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June 2, 2011
Earl vs. Seaborn: Did the Fruit Fall Too Far From the Tree?

Full Text Published by Tax Analysts®

By Katherine D. Black, Mary K. Black, and Julie M. Black

Katherine D. Black is an associate professor at Utah Valley University. Mary K. Black and Julie M. Black are law students at Brigham Young University.

In 1948 Congress created the joint filing status to try to create tax equality between married couples in community and non-community-property states. Favored tax treatment for taxpayers in community property states was a result of the 1930 Supreme Court case Poe v. Seaborn. However, joint filing has created the marriage penalty and innocent spouse problems. Also, if same-sex marriages can jointly file, virtually everybody, except minors, could use the problematic filing status.

The tax benefits that are intended to help families with children frequently go to families without children because of their filing status and the income phase outs associated with the benefits. We should require all earners to file a tax return but allocate larger standard deductions and personal exemption amounts to each person. That would allow a taxpayer who can claim a dependent to get a greater deduction. Thus, we would give the "family tax benefits" intended to help children to families who actually have children.

We also give a step-up in basis of all community property on the death of a decedent, while only allowing a step-up in basis of half of those same assets to a surviving spouse in a non-community-property state. We should repeal Seaborn and all of the code sections that give favored treatment to taxpayers in community property states while denying those same benefits to similarly situated taxpayers in non-community-property states.

Copyright 2011 Katherine D. Black,
Mary K. Black, and Julie M. Black.
All rights reserved.


Table of Contents

I. Introduction

II. Community Property States

III. Community/Non-Community Property


    A. Community/Separate Property

    B. Transmutation

    C. Divorce

    D. Death


IV. Income Taxation

    A. Temporary Community Property States

    B. History


V. The Court's Attempt to Modify Davis

VI. The Solution or the Problem?


    A. Same-Sex Marriage

VII. Property Consequences on Death

    A. Section 1014

VIII. The Better Solution

IX. Should We Have Followed Earl?

X. Conclusion


I. Introduction

In 1930 the Supreme Court created a dichotomy between the tax treatment of earned income in community property states and non-community-property states. Lucas v. Earl1 dealt with taxpayers in California and held that the person who earned income had to be taxed on it. Although California is a community property state, at the time it held that the nonearning spouse did not have a vested interest in the community property. The taxpayers in Earl had entered into a property agreement that converted all of their property to joint tenancy. In joint tenancy, each spouse has a vested interest in the property with right of survivorship. However, the court refused to allow the spouses to split the income; it held that the person who actually earned the income could not be allowed to shift the incidence of taxation.

In Poe v. Seaborn,2 however, the Supreme Court held that in community property states the earned income would be treated as if it were earned equally by both spouses, regardless of who actually earned it. Seaborn dealt with Washington's community property law, which gave a vested interest in the property to the nonearning spouse. Thus, each spouse was taxed on half. That taxation was predicated on the idea that each spouse had a vested interest in half the property. The court held that in community property states, the community, not the individuals, earned the income. The holding in Seaborn created an avalanche of legislation and litigation. It also gave rise to other problems and tax dichotomies.

Before 1948 there was just one income tax rate schedule with numerous rates for different levels of income, and everyone had to file his own tax return.3 Married couples in community property states were treated differently from their married counterparts in non-community-property states,4 which led to many non-community-property states passing legislation to try to get community property status.5 Those efforts led to extensive litigation with varying results.

The Tax Act of 1948 provided for a filing status called married filing jointly (joint filing), which had the effect of dividing the income in half, calculating the tax on half, and multiplying the result by two to get the total tax.6 Generally, that resulted in the income being taxed at lower marginal tax rates and put married couples in community property and non-community-property states in the same relative position for the calculation of the income tax. The states that had passed some form of community property repealed their legislation.7 The joint filing status, however, was not a panacea for all tax ills. It created a lot of unforeseen difficulties for taxpayers, such as the marriage penalty and innocent spouse problems.

Before the Tax Act of 1948, married couples in non-community-property states were trying to split their income (like their community property counterparts) to get better rates. Today, as a result of the Tax Act of 1948, married couples in all states may again be trying to split their income to get better tax treatment because of the problems caused by joint filing. This happens when Congress does not pay attention when it passes laws setting the rates and brackets. The joint filing status created in 1948 to resolve the conflict is responsible for the marriage penalty and the innocent spouse problems.8

Joint filing is also responsible for several tax inequalities that have been brought to light in the same-sex marriage debate. However, any solution to the tax inequalities creates other inequalities. The continuation of the joint filing status is untenable.

Income tax brackets and rates were never the only areas in which there was tax-favored treatment for taxpayers in community property states. In 1962 the Supreme Court held in United States v. Davis9 that divorce was a taxable transaction for taxpayers in non-community-property states, but not in community property states. Again, the states rushed to try to legislate community property.10 Again, their efforts generated substantial litigation with mixed results.11 Finally in 1984, as in the previous disputes, Congress passed legislation -- section 1041, which provided for no tax consequences on divorce.

Section 1014 gives favored tax treatment to community property on death12 and provides for a step-up in basis of both halves of community property.13 This is a tax treatment not afforded to taxpayers in non-community-property states, even if they own property as joint tenants. Those taxpayers get a step-up in basis of only half of the jointly owned property.14

Fundamental to all of the controversies and problems was the holding in Seaborn, which established the idea that taxpayers in community property states should be treated differently from taxpayers in non-community-property states. Seaborn was an ill-advised decision that should be overturned along with the legislative reactions to the problems it created. Had Seaborn simply followed Earl, there would have been no tax disparity between taxpayers in different states: no marriage penalty, no innocent spouse problems, no inequalities between taxpayers based on marital status, and probably no controversy over divorce or over the basis step-up for property received on death. Seaborn created the concept of unequal tax treatment because of the differences in property regimes. This was not well thought out.

Since the decision in Seaborn, legislatures and commentators have called for it to be overturned.15 Unfortunately, no one was willing or able to overcome political pressures against overturning it. However, these are different times, and we are facing new challenges, which could be impetus enough to finally fix the flawed laws. One would assume that at the very least, to receive such disparate tax treatment, the laws in community property states dealing with property, divorce, and inheritance must be significantly different from those in non-community-property states. But as you will see, that is not the case. Thus, the justification for maintaining the preferential treatment has been ignored. Perhaps it is time to consider a method that meets taxpayers' needs and treats all taxpayers equally.

The income tax should be restructured to tax each earner on his earnings. A realistic standard deduction and personal exemption should be assigned to each person, and a realistic method of allocating those deductions should be implemented.

The rationale behind encouraging and financially supporting marriage has changed. Perhaps we need to refocus our national priorities, taking into account the current social climate in which we live, and allocate our resources accordingly. The same-sex marriage debate has challenged the definition of marriage. It may no longer be appropriate for the government to financially encourage and support marriage, especially if the definition changes so dramatically that there is little meaning given to the term and little social benefit to commend it. Perhaps the concept and definition of marriage should be taken out of the tax code and again be left to the moral and religious convictions of each individual.


II. Community Property States

Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are the 10 community property states in the United States.16 However, there is no consistent community property system. Eight states have traditional community property: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, and Washington.17 Wisconsin adopted the Uniform Marital Property Act, which implements community property law principles,18 and Alaska allows spouses to choose to have community property laws apply.19 The rights of the spouses in all those states, however, are considered community property rights for purposes of federal income taxation.20

Most Eastern states and most of the remaining Western states are common-law property states, and their marital property systems are based on English common law.21 Hawaii, Michigan, Nebraska, Oklahoma, Oregon, and Pennsylvania had community property laws at one time but no longer do.


III. Community/Non-Community Property

A. Community/Separate Property

Under community and non-community-property systems, all property acquired before marriage, after the termination of the marriage, or by gift, devise, bequest, or inheritance is separate property and is solely owned by the owner spouse. All other property is considered community property or marital property.22

The statutes of several community property states provide that each spouse has a present, vested, one-half ownership interest in community property with equal management.23 The equal management statutes give each spouse managerial rights over community property.24 In community property states, community property includes the assets acquired during the marriage as a result of the earned income of either party.25 A spouse may prevent the disposition of some community assets by the other spouse.26 Further, either spouse may contract debts during the marriage that may be satisfied with community property.27 On divorce, each spouse generally may receive a share of the community property after satisfaction of creditors' claims.28 Spouses in all community and non-community-property states have rights to marital property on the death of a spouse.29 Federal law provides surviving spouses rights to retirement benefits of the decedent spouse.30 Likewise, on death, either spouse may pass his share of the community property to his heirs by will or by the law of intestate succession.31

In all community property states, property acquired during marriage or owned at the time of dissolution of the marriage is presumed to be community property.32 The presumption is rebuttable but requires clear and convincing evidence.33 Thus, property that is commingled becomes community property.34 Personal property that is community property acquired during marriage retains its character as such when it is removed to a non-community-property state.35 Under community property law, each spouse is entitled to receive half of the community property on the death of the other spouse.36 Thus, in Seaborn37 the Supreme Court determined that the ownership rights of spouses in community property were sufficient to justify the imposition of a tax liability on each spouse for half of the community income.38

In non-community-property states, just as in community property states, all property acquired before marriage, after the termination of the marriage, or by gift, devise, bequest, or inheritance, is separate property and is solely owned by the owner spouse.39 Assets acquired during the marriage as a result of the earned income of either property are called marital property in the non-community-property states. By declaration of the legislature or the courts, many of the non-community-property states have also declared that spouses' interests are vested or are a species of ownership.40 Most non-community-property states have laws to ensure support for a surviving spouse.41 They also give the surviving spouse a right to an elective share (also known as a forced share) in the decedent spouse's property.42 Under the elective share provisions, a surviving spouse has the right to elect to receive one-third to one-half of the decedent spouse's property in lieu of the amounts provided in the decedent's will.43

Thus, except for the terminology, there seems to be little difference between the effects of the laws in the community property and non-community-property states. Further, in the non-community-property states, most property is held in joint tenancy, further blurring the differences.

B. Transmutation

Generally, spouses in community property states may change the character of property from community to non-community by transmutation.44 Transmutation is at will. There are, of course, limitations governing fraudulent transfers. Transmutation of real estate or assets of significant value may need to be in writing.45 Even in the absence of an agreement, separate property may be transmuted if it is commingled with community property so that it is impossible to determine what is separate and what is community property.46 Thus, the parties are free to change their mind at will about how much each spouse owns of what property and how it is owned.

