husband and wife contribute through their labor to the family income." /2/

While therefore approving of mandatory joint returns in principle, the Treasury desired to leave the tax on earned net income the same as under separate returns. Merely to accord each spouse a separate earned income credit for purposes of the normal tax, as the Committee bill intended to do, would not have sufficed to equalize the tax on earned net income under joint and separate returns, since it would not have given any relief from the increased surtax. The maximum decrease in tax on earned net income that could result under the Committee proposal would be $56, whereas under the Treasury proposal the maximum decrease in tax would slightly exceed $3,000. /3/

Under the Treasury proposal the tax on earned net income would be precisely the same under a joint return as if husband and wife filed separate returns. Only on unearned income would the tax be higher.


/1/ Section 111(c).

/2/ Letter of the Secretary of the Treasury to the President, July 31, 1941, as printed in the Congressional Record August 4, 1941 (Vol. 87, No. 142, pages A4004-A4005.

/3/ Assuming 1941 rates. This is the relief accorded where husband and wife each have earned net income of $14,000. The normal tax is decreased by $56 (4 percent of the additional earned income credit of $1,400), and the surtax is decreased by $2,950, from that each would be under a joint return of the earned net income under the 1941 Act.


To make the tax on earned net income the same as under two separate returns, there would be allowed as a credit against the joint tax on the entire income an amount equal to the excess of a joint tax on the earned net income alone over the sum of two separate taxes on the earned net income alone. /1/

The tax results of the Treasury proposal and of the Committee proposal, for net incomes of selected size with specified amounts of earned net income, are shown in Cases 10-17 of Appendix A. The extent of the relief accorded by the Treasury proposal depends upon the aggregate amount of the earned net income and its division between husband and wife. In the examples, the division is assumed equal, and the relief indicated in each case is therefore at a maximum. It should be observed that neither the Committee proposal nor the Treasury proposal makes any difference to families with net income not in excess of $3,500, since for incomes of such size no difference in tax results whether joint or separate returns are filed. /2/

The estimated increase in revenue under the Treasury proposal, assuming 1941 income levels and rate scales. is $314.8 million. This compares with an estimated $352.8 million if the Treasury relief is not accorded. Of the $38.0 million estimated relief to earned net income under the Treasury proposal, $27.6 million would go to persons filing separate returns not on a community property basis and $10.4 million to persons filing community property returns. Hence, of the $314.8 million net gain, $260.2 million would come from persons filing separate returns and $54.6 million from persons filing community property returns. /3/


/1/ Actually the tax credit would be based on differences in the SURTAX on earned net income rather than on differences in total tax, since the flat-rate normal tax would be the same under a joint return as under separate returns provided that in computing it the earned income credit were the same under both types of return.

/2/ Provided, as is true in the provisions thus far drafted, that the mandatory joint returns provision allows the same earned income credit for purposes of normal tax as under two separate returns.

/3/ Memorandum Haas to Blough November 21, 1941. These estimates assume that for purposes of the surtax credit, income in community property States is deemed earned income only to the spouse rendering the service. Moreover, community property returns with net income under $5,000 are included in the estimate for separate returns.



a. CONTINUANCE OF SPREE SEPARATE RETURNS: So far as tax results are concerned, it would be entirely consistent with the Treasury proposal to continue to permit separate returns in those cases where all the net income of each spouse is earned net income (either because earnings constituted the sole source of income or because deductions offset income from other sources). Not only would the tax be unaffected, but the unnecessary labor would be avoided of computing a joint tax and tax credit rather than computing separate taxes directly. Provision for separate returns in such cases, however, might appear discriminatory to other taxpayers, and would considerably complicate the writing of the mandatory joint returns provision. Hence, the weight of opinion in the Treasury favors making the requiring for joint filing universal, with the possible exception of some cases under Supplement T.

b. SUPPLEMENT T: At present, as already indicated (see section IB1), one spouse meeting the income requirements of Supplement T may file a separate return thereunder, even though because of size or composition of income the other spouse must file on Form 1040. Such separate filing by one spouse under the Supplement would conflict with the application of a mandatory joint returns provision to the other spouse. Yet if the spouse not qualifying for Supplement T permitted to file separately on Form 1040 (Just as under the present Act), the couple might secure a tax benefit on some unearned net income.

Two ways of dealing with Supplement T have been advocated. One is to forbid the filing of separate returns thereunder, and to permit the filing of joint returns (as now) only if the aggregate income of husband and wife does not exceed $3,000.

The other is to permit a limited exception to joint filing whereby husband and wife might file separate returns under Supplement T if both were eligible to do so and both elected to do so. This would mean that neither could have gross income in excess of $3,000, all from the specified sources. The purpose of the exception would be to retain for low income individuals the benefit of ascertaining their tax from the simplified schedule. It should be noted that in these cases all the income would be deemed earned even if derived wholly from dividends, because of the statutory provision that where net income does not exceed $3,000, it shall all be considered earned. /1/ Lease the combined tax would not differ theoretically from the tax on a joint return under the Treasury proposal.


/1/ If this statutory provision were changed, however, the scope of separate filing under Supplement T should be correspondingly restricted.