In non-community-property states, case law has also held that parties can change the character of property by express agreement.47 In many equitable distribution states, the statute provides that parties can exclude marital property by an agreement classifying that property as separate.48 The burden of proving the agreement is on the party who asserts it.49 Transmutation is similar in both community and non-community-property states. The courts have generally upheld prenuptial and postnuptial agreements as well as transmutation along the way. Thus, spouses in neither type of state are required to stick with an allocation of property and can pretty much change them whenever they wish. Presumably, the differences in how a spouse can change the nature of his property are too insignificant to serve as justification for the disparate tax treatment.

C. Divorce

The scheme for property division on divorce varies among the community property states. California, Louisiana, and New Mexico divide the community property equally. The other five traditional community property states provide for an equitable division based on what is fair and equitable, taking into consideration all factors.50

Most of the non-community-property states also provide for an equitable distribution of the marital property on divorce.51 Those jurisdictions equitably divide marital property regardless of legal title.52 Divorce is treated as the dissolution of a partnership, with each party having a right to a share of the accumulated family assets.53 The actual distribution is usually left to the court's discretion based on criteria established by the state. Most states permit the property to be divided "equitably" or "in just proportions" between the spouses.54 However, some states presume that even though the statute provides for an equitable division, the division should be equal.55 The spouses in equitable distribution states may be entitled to receive a portion of the property owned by either or both spouses.56 Several non-community-property states have statutes that classify the spouses' property as marital or separate and authorize the divorce court to divide the marital property equally between the spouses.57

It is hard to distinguish the differences in the state laws based on a community property versus non-community-property laws division. There is no consistency among community property states nor among non-community-property states. Further, after the Davis struggle (in which the states were trying to create enough of a species of ownership in the spouses that they could avoid taxation on divorce), there is so little difference that even the courts were having a hard time seeing what was happening. At the very least, it would be impossible to say that the disparate income tax treatment can clearly be understood based on the party's community property states' rights at divorce.

The parties' rights in the property are fixed by state law. If the highest court of a state has made a determination on the parties' property interests, that decision controls in the federal courts for federal tax purposes.58 Once those rights are determined by the state, the federal taxation of the income flowing from the rights, or the taxation of the value of an estate, is a matter of federal law.59 Property rights on divorce do not seem to distinguish between community versus non-community-property laws.

1. Income earned after separation. Section 66 provides that spouses in community property states who live apart are taxed only on their own earnings if they live apart for the entire year, do not file a joint return, and no part of the earned income is transferred between them. Further, a spouse who does not live with the other spouse and who does not file a joint return may be considered an innocent spouse and may be relieved of liability for the spouse's share of the community property if she did not know and had no reason to know of the omitted income.60 An additional provision allows relief from taxation if under the facts and circumstances it is inequitable to hold the spouse liable.61 Similar rules apply in non-community-property states.62

D. Death

Under community property law, a spouse is entitled to receive half of the community property on the death of the other, as opposed to the one-third-to-one-half share received by spouses in non-community-property states.63 Each spouse may pass her half-share of the community property to her heirs by will or intestate succession.64 That ability is sometimes touted as the biggest difference in the rights. Spouses in non-community-property states generally do not have the same right.65 This right, while significant, is never mentioned as the basis for the disparate treatment, however.

The similarities between community and non-community property are striking. With the exception of the vested nature of the property interest on acquisition, it is hard to see any remarkable difference that would give rise to the disparate tax treatment. Further, many states have indicated that the wife's interest vests when she needs it to (for example, on divorce or death), thus diminishing even that difference. Certainly, nothing precludes the wife from passing her share of the marital property to her heirs by will or intestate succession. Perhaps it is the inability of the community property spouse to pass his property to his heirs in defraud of his spouse that sets them apart. But that couldn't be, because the court has the same right to recover for transfers in defraud of creditors under either property regime. Thus, it is hard to see a property difference that is great enough to justify preferential tax treatment for community property.


IV. Income Taxation

Taxpayers in community property states used to be given much more advantageous tax treatment than that afforded to taxpayers in non-community-property states. As a result, many state legislatures and state courts attempted to intervene to procure the favored tax treatment for their citizens. By redefining the parties' rights under some circumstances or by holding that the parties' rights were equivalent to a form of ownership, the states achieved some degree of success in providing community property tax treatment for their citizenry without actually changing their form of property ownership.

A. Temporary Community Property States

Since state community property laws govern spouses' rights in property for purposes of federal income, gift, and estate taxes,66 several non-community-property states temporarily adopted community property laws.67 Those states were Hawaii, Michigan, Nebraska, Oklahoma, Oregon, and Pennsylvania.68 None of those community property laws are currently in effect. In all the temporary community property states except Pennsylvania, community property acquired during the effective periods in which there was community property retained its community property character even after the repeal of the statute.69 Therefore, spouses who have lived their entire lives in traditional common-law states may nevertheless own community property.

B. History

In 1944 and 1945 (during World War II) the top marginal federal income tax rate was 94 percent on incomes exceeding $200,000.70 This was the highest rate ever.71 Tax liability increased rapidly as income rose.72 During that time, there was only one tax schedule used by all taxpayers, and husband and wife were treated as separate taxpayers.73 However, taxpayers in community property states were allowed to split their income between the spouses, which resulted in lower marginal tax rates.74

1. Earl. In 1930 the Supreme Court heard two cases, Earl and Seaborn, that involved attempts by couples to shift income between spouses for federal income tax purposes. In 1901 (12 years before the passage of the 16th Amendment in 1913, which provided for an income tax) Earl and his wife, who lived in California,75 entered into a contract that transmuted all of their property, including their earnings, to joint tenancy with the right of survivorship.76 The couple entered into the contract because Earl was sick and believed that such an agreement would simplify his wife's affairs in the event of his death.77 The effect of the contract was to change all of their community property to joint tenancy, which would immediately pass on the death of one of the parties to the survivor without the need for a probate.

Under their understanding of their contract, each spouse reported half of Earl's earnings on their separate tax returns for 1920 and 1921 (when there actually was an income tax). The commissioner challenged their course of action and assessed a deficiency. The couple argued that under their contract each spouse "owned" half of Earl's earnings.78 After all, by contract each owned the property in joint tenancy. In Earl, the Supreme Court held: "The validity of the contract is not questioned, and we assume it to be unquestionable under the law of the State of California, in which the parties lived."79

Let's analyze what happened. The Earls lived in California, a community property state. However, by contract, they commuted their community property into joint tenancy. Under the laws that govern non-community-property states, all income is taxed to the spouse who earns it, regardless of whether the property, after it is earned, is called joint tenancy.

The Board of Tax Appeals had stated: "An agreement such as this did not have the effect of preventing the earnings from becoming community property. The earnings are taxable to the petitioner when received."80

As the Supreme Court pointed out, the Earls argued that the salary and fees became the joint property of the couple "on the very first instant on which they were received."81 To that claim the Court responded:


    We well might hesitate upon the latter proposition, because however the matter might stand between husband and wife he was the only party to the contracts by which the salary and fees were earned, and it is somewhat hard to say that the last step in the performance of those contracts could be taken by anyone but himself alone. But this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.82

However, that of course is exactly what community property laws do. They split (attribute) the fruits (income) of each party's labors half each, to different trees from which they grew.

According to the Supreme Court, the contract between the Earls was acknowledged and upheld as valid regardless of how skillfully it may have been "devised to prevent the salary when paid from vesting even for a second in the man who earned it."83 If the court upheld the contract, Earl's income would have been transmuted to joint tenancy, and by law Earl would have had to report the total of his earned income on his tax return. If the contract were not valid, Earl's income would have remained community property, and under current California law, it would have been taxed half to each spouse.

The popular belief is that Earl was taxable for all of his salary, regardless of the contract between him and his wife.84 However, the holding also could be justified because the contract changed the community property to joint tenancy; thus, only Earl was taxed on the income. If the contract had not been validated by the Supreme Court, Earl's income would have continued to be community property and should have been taxed half to each. Unfortunately for the Earls, the Supreme Court had held four years earlier in United States v. Robbins85 that California's community property law was flawed:


    In the Robbins case, we found that the law of California, as construed by her own courts, gave the wife a mere expectancy and that the property rights of the husband during the life of the community were so complete that he was in fact the owner. Moreover, we there pointed out that this accorded with the executive construction of the Act as to California.86

Justice Holmes held that Earl was liable for the tax on all of his earnings and that "the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it."87 While the Earls' contract was not skillfully devised to avoid tax, but instead to avoid probate, the Court's holding was very unskillfully stated. What we do know is that the Supreme Court apparently upheld the contract. Presumably, whether or not the contract had been upheld, Earl would have been taxed on the income, because neither joint tenancy nor California's community property statute at the time would have allowed a different result.

Today we require no showing by the community property states that the wife's interests are vested. In fact, some of the community property states make community property elective. It would seem to be a hard sell to argue that an interest is at the same time both vested and elective.

In Seaborn, eight months after Earl, the Supreme Court again explained its holding in Earl in an effort to differentiate it:


    We held [in Earl ] that assuming the validity of the contract under local law, it still remained true that the husband's professional fees, earned in years subsequent to the date of the contract, were his individual income, "derived from salaries, wages, or compensation for personal services" under sections 210, 211, 212(a) and 213 of the Revenue Act of 1918. The very assignment in that case was bottomed on the fact that the earnings would be the husband's property, else there would have been nothing on which it could operate. That case presents quite a different question from this, because here, by law, the earnings are never the property of the husband, but that of the community.88

Fourteen years later, the Supreme Court again elaborated on its holding in Earl:

    Those cases [ Robbins and United States v. Malcolm89 ] dealt with the community property law of California. . . . There had been a series of decisions in California with respect to the character of the wife's rights in the community. The courts had at times indicated that this was a vested property right and on other occasions had indicated that all the wife had was a mere expectancy which ripened on the death of the husband. Prior to the decision in the Robbins case the Supreme Court of the State had finally ruled that her interest was of the latter sort. The Treasury had taken the same view and had denied California spouses the privilege of each returning one-half of the community income. In view of the decision of the Supreme Court of California this court sustained the Treasury's ruling in the Robbins case. This was in spite of the fact that over a period of years the legislature of California had adopted statutes which indicated that the wife's interest was in fact more than a mere expectancy. In 1927 [three years before Earl was heard, but after the tax years in question -- 1920 and 1921] the California legislature, in an effort to settle this controversy of long standing, adopted a statute declaring that the wife's interest in the community was a present, vested interest.90

The Earl Court would have applied pre-1927 California law.

2. Assignment of income doctrine. The assignment of income doctrine, as the Earl decision has come to be known, is well established in tax law. Justice Holmes penned the famous "fruit of the tree" analogy, in which he held the fruits of the taxpayer's labor could not be "attributed to a different tree from that on which they grew" (presumably, unless it grew in a community property state). A unanimous Court did not question the validity of the contract under state law; instead, it imposed a limitation on taxpayers' ability to use contracts to minimize their federal taxes on earned income.91

A taxpayer must give away control of the entire tree and not just the fruit from the tree to avoid taxation.92 The Supreme Court stated in Commissioner v. Sunnen93:


    The critical question remains whether the assignor retains sufficient power and control over the assigned property or over receipt of the income to make it reasonable to treat him as the recipient of the income for tax purposes.94

In Horst, the Supreme Court said, "The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it."95

3. Seaborn. The Supreme Court in Seaborn held that Seaborn and his wife were entitled to file separate returns with each reporting half of his earned income as well as the joint income. The court felt bound by Washington's community property law, which determined property ownership.96 Even though all the real estate was in Seaborn's name alone, the court noted that it was "undisputed that all of the property real and personal constituted community property and that neither owned any separate property or had any separate income."97 The court reasoned that the Seaborns' property vested in the community first and that the earnings were never the property of the husband:


    We held [in Earl ] that . . . it still remained true that the husband's professional fees, earned in years subsequent to the date of the contract, were his individual income. . . . The very assignment in that case was bottomed on the fact that the earnings would be the husband's property, else there would have been nothing on which it could operate. That case presents quite a different question from this, because here, by law, the earnings are never the property of the husband, but that of the community.98

The Court failed to explain how earned income could be earned by the community. The person who actually earned the income was not considered the earner. How was that possible? Just months before, the Court had stated in Earl that it was the intent of the taxing statute to tax the salary of those who earned it and to provide that the tax could not be escaped by anticipatory assignment, contracts, or even state laws "however skillfully devised to prevent the salary when paid from vesting for even a second in the man who earned it."99 The Earl Court continued: "That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew."100

Presumably, in Seaborn only the husband was hired and only he did the work. Just as in Earl, Seaborn should have been taxed as the one who earned the income even though the second it was earned it belonged to the community. The fiction that the community earned the income should have been challenged, but instead it was simply accepted as correct. Thus, it became axiomatic that taxpayers in community property states were treated differently for tax purposes from those in non-community property states. Further, the Court never looked at the underlying law, but relied instead on the "community" label to determine the tax consequences.

In 1926 and 1927, before the hearings in Earl and Seaborn (but after the respective tax years in question in those cases), the Supreme Court of California finally held that the wife's interest was a mere expectancy. In response, the California State Legislature, in an effort to settle the long-standing controversy, adopted a statute in 1927 declaring that the wife's interest in the community was a present, vested interest. Then the Ninth Circuit in Malcolm certified two questions to the U.S. Supreme Court: First, whether under California law the husband must return the entire income, and second, whether the wife had such an interest in the community income that she should separately report and pay tax on half thereof.101 The Court answered that the husband should report only half the income and that the wife's interest in the community income was such that she should separately report and pay tax on her half.102

This finally resolved the wife's ownership interest in the income from the earnings, but that did not mean that a new entity could have the incidence of taxation imputed to it. Seaborn, not the community, had earned the income; thus, Seaborn, as the earner, should have been taxed, and then the community would have divided the income.

The income, however, was either earned by one or more of the individuals or by an entity. If the community was an entity that could earn income, it must have been a partnership. However, the Court did not go this route. Instead it said that because Seaborn's wife had a vested interest, she could report her half-share. Again, this did not address the underlying question of how she could be the earner of half the income.

The Supreme Court has held that a partnership exists for federal income tax purposes only when, after considering all the facts, the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.103 In cases in which the husband and wife lacked a bona fide business purpose, the Supreme Court has denied partnership status to the enterprise.104 Many courts will not classify an enterprise as a partnership for tax purposes unless the parties also manifest an intent to earn a profit.105 A married couple, however, lacks a business purpose and a commercial profit motive. Its purpose is to support and foster family unity.106 Because the community is intimately related to the personal lives of the spouses, it differs in many respects from a commercial partnership.107 Thus, the community could not have earned the income.

Interestingly, if the Earls had not tried to transmute their property, it would have been community property. If it was community property at the time they transmuted it, both parties would have had vested, half interests, and therefore both parties would have had to transfer their half in the agreement, not just Earl transferring the whole as the Court concluded. Thus, the Earls should have prevailed under Seaborn, at least for tax years after 1927.

The Court in Seaborn concluded that the wife had a present, vested interest in the property. A vested interest in the community property was sufficient for tax purposes to allow the Seaborns to split the husband's income.108 However, the Court never explained why an owner of joint tenancy property did not have the appropriate vested interest. The Court simply said that "here, by law, the earnings are never the property of the husband, but that of the community."109 That is true, but the earnings must be earned first. It would have seemed more logical and more consistent to tax each party on the property he actually earned and let the state determine who owned the property once it was earned.

The Court's holding seemed to imply that spouses in community property states somehow have an ownership interest in the property before it is earned (which should be bad news for employers). Perhaps the Court was trying to say that in community property states, a spouse makes an equal contribution and the earnings should therefore be split. However, shouldn't that be the same in non-community-property states? It would be analogous to a divorce action in which the husband argued that only he earned the money, to which the court responded, "Such an analysis ignores contributions of love, encouragement, and companionship, which elude monetary valuation. Such an analysis also gives short shrift to spouses who contribute homemaking skills and child care."110 However, the Supreme Court could hardly argue that only spouses in community property states make such a contribution. The Court did not explain the equities of the disparate tax treatment. Instead, it held:


    The answer to such argument, however, is, that the constitutional requirement of uniformity is not intrinsic, but geographic. And differences of state law, which may bring a person within or without the category designated by Congress as taxable, may not be read into the Revenue Act to spell out a lack of uniformity.111

4. The states' reaction. The states didn't buy it. Because of the inequitable treatment of taxpayers that resulted from Earl and Seaborn, Michigan,112 Nebraska,113 Oklahoma,114 Oregon,115 and Pennsyl-vania116 adopted statutes between 1939 and 1947 to get community property treatment. Eight states -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington -- already had community property laws in place.117

In 1939 Oklahoma became the first common-law state to enact laws to create community property.118 Oklahoma's statute allowed married couples to elect community property.119 In 1943 Oregon also enacted an elective community property statute.120 The following year, the Supreme Court in Commissioner v. Harmon121 held that Oklahoma's statute, because it was elective, merely permitted contracts similar to those in Earl.122 Oklahoma's statute did not create community property between a husband and a wife as an incidence of marriage.123 Oklahoma's system was not "dictated by state policy," as were the traditional community property state systems.124 Harmon effectively invalidated both Oklahoma's and Oregon's community property laws.125 The Court reasoned that the Oklahoma statute caused electing couples to enter a consensual community arising out of a written contract, rather than a legal community arising out of the settled legal policy of the state. The Court reinforced its support for state law determinations of community property for federal income tax purposes.

Hawaii, Michigan, Nebraska, Oklahoma, Oregon, and Pennsylvania126 enacted new laws that created community property between husband and wife as an incidence of marriage. These new mandatory community property regimes were primarily tax motivated.127 In Willcox v. Pennsylvania Mutual Life Insurance Co.,128 the Court held that the Pennsylvania law was unconstitutional because it deprived citizens of their property without due process.129 Willcox forced states that had already enacted these statutes to consider potential legal challenges to their new laws.130

Before other states could adopt community property statutes, Congress passed the Revenue Act of 1948, which stated that "equalization is provided for the tax burdens of married couples in common-law and community property states."131 The Revenue Act achieved equalization by allowing husbands and wives to file a joint return132 and calculate the tax liability on half of their income then multiply that figure by two.133 The act also reduced the extremely high tax rates.134 Joint filing made community property laws inconsequential to a taxpayer's income tax liability.135 In less than a year after the passage of the Revenue Act of 1948, Hawaii, Michigan, Nebraska, Oklahoma, and Oregon repealed their community property statutes.136

5. Davis. Disparate tax treatment took another turn in 1962. In Davis,137 the Supreme Court held that a transfer of appreciated property to a spouse on divorce, in exchange for the release of marital rights in property, resulted in the recognition of gain to the transferor. No gain was recognized by the transferee, because her marital rights were deemed to have a basis equal to the value of the property received. Those rules did not apply in the case of the equal division of community property on divorce, but they did apply in the non-community-property states. The IRS took the position that the rule also did not apply to the division of jointly held property.138

Tax treatment under the Davis rule depended on the way marital rights were defined under state law. If the state law defined the marital rights in a way so that they were equivalent to a form of ownership, divisions on divorce could be made without taxation. In an effort to avoid those tax consequences, Illinois, Kansas, Minnesota, Missouri, North Carolina, and Oregon passed anti-Davis legislation. Those laws attempted to define marital rights so that they could be divided without tax consequences, but without the states actually implementing a system of community property.139 The tax treatment of the spouses under those and other statutes resulted in much litigation.140


V. The Court's Attempt to Modify Davis

In Collins v. Commissioner (Collins I),141 the Tax Court reviewed an Oklahoma statute that required the divorce court to make a just and reasonable division of property acquired jointly during marriage, regardless of the manner in which title was held.142 The wife had no control over jointly acquired property, no right to any particular division other than a just and reasonable one, and no testamentary power over the property. The Tax Court held that the wife's rights were not like community property. In Collins II,143 the Tenth Circuit upheld the Tax Court's decision.

Collins III144 took the identical issue to the Oklahoma courts. The taxpayer in that case contested the imposition of a state income tax on the same divorce transaction. The Oklahoma Supreme Court held that the state had a "species of common ownership" because the division of jointly acquired property was mandatory and the wife's rights were vested:


    Neither the actual investiture of title, a right to make present disposition of property, nor absence of a descendible interest are controlling. A wife has a vested interest in jointly acquired property of the marital community. This right is exercisable by the wife at any time during marriage, even though she is not entitled to divorce.145

The U.S. Supreme Court heard the case (Collins IV)146 and remanded it based on the holding of the Oklahoma Supreme Court. Thus, transfers of property under a modern equitable distribution statute were presumably nontaxable. Equitable distribution statutes take the position that marriage is a partnership, and that the property of the partnership -- regardless of who has title to it -- should be distributed equitably on divorce, taking into consideration criteria established by the state legislature. The Oklahoma Supreme Court held that the wife's marital interests were vested and a form of ownership. Thus, the right to an equitable distribution on divorce was sufficient to be a form of ownership.