Opinion is divided as to which of these two solutions should as adopted, though consistency suggests that if separate returns are to be prohibited in all other cases, including other cases where the entire net income is earned, they should also be prohibited under Supplement T. In many cases the prohibition would be a matter of indifference, since the equal division of the personal exemption would make separate filing under Supplement T disadvantageous to the taxpayer. (See section IIB1 above.)

c. COMMUNITY PROPERTY EARNED INCOME: It appears undesirable that husbands and wives in community property States should receive the earned income relief contemplated by the Treasury proposal if in fact their earned income, though divided under State law, has all originated with one spouse. To prevent relief in such cases it has been suggested that, for purposes of computing the tax credit on earned net income, learned income of either spouse shall not include any income which does not constitute compensation for services actually rendered by such spouse. The same restriction might apply also in computing the earned income credit for purposes of the normal tax.

Under such a definition, if a husband in a community property State earned $10,000, and the wife earned nothing, the income would belong half to the husband and half to the wife, but only the husband's share would be deemed earned income for Federal income tax purposes. This night lead to results discriminatory to community property States, since the earned income credit for purposes of the normal tax would be lower than on a $10,000 earned income in other States (even though the wife's income up to $3,000 would be accounted earned net income) and the tax credit contemplated by the Treasury plan might be considerably lower than in other States (depending on whether the wife in the non-community property State had any separate income and how much). These possible discriminatory results are illustrated in Case 18, Appendix A.

Thus the suggested solution, in attempting to remove discrimination in favor of community property States, is likely to discriminate against them. To say that income shall be considered earned only to the spouse rendering the service does not go far enough. It would be necessary to provide rather that earnings shall be considered income only to the spouse rendering the service, if so basic a change in the treatment of community property income is thought desirable incidental provision. A more general application of such a provision is considered below. (Section IVB)

The only other treatment that seems calculated to put community and non-community property States on an equal footing for Federal income tax purposes is a requirement for joint returns without any relief for earned income beyond that accorded by the 1941 Act and the current regulations. (See Case 18, assumption 2.)

d. IMPUTED EARNED NET INCOME UP TO $3,000: If the present statutory provision that the first $3,000 of net income constitutes earned net income is allowed to hold in connection with the Treasury relief provision, a tax credit will be secured in all cases where husband and wife each have income whether or not such income is earned, and not merely in the cases mentioned by the Secretary "where husband and wife contribute through their labor to the family income." As illustrated in Case 18, Appendix A, the tax credit computed on imputed earned net income of $3,000 can amount to several hundred dollars Provision should probably be made to continue the allowance only for purposes of the earned income credit allowed in computing the normal tax, with respect to the first $3,000 of the joint net income.

e. LARGE EARNED NET INCOMES: From the point of view of ability to pay, the case for complete relief with respect to earned income from the additional tax entailed by a Joint return is relatively weak where the earned incomes of husband and wife are both large. It is felt generally that the benefits of the surtax credit should not be extended to large earned net incomes, attaining a possible maximum of $28,000 for husband and wife together, but that instead the maximum separate earned net income for purposes of the tax credit should be limited to some such figure as $5,000 or $7,000.

f. LIMITATION UPON TAX REDUCTION: There is also a concensus of opinion that the benefit of the tax credit for earned net income should not be extended to persons whose combined tax is less under a joint return than under two separate returns (as may happen where the joining of the incomes permits come offsets not allowed the taxpayers separately). (See Section IIB1 above.) Furthermore, the tax credit should not reduce the joint tax below the sum of two separate taxes on the entire income. Such a result could occur where the joining of the incomes reduced their aggregate amount, either by permitting the net short-term capital loss of one spouse to be applied against the short-term capital gain of the other spouse or in some other way. Unless it is provided that the tax credit shall in no case reduce the net tax to an amount less than the sum of two separate taxes computed upon the separate incomes, certain husbands and wives would in effect benefit both from a reduction in joint tax due to aggregation of the income and also from the full credit on account of earned net income.

g. MISCELLANEOUS POINTS: For the proper application of the Treasury plan, it is essential that earned net income be limited by statutory definition to net income. The present statutory limitation applies merely to the CREDIT for earned net income.

For purposes of the normal tax the same earned income credit should be allowed under a joint return as under two separate returns, consistently with the view that with respect to earned net income husband and wife are to be treated as separate taxpayers.

Since under separate returns husband and wife are allowed to divide the personal exemption in any proportion (unless one spouse files under Supplement T), a similar privilege must be accorded in computing the tax credit, if the tax on earned net income is to be the same as under separate returns. Logically, however, it is not apparent why husband and wife making separate returns should not always have been required to take the same exemption as a single individual, which under present statute would be equivalent to dividing the exemption equally.

4. THE TREASURY'S PRIOR POSITION: Historically the Treasury has not taken a consistent position with respect to mandatory Joint returns.

IN DECEMBER 1933, through Acting Secretary Morgenthau, it recommended that the Committee on Ways and Means "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." /1/ This appears to be the first time that the Treasury, in a published statement, advocated compulsory Joint returns. In the preparation of the Revenue Bill of 1934 the Ways and Means Committee tentatively approved of "an amendment requiring husbands and wives in all States to file a joint return, . . . this proposal was later dropped because of drafting difficulties." /2/

In MAY 1934, however, the Treasury changed its position by expressing preference for a substitute proposal incorporated in a bill introduced by Congressman Treadway of Massachusetts. /3/ This bill required that, in determining Federal income tax liability, income of a marital community should be considered income of the spouse having the management and control thereof under the law of the Jurisdiction in which the marital community existed. It would therefore have affected community property States only.