Soon after its pronouncement in Collins III, the Oklahoma Supreme Court reversed itself, holding that the wife had virtually no rights in jointly acquired property before a divorce action was instigated. Further, the wife's rights were unvested, the husband could alienate property during marriage without the approval of the wife,147 and the husband was liable for state gift tax if he gifted any portion of the jointly acquired property to his wife.148

Despite the U.S. Supreme Court's remand in Collins IV, the Tax Court in Wiles v. Commissioner,149 a Kansas case, held that even though the state had an equitable distribution statute, it would apply Davis rather than Collins absent a clear declaration by a state court that the wife's interest was a species of co-ownership. The Kansas Legislature then passed anti-Davis legislation providing that the interest of the spouse was a form of ownership.150 It seemed that the requirement was to have a declaration by either the Legislature or the state's highest court that the property interests on divorce were a form of ownership.

On remand in Collins V, the Tenth Circuit rejected the argument that federal criteria were established in Davis (for example, right of control, descendible interest): "The [U.S. Supreme] Court merely discussed certain general characteristics of co-ownership in an attempt to determine whether the wife possessed the rights of a co-owner under state law."151 Because the Oklahoma Supreme Court determined that the wife was a part owner, "there is no need to search state law for indications of other factors that might signify the nature of the wife's property interest."152

In Imel v. United States,153 the district court found no material difference between the statutes in Colorado and those of Oklahoma. The divorce transfer was a recognition of a species of common ownership of the marital estate by the wife, which resembled a division of property between co-owners. However, the court undertook an in-depth analysis of the cases, which showed the lack of consistency and the difficulty courts were having in establishing what the law was.154

In the Davis controversy, the court was looking for the appropriate time to impose a tax on a transfer of property. It believed that when separate property was used to "buy" the release of the other spouse's rights in the property, there had been a taxable sale or exchange. However, the mere division of community property or jointly held property did not result in a sale or exchange. That would probably make sense if each party took a half-interest in each asset. But on divorce, even in community property states, the assets were usually divided by giving each spouse half of the total value, and that was accomplished by giving each spouse 100 percent of specified individual assets whose values added up to that spouse's share. This type of division has the effect of equally dividing the assets while disentangling the parties' interests from each other.

Thus, there was an exchange of the one-half of the individual assets, even though afterward the parties each owned the same amount (of total value) that they did before the division. Barring the applicability of the like-kind exchange provisions of section 1031, these divorce exchanges should have been taxable even under community property laws. However, again community property was deemed to be a special form of ownership, the division of which should not have resulted in taxation. The requirement that the legislature or the state's highest court define the rights of the spouses on divorce as a form of ownership was designed to enable the taxing authority to label this event a division of jointly owned property, rather than a sale or exchange.

However, the basic premise didn't make sense. Consequently, the non-community property states tried to achieve the favored tax treatment by finding some species of ownership in their property rights. Even springing interests were enough to make the divorce nontaxable.155 All that was required to avoid taxation was that the property interests in a specific context be defined as a form of ownership. There was no requirement that this form of ownership be applied in any other context or that the property regime be defined as community property. Further, it did not appear to even matter if the reality of ownership existed, as long as the court or the legislature labeled it as such.

Obviously, everyone was having difficulty interpreting the states' laws and getting any equity or certainty. The Davis controversy was ultimately resolved by the passage of section 1041, which provides that no gain or loss is recognized on any transfers of property incident to divorce. However, section 1041 was not well thought out either.156 The problem could have been resolved by bringing the division of assets on divorce under the section 1031 like-kind exchange provisions. Instead, Congress chose to legislate the problem away. Section 1041 has brought its own set of problems: the ability to unload burned-out tax shelters, professional flight resulting from the impracticality of keeping a business or selling it, basis issues between separately owned businesses, and equal property divisions that are not actually tax equal. This has placed a greater burden on divorce attorneys to be tax savvy if they want to competently handle divorce issues.

Perhaps the Davis issue would have arisen regardless of the Seaborn precedent. However, without the precedent that community property should be treated differently, the result under Davis may have been different. After all, the laws governing divorce are essentially equivalent regardless of whether the state has community property or non-community property. Even though the community property states differ on how property is divided, the majority have the same division as non-community property states. Ultimately, however, a species of ownership that sprang into being only on divorce was enough to avoid tax treatment. Thus, the Davis line of cases tested the limits on the definition of property interests. It is also interesting to note the lengths to which the courts and legislatures would go to try to get equal treatment for taxpayers.


VI. The Solution or the Problem?

The first disparity between the income taxation of community property states and non-community property states was resolved by the Revenue Act of 1948, which created the joint filing status. Joint filing allows all couples to file a joint return and include all their income on it, rather than requiring them to file separate returns. However, that change gave rise to another problem, known as the marriage penalty. As a result of changes in tax rates and brackets, for some married couples the tax generated by filing jointly is more than what would be computed if they were two single individuals filing separate returns. This occurs because the top marginal income is taxed at a higher rate. So the solution (joint filing) has produced the same kind of problem that taxpayers were trying to fix: The required method produces a higher tax than they might otherwise get.

Under the current income tax regime, the only alternative to joint filing is to file as married filing separately. Married filing separately denies some deductions and benefits and has smaller brackets, resulting in greater tax.

In 1948 Congress had two options to solve the disparate tax problem. The first, which it tried, was to keep the preferential tax treatment for community property states but to allow all married couples to file jointly and get the better tax treatment. This method reduced the tax liability for married couples under some circumstances. It was chosen because right after World War II the United States had a $6.8 billion surplus and Congress thought it was a good way to return the money to the people.157 However, as tax rates and brackets have changed over the years, the solution chosen by Congress has created the marriage penalty. The marriage penalty has resulted in much legislation -- and in litigation to try to correct the legislation.

Congress has reacted to the marriage penalty on several occasions by changing the rates and deductions to allow married couples to file a joint return but get the rates and deductions they would have if they filed two separate returns. For example, the Economic Growth and Tax Relief Reconciliation Act of 2001 introduced section 1(f)(8) to the code, which mitigates the marriage penalty effect in the lower tax brackets.158 The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated the benefit to joint return filers by eliminating the marriage penalty for 2003 and 2004, and the Working Families Tax Relief Act of 2004 extended the benefit to 2005-2007.159 The marriage penalty in the lower tax brackets has been eliminated through 2010.160 Congress has also extended the brackets for 2011.

Because the Tax Act of 1948 effectively made most married taxpayers file joint tax returns, each spouse also had joint liability for the tax return. Joint liability applies to both the tax as well as the truthfulness of the return. This puts a burden on an innocent spouse who had no knowledge of unreported income -- and didn't benefit from it -- but is liable for the truthfulness of the tax return. Efforts to provide innocent spouse relief have been numerous, but innocent spouse liability continues to be troubling.161

Rather than essentially mandating joint filing for married couples, Congress could have followed Earl. It should have stated that while state law can determine property rights, it cannot change the taxation of earned income. The initial taxation of earned income should be applied to the person who earns it. In other words, Congress should have told the community property states that they could not change the incidence of income taxation on earned income but that they could decide by state law who owned the property once it was earned. Further, if Congress had simply refused to allow the states to dictate federal tax law, we would not have the marriage penalty and the attempts to fix it.

A. Same-Sex Marriage

Regardless of the social impact of same-sex marriage, it is necessary to investigate the tax consequences. In Perry v. Schwarzenegger,162 the district court noted that same-sex couples pay more in income taxes than their heterosexual, married counterparts. A same-sex couple cannot file jointly. Under the Defense of Marriage Act, marriage for tax purposes is defined as only between a man and a woman.163 Also, head of household status is not available for someone supporting a nonrelative, so filing singly is the only filing status available to same-sex couples.164 Disparate tax treatment is one of the significant arguments for same-sex marriage.165 If same-sex marriage is upheld as marriage for income tax purposes, those couples would qualify for joint filing status. This would change their standard deduction, tax rates, and brackets. It would also change the limits for credits, rebates, and deductions. Thus, same-sex couples would pay less tax. Today there is very little justification for granting joint filing status to a man and a woman but not to two men or two women similarly situated.

Originally, the justification for giving married couples an advantageous tax rate was to encourage reproduction. Countries need new soldiers and taxpayers. In 1948 the only kind of birth control was abstinence, and abortion was against the law. Thus, couples who married were likely to have children. Today, however, birth control and abortion are readily available to married couples, and since many married couples are choosing not to have children, giving them tax advantages over other couples does not make sense.

The argument for granting joint filing to same-sex couples, however, has its own set of problems. If some taxpayers get a tax break, that burden has to either be borne by someone else, by an increase in the deficit, or by a tax increase.

The first problem that arises in extending joint filing status to same-sex couples is how we define a couple. The Supreme Court has said that "the decision to marry is a fundamental right" and that marriage is an "expression of emotional support and public commitment."166 It has similarly said that "the right to marry is of fundamental importance for all individuals,"167 and that "marriage is a coming together for better or for worse, hopefully enduring, and intimate to the degree of being sacred."168 Having established that everyone should have the right to marry, the Court left out the details of to whom or under what circumstances marriage might take place. Law is all about definitions. However, based strictly on the broad criteria established in the statements quoted above, how do you define marriage? Without some definition of couple and marriage, we open ourselves up to some rather troubling scenarios. For example, all roommates could have the right to marry (and divorce). Why would students file as singles when they could simply get a marriage license, file jointly, and get the tax advantages? Marriage would become another tax incentive for education.

Further, it would appear to be discriminatory to deny married treatment to parents and children, as long as those children are of marrying age. There would simply be no reason any single adult, living with or supporting another single adult could not marry to get joint filing status. As we discussed in an earlier article,169 a middle-income, single parent supporting an adult child pays more in tax than a one-earner, married taxpayer. The rationale for the disparity is not apparent. However, if Perry is upheld, a logical solution for the single parent supporting an unmarried adult child would be for the parent to marry the adult child. Under current laws, that would be forbidden because of the rules relating to consanguinity. However, under the analysis in Perry, there should be no problem for a father to marry his son or for a mother to marry her daughter, and presumably it should also be all right for a father to marry his daughter and a mother to marry her son. Under Perry, closely related family members should no longer be restricted from marrying "based on love, enduring commitment, and the intent to form a family."170 The biggest concern in the past regarding family marriages was that the offspring from these unions might have severe mental or physical disabilities.

Today, however, there are many forms of birth control, abortion is available, and genetic testing can be used to determine birth defects. Married and unmarried women have the ability to know if the child will have birth defects and to decide whether to terminate the pregnancy. Thus, without definitions as to who can marry there should be no logical rationale for denying marriages to family members under the Perry criteria. Thus, parents and children theoretically should not be barred from marrying, and in fact, it would provide a logical solution to the disparate tax treatment between single parents and married couples.

Further, under the Perry analysis, the government should not be allowed to look at fertility when granting marriage licenses. The Perry court stated: "Plaintiff's equal protection claim is based on sexual orientation, but this claim is equivalent to a claim of discrimination based on sex." It continued: "Proponents did not, however, advance any reason why the government may use sexual orientation as a proxy for fertility or why the government may need to take into account fertility when legislating. . . . All classifications based on sexual orientation appear suspect."171

Because fertility and sex are not acceptable criteria, this would suggest that a single parent supporting an adult single child should be allowed to marry the child to qualify for joint filing. This would do away with all of the limits and denial of deductions and provide better rates and brackets to eliminate the code's bias against single parents.172 Finally, single parents of minor children could consider marrying to get the beneficial tax treatment. Interestingly, this would mean that the only individuals who would have to file as other than married would be minors, those unwilling to enter into marriage under this new definition, or those unaware of the changes.

Under the holding in Perry, we would also have to consider whether polygamists should be denied marital status. According to the holding in Perry, "Whether that belief is based on moral disapproval . . . or simply a belief that a relationship between a man and a woman is inherently better than a relationship between two men or two women (or some group), this belief is not a proper basis on which to legislate. 'The Constitution cannot control [private biases] but neither can it tolerate them.'"173 Under Perry, polygamists, if not allowed to legally marry, should be allowed to marry in groups of two (that is, husband and one wife, then additional wives could pair up in groups of two). This would have several tax advantages. Each group would get an additional married standard deduction, additional stimulus payments, additional rebates, and smaller tax rates and brackets. Thus, their combined taxes would be dramatically reduced. From a tax standpoint, it would be better to allow the whole group to marry and form one unit, because that would result in fewer deductions and greater tax than if they could marry in groups of twos. But if allowing them to marry as a group is unacceptable, under Perry polygamists should be able to take the steps necessary to reduce their taxes.

Taxpayers have an obligation to pay what they owe but nothing more. Taxpayers also have the right to arrange their affairs to get the best tax consequences. As Judge Learned Hand stated: "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands. Taxes are enforced exactions, not voluntary contributions."174

An influx of new marriages and perhaps divorces could overwhelm our already overburdened court system. Perhaps we could learn by past experiences with corporations and limited liability companies. Instead of going through years of litigation over definitions, we could go right to check-the-box regulations. Individuals could simply check the box to choose whether to be taxed as married or single. This would have the advantage of judicial economy. However, because an overly broad change in the definition of marriage would allow all adults to choose to file jointly, we would dramatically reduce the amount of tax collected. Instead of simply allowing an election, we could follow another pattern frequently found in the code: We could provide an extremely complex definition of who could file jointly and require an equally complex form to be filled out before the taxpayer could qualify (an example would be Form 4797). Experience has shown that given two choices -- one that is difficult but results in less tax, and one that is simpler but results in more tax -- most taxpayers will choose the simpler method.

The rationale for giving married, heterosexual couples preferential tax treatment over single parents supporting children or over same-sex couples no longer seems rational. However, equally as obvious is our need to have carefully drafted definitions of who can constitute a "couple" and what "marriage" means. Because we must raise a designated amount of money through the income tax, if we give tax advantages to one group, it must come from another. Many of the advantages given to married, heterosexual couples were premised on the idea that married couples would have children (for example, child tax credits, education credits, and child care credits). Today that premise is flawed. Perhaps it is time to give the tax benefits to taxpayers who actually have children, regardless of marital status, and treat all others the same.

The rationale behind encouraging and financially supporting marriage has changed. Perhaps we need to refocus our national priorities to realistically take into account the social climate in which we live. It may no longer be appropriate for the government to encourage and support marriage, especially if the definition changes so dramatically that there is very little meaning given to the term and very little social benefit to commend it. Perhaps marriage should be returned to morality and religion where it belongs.


VII. Property Consequences on Death

If taxpayers live in a non-community-property state, their property is generally held either as separate property or as a joint tenancy. As discussed earlier, separate property consists of property brought into the marriage, or received as gifts or inheritances during the marriage. Property acquired during marriage from one spouse's labor may be either separate property or marital property.175 Spouses, however, generally take title to assets as joint tenants. Thus, the decedent includes all of his separate property and half of the marital and joint tenancy property in his estate. The separate property gets a step-up in basis to its fair market value on the date of death, and half of the marital and joint tenancy property also gets a step-up in basis.

However, if those same taxpayers live in a community property state, the property they acquire during marriage is community property. Separate property is property brought into the marriage, or received as gifts or inheritances. When one spouse dies, his separate property gets a step-up in basis but so do both halves of the community property.

A. Section 1014

Section 1014(b)(6) provides that community property received from a decedent gets a step-up in basis of both halves of the property. The wording of the provision requires that the property be "held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country." There is no requirement under section 1014 that the surviving spouse receive both halves of the community property to get a step-up in basis of her half, nor is there even a requirement that an estate tax return be filed or estate tax paid.176 There is also no definition of community property or explanation of what it means to be "held by the decedent and the surviving spouse under the community property laws of any State."177

Section 2033 requires that only half of the value of community property be included in the decedent's gross estate. Thus, only half is subject to the estate tax. This rule is the same for marital property in non-community-property states. Further, the IRS has recognized that only half of the value of joint tenancy property acquired with community property funds is includable in a deceased spouse's estate.178 In spite of the inclusion of only half in the gross estate, section 1014 allows a step-up in basis of both halves of the community property179 but does not allow an increase in basis for marital property or joint tenancy property.180 The effect is to give the surviving spouse in a community property state a great advantage for income tax purposes on the subsequent sale of community property.

Section 2056 provides for an unlimited marital deduction for property passing to the surviving spouse. Thus, regardless of the value of the assets required to be included in the gross estate, there should be no estate tax assessed for property passing to the surviving spouse, regardless of whether it is community property. Section 1014 provides for the step-up in basis of both halves only on the condition that half is included in the gross estate, not that half is taxed nor that it pass to the surviving spouse. As mentioned earlier, there is not even a requirement that an estate tax return be filed.181

For example, assume that a husband and wife bought an investment at a cost of $100,000. At the time of the husband's death the investment is worth $300,000. Thus, each half had an original basis of $50,000 and a fair market value of $150,000 at date of death. Assume also that the wife sells the investment for $300,000. If the investment is community property, only $150,000 worth of value will be included in the husband's estate, but the wife will have a basis of $300,000 in the investment. If she sells it for $300,000, there will be no gain for income tax purposes. If the investment is the husband's separate property, $300,000 of value will be included in his estate, and the wife will have a basis of $300,000. Thus, again, there will be no gain if the investment is sold for $300,000. However, if the investment is held as joint tenancy (because the couple lives in a non-community-property state), $150,000 of value will be included in the estate, and the wife will have a basis of $150,000 for the husband's half and $50,000 for her half, for a total basis of $200,000. Thus, if she sells the investment for $300,000, she will have a gain of $100,000 for income tax purposes. In either case, the unlimited marital deduction is available to ensure that no estate tax will be paid on the amount included in the gross estate.

Section 1014 provides for a step-up in basis at no cost to the recipient. In the usual income tax scheme, basis must be bought either with real after-tax dollars (that is, purchase price) or with previously taxed dollars (that is, recognition of gain or loss, or a deduction). Property received from a decedent is usually given a basis equal to the fair market value at date of death or at the alternate valuation date, because that is the value included in the estate and subject to the estate tax. However, in the case of community property, the surviving spouse is given a step-up in basis of his half when it is not included in the decedent's gross estate and is not subject to estate tax -- and with the possibility that even the decedent's half may not be taxed because of the marital deduction. Thus, no taxed dollars are required to give the favored community property a step-up in basis.

The IRS acknowledges that people in community property states can transmute their property from community property to separate property, or to non-community property, or back again to community property at will.182 Presumably, this is based on the community property state's laws, which allow transmutation of property.183 However, because spouses are allowed to transmute their separate property to community property, even separate property in community property states (with proper planning) may be able to get the step-up in basis.184


VIII. The Better Solution

Initially, the better solution would have been to not allow state laws to change the tax consequences on earned income in the first place. Congress and the courts should have upheld the holding in Earl and rejected the holding in Seaborn. Seaborn was predicated on beliefs that weren't accurate. For example, the court held that spouses had such an interest in the earnings of the other that they owned it outright and thus should be taxed on their one-half, absolute ownership in the property. Unfortunately, this was tempered by Congress legislating that on death, we would like to go a little easy on that absolute ownership idea because we want to make the case that the wife's half isn't really hers outright, but instead she gets her half from her husband's estate. That way she should get a step-up in basis of her half as well as his.

So, which is it? Is there such an absolute ownership interest that the wife owned the property before it was even earned? Was it hers and hers alone, thus allowing her to file on half of her husband's earnings because, in fact, they were her own? Was her ownership such that it would be wrong to tax her husband on the half that belongs outright to her in fee simple? Or was the wife's ownership such that she had only a "sort of" ownership interest? Thus, on her husband's death, her interest and his (if she gets his interest) would come to her as her separate property, but only after first going through the husband's estate. It can't be both ways. The wife couldn't have owned the property so absolutely that it was wrong to tax anyone but her on her solely and separately earned property -- but it wasn't actually hers until her husband died and left it to her.

Interestingly, joint tenancy -- which is how most couples hold their property in non-community property states -- is of such an absolute nature that the other spouse does not even have to go through probate, because the property transfer occurs as a matter of law on death. The surviving spouse/joint tenant takes it all, end of discussion. Just as in community property states, only half of the property is included in the decedent spouse's estate, but nobody questions that the survivor gets all the property. Rather than give the parties with these absolute property rights a step-up in basis of both halves (as in community property states), these taxpayers are relegated to a step-up in basis of only half of the property, even though the surviving spouse gets it all. In community property states, where it may turn out that someone else may get the husband's half, the fiction is that the wife gets her own half through him and thus gets a step-up in basis through his estate. And his half, regardless of to whom it passes, will also get a step-up in basis to fair market value on the date of his death.

Certainly, the spouse who owns the property in joint tenancy has more of an unquestionable ownership interest than the community property spouse. However, we give exactly the opposite tax treatment one would expect. Presumably, this is based strictly on our belief that somehow community property ownership is so superior that regardless of whether it makes sense, that ownership deserves better tax treatment than other arrangements.

There does not appear to be any rationale for giving this favored tax treatment to the surviving spouse in a community property state and denying it to the surviving spouse in a non-community-property state. If the intent is to ease the burden on the surviving spouse, all jointly owned property passing to the surviving spouse, regardless of state law or how title is taken, should be given a step-up in basis of both halves. In the alternative, only that portion included in the decedent's estate, whether community property or not, should be given a step-up in basis.

The non-community-property states seem to be inexplicably disadvantaged. No one questions this provision. Perhaps it is because the Seaborn line of cases created the disparate treatment and no one has questioned it since.

The disparate tax treatment for surviving spouses in community property states and those in non-community-property states should raise the same level of concern among legislators as did the early income tax consequences. However, this does not appear to be the case. Legislators (primarily male) may have been concerned about the income tax incidence when it affected them personally but not as concerned when it affected their spouses. Because women tend to outlive their husbands, this incidence of taxation on the sale of property after the first spouse's death tends to fall more heavily on women. Further, that there is additional taxation would only become apparent when the surviving spouse sells the assets at some later time. It may also be that legislators were not even aware of the problem.


IX. Should We Have Followed Earl?

In retrospect, the holding in Seaborn has been a double-edged sword.185 Seaborn led to the belief that state laws should govern tax consequences. Originally, the battle was about the initial incidence of income tax on earned income. Eventually, in Davis, it became about taxation on divorce. Now the problem revolves around the basis of property at death -- a problem that was created by a discriminatory tax law.

Even if state law indicates that spouses have a vested interest in all property, that does not mean that both spouses earned it for income tax purposes. Although it is well established that state law determines property interests, the federal incidence of taxation should have always followed Earl and should have been determined at the federal level. If that had been the case, we would not have had the avalanche of legislation and litigation on the part of states and taxpayers trying to get equal tax treatment.

Following Earl would have resulted in taxpayers in community property states receiving the same income tax treatment as taxpayers in non-community property states. It would have negated the pressure to introduce the joint filing tax status. Without the joint filing status, there would not have been a marriage penalty or an innocent spouse problem. Further, without the joint filing status, there would have been no discrimination against same-sex couples or single parents. In short, following the original holding in Earl would have relieved a litany of tax problems.

In Seaborn, the Supreme Court determined that the ownership rights of spouses in community property were sufficient to justify the imposition of a tax liability on each spouse for half of the community income.186 Following suit, the courts in Davis and its line of cases found that divorce was a taxable event but not for community property or for property held as joint tenancy. Thus, only marital property that was not held in joint tenancy was taxable. This was so illusive, however, that before the passage of section 1041, the courts were having difficulty figuring out how to apply the rules and tended to find some "species" of ownership designed to avoid the taxation. However, the differences between community property and non-community property on divorce were never significant enough to justify disparate tax treatment. It had just become an accepted practice that community property should be given preferential tax treatment.

To give a step-up in basis of both halves of community property on death flies in the face of reason and equity. The fiction is that somehow the spouse receives both halves through the estate, thus warranting the advantageous step-up in basis of both halves. But you can't have it both ways. Either each spouse has such a vested interest in his half that each party is the absolute owner of his own half on death (and thus it warrants splitting the income when earned and treating it as a division of equally owned property on divorce), or none of those things is true and the survivor receives his half through the estate.

We have perpetuated the myth that community property law creates such an absolute ownership that it warrants different tax treatment. In Earl the community property of California was deemed not to create a species of ownership. Thereafter, California changed its laws to give the wife a vested interest. However, all of the community property states are different. Apparently, as the law has developed, whether property is community property is now all in the name or the declaration, rather than the realities.

The right to split income is dear to married taxpayers. Any attempt to repeal the joint return provision would face strong political opposition.187 Proposals to prevent income splitting by spouses domiciled in community property states and to tax community income to the spouse having management and control of community property were raised in connection with the revenue acts of 1921, 1924, and 1934.188 As Susan Kalinka explains, all the proposals failed:


    In 1941, the Treasury Department persuaded the House Committee on Ways and Means to recommend enacting a provision that disregarded community property laws by requiring joint returns that equalized the tax on married couples with the same aggregate income whether domiciled in community or noncommunity property states. The Senate Committee on Finance added a provision that would have taxed earned income to the spouse who earned it, regardless of the treatment of the earnings under state community property law and would tax the income earned from community property to the spouse who had the management and control of the property. However, supporters of the proposal were unable to overcome political pressures against it.

    Commentators who argue that all individuals should be taxed on their own earnings regardless of state laws, have not received the political support necessary to effect a change in the law. The economic underpinning for the joint filing rule is the perception that the family is an economic unit and should be taxable as such.189


The joint filing status caused the marriage penalty and the innocent spouse problems and solidified the notion that taxpayers in community property states should be favored. Today, despite including the same amount in the decedent's estate, only spouses in community property states get a step-up in basis or both halves. This occurs whether or not the spouse inherits the decedent's property and whether or not the property was subject to estate tax. No one challenges this provision. Perhaps the reason is that they realize there is no point in fighting this uphill battle. Nonetheless, it is bad law and should be changed.

The same-sex marriage debate has questioned the continued viability of the joint filing status. Allowing same-sex marriage for tax purposes opens the door for any two adults to marry to claim joint filing status. It renders our multiple filing statuses moot. The tax should be restructured to tax each earner on his earnings as in Earl. A realistic standard deduction and personal exemption should be assigned to each person. Individuals residing together and contributing to the support of others should allocate the dependents' standard deduction and personal exemptions pro rata based on income or contribution. This would do away with the marriage penalty and the innocent spouse problems. Further, it would eliminate discrimination against same-sex couples.

Finally, changing section 1014 so that all of the assets received from a decedent spouse get a step-up in basis regardless of the parties' domicile would end a significant area of tax discrimination. Current section 1014 cannot be justified, and it discriminates against some of our most vulnerable citizens. Seaborn caused all these problems. Thus, the continued validity and desirability of Seaborn is questionable.


X. Conclusion

There are three circumstances in which taxpayers who reside in community property states have been given preferential tax treatment compared with those who reside in non-community-property states: income tax treatment of earned income, taxation of divorce, and taxation incident to death. In the first two situations, the states fought back and received relief through legislation. In the last scenario, the problem was created through legislation and most just accept it as the way it is. No one is fighting it, presumably because it occurs after death and even then, only on the sale of assets, which may occur long after the predeceased spouse's death.

We need to overturn the holding in Seaborn, which spawned the belief that taxpayers in community property states deserve favorable tax treatment. The disparate tax treatment led to the passage of the Revenue Act of 1948. This created a legislative fix that made joint filing available to all married taxpayers. However, keeping Seaborn alive and well just encouraged the issues that followed. The joint filing status created the marriage penalty and the problems for innocent spouses. Further, as the same-sex marriage debate has shown, extending joint filing to same-sex marriage creates the possibility of making any other filing status moot.

The holding in Seaborn also gave rise to the belief that somehow spouses in community property states had vastly different rights in property than those in non-community-property states and therefore deserved preferential tax treatment. The Davis line of cases followed that belief and held that divorce was a taxable event for spouses in non-community-property states but not for those in community property states. This disparate treatment was solved by the passage of section 1041, which provided that no gain or loss should occur on marital property divisions. However, the dispute further entrenched the notion that somehow community property was significantly different from marital property.

Section 1041 was not well thought out either. It has brought its own set of problems, and we could have resolved the divorce issues more effectively through the use of the like-kind exchange provision of section 1031. Congress's rush to fix the problem created problems of its own. Presumably, were it not for Seaborn, we would have never had Davis and we would not now be trying to find a cure.

No one has disputed the inequities of section 1014(b)(6), which gives property in community property states a step-up in basis of both halves on the death of one of the spouses, while denying that treatment to similarly situated spouses in non-community property states. Spouses in all states have rights in their jointly acquired property at death. Because the property rights of spouses in community and non-community-property states are similar, there is simply no justification for the disparate tax treatment. After almost a century of litigation and legislation, perhaps it is time to overturn Seaborn and repeal the flawed legislation that followed.

The same-sex marriage debate has challenged the continued viability of the joint filing status. Allowing same-sex marriage for tax purposes opens the door for any two adults to claim joint filing status by entering into a marriage for tax purposes. Having no definition of marriage would make marriage moot. Thus, the continued validity and desirability of the joint filing status is questionable. The tax should be structured to tax each earner on his earnings, and it should provide a realistic standard deduction and personal exemption to each taxpayer or dependent.

It is time to give tax equity to taxpayers regardless of where they live. It is time to repeal Seaborn.


FOOTNOTES

1 281 U.S. 111 (1930).

2 282 U.S. 101 (1930) (Wash. law).

3 Tax Policy Center, "Historical Individual Income Tax Parameters" (Jan. 19, 2011), available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=543&Topic2id=30&Topic3id=39; section 11 (1939).

4 Seaborn, 282 U.S. 101.

5 Jennifer E. Sturiale, "The Passage of Community Property Laws, 1939-1947: Was 'More Than Money' Involved?" 11 Mich. J. Gender & L. 213, 215, nn.6-10.

6 Id. at 215, 228, nn.15, 89.

7 Id. at 215, nn.5-11.

8 Susan Kalinka, "Federal Taxation of Community Income: A Simpler and More Equitable Approach," 1990 Wis. L. Rev. 633, 636, n.11 (1990) (Kalinka I).

9 370 U.S. 65 (1962).

10 See Ore. Rev. Stat. section 107.105(f). Similar statutes were enacted in Illinois, Kansas, Minnesota, Missouri, and North Carolina.

11 See Commissioner v. Collins, 412 F.2d 211 (10th Cir. 1969); United States v. Wallace, 439 F.2d 757 (8th Cir. 1971); Commissioner v. Wiles, 499 F.2d 255 (10th Cir. 1974); United States v. Imel, 523 F.2d 853 (10th Cir. 1975); McKinney v. Commissioner, 64 T.C. 262 (1975); United States v. Bosch, 590 F.2d 165 (5th Cir. 1979).

12 Section 1014(b)(6); reg. section 1.1014-2(5).

13 Section 1014(b)(6) states:


    In the case of decedents dying after December 31, 1947, property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939.

14 Reg. section 1.1014-2; Rev. Rul. 55-605, 1955-2 C.B. 328 (Nev. law).

15 See, e.g., Randolph E. Paul, Selected Studies in Federal Taxation 40-41 (1938); George T. Altman, "The Tax Nationalization of Community Property," 26 Taxes 14, 16-17 (1948); George E. Ray, "Proposed Changes in Federal Taxation of Community Property: Income Tax," 30 Calif. L. Rev. 397, 405-408 (1942); Note, "Federal Tax Liability of the Wife for Community Income Earned by the Husband," 32 La. L. Rev. 471 (1972); Note, "Community Property -- Federal Income Tax Liability of Wife During Existence of Community," 46 Tul. L. Rev. 329 (1971); Reka Potgieter-Hoff, "Why Tax a Spouse on Community Income She Does Not Receive?" 7 Community Prop. J. 61, 64 (1981).

16 Ariz. Rev. Stat. Ann. section 25-211; Calif. Fam. Code section 760 (2010); Idaho Dom. Code section 32-906 (2008); La. Civ. Code section 2338 (2005); Nev. Rev. Stats. section 123.220 (2009); N.M. Dom. Aff. Stat. section 40-3-8 (2010); Wash. Rev. Code Ann. section 26.16.030 (2010); Tex. Fam. Code Ann. section 3.002; Wis. Stat. Ann. section 766.58 (1997); Alaska Stat. section 34.77 et seq. (2010); see also generally W.S. McClanahan, Community Property Law in the United States (1982 and Supp. 1992); William Quimby DeFuniak, Principles of Community Property (1971).

17 DeFuniak, supra note 16, at 2. Blaine D. Beckstead, "Understanding and Applying I.R.C.," 33 Idaho L. Rev. 567 (1997).

18 Wis. Stat. Ann. section 766.58 (1997).

19 Alaska Stat. section 34.77.010 et seq. (2010).

20 See Rev. Rul. 87-13, 1987-1 C.B. 20.

21 DeFuniak, supra note 16, at 2; Beckstead, supra note 17.

22 Id.

23 Susan Kalinka, "Taxation of Community Income: It Is Time for Congress to Override Poe v. Seaborn," 58 La. L. Rev. 73, 79-82, nn.21-25, 29, 36, 40 (1997) (Kalinka II); see, e.g., Calif. Fam. Code section 751 (2011); La. Civ. Code Ann. art. 2336 (2011); Nev. Rev. Stat. section 123.225(1) (2010); Wis. Stat. Ann. section 766.31(3) (2010).

24 See Ariz. Rev. Stat. Ann. section 25-214 (B) (2011); Calif. Fam. Code sections 1100, 1102 (2011); Idaho Code section 32-912 (2010); La. Civ. Code section 2346 (2011); Nev. Rev. Stat. section 123.230 (2010); N.M. Stat. Ann. section 40-3-14 (2010); Texas Fam. Code Ann. sections 3.102, 3.103 (2010); Wash. Rev. Code Ann. section 26.16.030 (2010); Wis. Stat. section 766.51 (2010).

25 See, e.g., Calif. Fam. Code section 760 (2010); see, e.g., Hall, 858 P.2d at 1022; Burt, 799 P.2d at 1172; Dunn, 802 P.2d at 1317-1318 (quoting Gardner, 748 P.2d at 1079).

26 Kalinka II, supra note 23, at 79, n.24.

27 Id. at 79, n.25; see Ariz. Rev. Stat. Ann. section 25-215 (2011); Calif. Fam. Code section 910 (2011); Idaho Code Ann. section 32-912 (2010); La. Civ. Code Ann. art. 2372, 2373 (2011); N.M. Stat. Ann. section 40-3-11 (2010); Texas Fam. Code Ann. sections 3.201, 3.202 (2010); Wis. Stat. Ann. section 766.55(2)(B) (2010).

28 The community property laws of some states provide that each spouse is entitled to receive half of the community property on divorce. See Calif. Fam. Code section 2550 (2011); see also Calif. Fam. Code section 2600 et seq. (overriding section 2550 to give the court leniency in effecting the distribution); La. Civ. Code Ann. art. sections 2336, 2370, 2374 (2010); Michelson v. Michelson, 520 P.2d 263 (1974). Several of the community property states, however, provide for an equitable distribution of property between the spouses on divorce. See Ariz. Rev. Stat. Ann. section 25-318(A) (2011); Idaho Code Ann. section 32-712 (2010); Nev. Rev. Stat. section 125.150(1) (2010); Texas Fam. Code Ann. section 7.001 (2010) (distribution that is just and right). In the equitable distribution states, one spouse may receive more than half of the community property on a showing that the division is equitable.

29 Ariz. Rev. Stat. Ann. sections 25-211-213, 14-2102 et seq. (2011); Calif. Fam. Code section 802-803 (2011), Calif. Prob. Code section 6401 et seq.; Idaho Dom. Code section 32-916 (2010); Nev. Rev. Stats. section 123.220 (2010); Wash. Rev. Code Ann. section 26.16.095 (2010); Texas Fam. Code Ann. section 3.006 (2010); Wis. Stat. Ann. section 766.60 et seq. (2010); Alaska Stat. section 34.77.155 et seq. (2010).

30 Kalinka II, supra note 23, at 81, n.29 (citing 42 U.S.C. section 402(e) and (f)).

31 Id. at 79, n.22; see e.g. Calif. Prob. Code section 6101 (2010).

32 Alaska Stat. section 34.77 et seq. (2010); Ariz. Rev. Stat. Ann. section 25-211 (2011); Calif. Fam. Code section 760 (2011); Idaho Dom. Code section 32-906 (2010); La. Civ. Code. section 2338 (2011); Nev. Rev. Stats. section 123.220 (2010); N.M. Dom. Aff. Stat. section 40-3-8 (2010); Wash. Rev. Code Ann. section 26.16.030 (2010); Texas Fam. Code Ann. section 3.002 (2010); Wis. Stat. Ann. section 766.58 (2010).

33 Alaska Stat. section 34.77.030 et seq. (2010); Ariz. Rev. Stat. Ann. section 25-211-213 (2010); Calif. Fam. Code sections 802-803 (2011); Idaho Dom. Code section 32-916 (2010); Nev. Rev. Stats. section 123.220 (2010); Wash. Rev. Code Ann. section 26.16.095 (2010); Texas Fam. Code Ann. section 3.003 (2010); Wis. Stat. Ann. section 766.31(2) (2011).

34 Kalinka I, supra note 8, at 644, nn.60-66.

35 See Tomaier v. Tomaier, 146 P.2d 905 (Calif. 1944); Succession of Packwood, 9 Rob. 438 (La. 1845); Re Estate of Kessler, 203 N.E.2d 221 (Ohio 1964); King v. Bruce, 201 S.W.2d 803 (Texas 1947). See also Restatement, Conflict of Laws 2d, section 259; Doss v. Campbell, 19 Ala. 590 (1851).

36 Alaska Stat. section 34.77.155 et seq. (2010); Ariz. Rev. Stat. Ann. sections 25-211-213, 14-2102 et seq. (2010); Calif. Fam. Code sections 802-803 (2011); Calif. Prob. Code section 6401 et seq.; Idaho Dom. Code section 32-916 (2010); Nev. Rev. Stats. section 123.220 (2010); Wash. Rev. Code Ann. section 26.16.095 (2010); Texas Fam. Code Ann. section 3.006 (2010); Wis. Stat. Ann. section 766.60 et seq. (2011).

37 Seaborn, 282 U.S. 101.

38 Id. at 113, 118.

39 See, e.g., Hall, 858 P.2d at 1022; Burt, 799 P.2d at 1172; Dunn, 802 P.2d at 1317-1318 (quoting Gardner, 748 P.2d at 1079).

40 See discussion below regarding United States v. Davis.

41 Kalinka II, supra note 23, at 82, n.36.

42 Id. at 82, n.40.

43 Id. at 79, n.24.

44 Kalinka I, supra note 8, at 656, n.113. All community property states permit couples to opt out of the community property system either by antenuptial contract or by contract at any time during the marriage. See also Ariz. Rev. Stat. Ann. section 25-203 (2010); Calif. Fam. Code sections 1620, 3580 (2010); Idaho Code Ann. sections 32-906, 32-916 (2010); La. Civ. Code Ann. art. 2329 (2011); Nev. Rev. Stat. section 123.070 (2010); N.M. Stat. Ann. section 40-2-2 (2010); Texas Fam. Code Ann. sections 4.102, 4.103 (2011); Wash. Rev. Code Ann. sections 26.16.050, 26.16.120 (2010); Wis. Stat. Ann. sections 766.58, 766.585, 766.587, 766.589 (2011). The courts and the IRS have generally respected contracts that partition community property for income tax purposes. See Clay v. United States, 161 F.2d 607, 611 (5th Cir. 1947); O'Bryan v. Commissioner, 148 F.2d 456, 458 (9th Cir. 1945); Helvering v. Hickman, 70 F.2d 985, 986 (9th Cir. 1934); Rev. Rul. 73-390, 1973-2 C.B. 12. A couple cannot, however, seek to assign community income already earned, but not received, as of the date of the contract. An attempt to do so returns to the question originally posed in Earl. See also Moser v. Moser, 572 P.2d 446 (Ariz. Ct. App. 1977); Bliss v. Bliss, 898 P.2d 1081 (Idaho 1995); O'Krepki v. O'Krepki, 529 So.2d 1317 (La. Ct. App. 1988); Roberts v. Roberts, 999 S.W.2d 424 (Texas Ct. App. 1999); In re Marriage of Schweitzer, 937 P.2d 1062 (Wash. Ct. App. 1997). See also Calif. Fam. Code sections 850-852 (2010); see Beckstead, supra note 17, at 579.

45 E.g., Calif. Fam. Code sections 850 and 852.

46 See, e.g., Calif. Fam. Code section 852.

47 E.g., Chotiner v. Chotiner, 829 P.2d 829 (Alaska 1992) (holding that agreements, written or oral, may demonstrate the owner's intent, or lack of intent, to convert separate property to marital property); Husband T.R.G. v. Wife G.K.G., 410 A.2d 155 (Del. 1979) (finding that an interspousal transfer can be evidence of a midnuptial agreement); Brice v. Brice, 411 A.2d 3410 (D.C. 1980) (considering an antenuptial agreement); Hylton v. Hylton, 716 S.W.2d 850 (Mo. Ct. App. 1986) (finding that the wife made an express agreement with her husband that in exchange for the husband's help with a note payment, the wife would transfer an interest in the property to the husband); Johnson v. Johnson, 372 S.E.2d 107 (S.C. Ct. App. 1988) (considering an antenuptial agreement); McDavid v. McDavid, 451 S.E.2d 713 (Va. Ct. App. 1994) (finding that language in a deed of trust whereby the wife relinquished "her interest in the property to the lender" was insufficient to transmute marital property into separate property); Stainback v. Stainback, 396 S.E.2d 686 (Va. Ct. App. 1990) (finding there was no agreement between the parties to transmute shares of separate stock); Westbrook v. Westbrook, 364 S.E.2d 523 (Va. Ct. App. 1988) (finding an agreement between the parties as evidenced by a deed of trust). Cf. Wolford v. Wolford, 785 P.2d 625 (Idaho 1990) (determining that an agreement written on a restaurant napkin was insufficient). See also Katherine D. Black et al., "Community Property for Non-Community-Property States," 24 Quinnipiac Prob. L.J. 101, 122 (2011).

48 E.g., Ark. Stat. Ann. section 9-12-315 (2001); Colo. Rev. Stat. section 14-10-113 (Supp. 2003); 13 Del. Code Ann. section 1513 (Supp. 2003); Ky. Rev. Stat. Ann. section 403.190 (1995); 19-A Maine Rev. Stat. Ann. section 953 (2002); Minn. Stat. Ann. section 518.54 (2002); Mo. Ann. Stat. section 452.330 (2000); N.Y. Dom. Rel. Code section 236B (2000); Wis. Stat. Ann. section 766.31 (2002).

49 Shenk v. Shenk, 571 S.E.2d 896 (2002).

50 Kalinka II, supra note 23, at 81, n.28. The community property states that have adopted equitable distribution statutes are Arizona, Idaho, Nevada, Texas, and Washington. See Ariz. Rev. Stat. Ann. section 25-318(A) (2010); Idaho Code Ann. section 32-712 (2010); Nev. Rev. Stat. section 125.150(1)(b) (2010); Texas Fam. Code Ann. section 7.001 (2011); Wash. Rev. Code Ann. section 26.09.080 (2010).

51 See generally Doris J. Freed and Henry H. Foster Jr., "Divorce in the Fifty States: An Overview as of August 1, 1980," 6 Fam. L. Rep. 4043 (1980); Foster, "Commentary on Equitable Distribution," 26 N.Y.L. Sch. L. Rev. 1 (1981); Carmen Valle Patel, "Treating Professional Goodwill as Marital Property in Equitable Distribution States," 58 N.Y.U.L. Rev. 554, n.21 (1983).

52 Patel, supra note 51, at n.21.

53 See Hunt v. Hunt, 397 N.E. 2d 511, 516-518 (Ill. 1979) (noting the similarity between Illinois's equitable distribution statute and community property statutes); Ark. Stat. Ann. para. 34-1214; N.C. Gen. Stat. section 50-20; Ore. Rev. Stat. section 107.105(e); Wis. Stat. Ann. section 767.255; Dunn, 802 P.2d at 1317-1318.

54 Kalinka II, supra note 23, at 81, n.28, citing 1 Ann Oldfather et al., Valuation and Distribution of Marital Property, paras. 20.07[1], 3.01[2], 3.01[3], 20.04[1] [a] [ii], nn.9-13. (1997). See Foster, supra note 51; Patel, supra note 51, at n.21.

55 See Ark. Stat. Ann. section 34-1214; N.C. Gen. Stat. section 50-20; Ore. Rev. Stat. section 107.105(e); Wis. Stat. Ann. section 767.255.

56 See Homer H. Clark Jr., 2 The Law of Domestic Relations in the United States, section 15.1 (2d ed. 1987); and Oldfather et al., supra note 54, at paras. 20.07[1], 3.01[2].

57 See Clark, supra note 56, at section 15.1; Oldfather et al., supra note 54, at paras. 20.07[1], 3.01[2]; Dunn, 802 P.2d at 1317-1318.

58 Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).

59 Seaborn, 282 U.S. 101.

60 Section 66(b).

61 Section 66(c).

62 Section 6015.

63 Kalinka II, supra note 23, at 82.

64 See, e.g., Calif. Prob. Code section 6101.

65 They may pass their separate property or any property they may own at their death, but they cannot pass specifically half of the marital property because they may not actually receive half.

66 Seaborn, 282 U.S. 101 (Wash. law); Massaglia v. Commissioner, 286 F.2d 258 (10th Cir. 1961) (N.M. law); Bishop v. Commissioner, 152 F.2d 389 (9th Cir. 1945) (Calif. law).

67 See, e.g., United States v. Malcolm, 282 U.S. 792 (1931) (Calif. law); Goodell v. Koch, 282 U.S. 118 (1930) (Ariz. law); Bender v. Pfaff, 282 U.S. 127 (1930) (La. law); Hopkins v. Bacon, 282 U.S. 122 (1930) (Texas law); Seaborn, 282 U.S. 101.

68 See Act of July 1, 1947, No. 317, 1947 Mich. Pub. Acts 517 (codified as amended at Mich. Comp. Laws sections 557.201-.220 (1947)) (repealed 1948); Act of June 12, 1947, ch. 156, 1947 Neb. Laws 426 (codified as amended at Neb. Rev. Stat. sections 42-601 to -616 (1947)) (repealed 1949); Act of May 10, 1939, ch. 62, 1939 Okla. Sess. Laws 190 (codified as amended at Okla. Stat. sections 51-65 (1941)) (repealed 1945); Act of Mar. 29, 1943, ch. 440, 1943 Ore. Laws 656 (codified as amended at Ore. Rev. Stat. sections 63-2A01 to -2A16 (1945)) (repealed 1945); Act of Apr. 19, 1947, ch. 525, 1947 Ore. Laws 910 (codified as amended at Ore. Rev. Stat. sections 63-2B01 to -2B16 (1947)) (repealed 1949). See Act of July 7, 1947, ch. 550, 1947 Pa. Laws 1423 (to be codified at Pa. Stat. Ann. section 201-15 (1947)); Willcox, 55 A.2d 521 (holding Pennsylvania's community property law unconstitutional). William Q. DeFuniak and Michael J. Vaughn, Principles of Community Property 51, 56 (2d ed. 1971).

69 See Hawaii Rev. Laws 1945, ch. 301A; Mich. Comp. Laws sections 557.201-.220 (1947)) (repealed 1948); Neb. Rev. Stat. sections 42-601 to -616 (1947)) (repealed 1949); Ore. Laws 1943, ch. 440; Ore. Laws 1945, ch. 270; Ore. Laws 1947, ch. 525; Pa. Stat. Ann. section 201-15 (1947)); "Oregon Tax Balm," Newsweek, June 21, 1943; William J. Moshofsky, "Repeal of the Community-Property Law," 28 Or. L. Rev. 311 (1948); Willcox, 55 A.2d 521; Stephanie Hunter McMahon, "To Save State Residents: States' Use of Community Property for Federal Tax Reduction, 1939-1947," 27 Law & Hist. Rev. 585, 599, 616 (2009).

70 Section 11 (1939); Tax Policy Center, supra note 3.

71 Tax Policy Center, supra note 3.

72 Id.

73 Id.

74 Seaborn, 282 U.S. 117.

75 The first codification of community property occurred in 1872 in Calif. Civ. Code sections 163 and 164 (now Calif. Fam. Code section 760).

76 Earl, 281 U.S. at 113-114.

77 Earl, 10 B.T.A. at 723.

78 Brief for Respondent, 11; Lucas v. Earl, 281 U.S. 111 (1930).

79 Earl, 281 U.S. at 114.

80 Earl, 10 B.T.A. at 723.

81 Earl, 281 U.S. at 114.

82 Id. at 114-115.

83 Id. at 115.

84 Id. at 114-115.

85 269 U.S. 315 (1926).

86 Seaborn, 282 U.S. at 116.

87 Earl, 281 U.S. at 115.

88 Id.

89 282 U.S. 792 (1931).

90 Commissioner v. Harmon, 323 U.S. 44, 48 (1944).

91 Earl, 281 U.S. at 114-115.

92 Helvering v. Horst, 311 U.S. 112 (1940). See Helvering v. Eubank, 311 U.S. 122 (1940), in which the Supreme Court expanded the assignment of income doctrine to include income to be received in the future as a result of work previously performed. In Eubank the taxpayer was a life insurance agent who assigned renewal commissions payable after the termination of his agency to another. The taxpayer was under no future obligation to perform services. The Supreme Court held that the payments, although received long after services were performed, were income to the assignor. Granting another the power to collect the renewal commissions was not sufficient to transfer the incidence of taxation.

93 333 U.S. 591 (1948).

94 Id. at 604.

95 Horst, 311 U.S. at 118.

96 McMahon, supra note 69, at 592.

97 Seaborn, 282 U.S. at 109.

98 Id. at 117.

99 Earl, 281 U.S. at 115.

100 Id.

101 Malcolm, 282 U.S. 792.

102 Id.

103 Commissioner v. Culbertson, 337 U.S. 733, 742 (1949) (footnote omitted). Those facts are the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts shedding light on their true intent.

104 Lusthaus v. Commissioner, 327 U.S. 293 (1946); Commissioner v. Tower, 327 U.S. 280 (1946). For the Supreme Court's explanation of these cases, see Culbertson, 337 U.S. at 737-748.

105 See, e.g., Howell v. Commissioner, 41 T.C. 13 (1963), aff'd per curiam, 332 F.2d 428 (3d Cir. 1964) (holding that there was no partnership when the taxpayer advanced funds to his sister-in-law's business with no expectation of economic profit); Ewing v. Commissioner, 20 T.C. 216 (1953), aff'd, 213 F.2d 438 (2d Cir. 1954) (finding no joint venture when the taxpayer's intent in advancing funds to an artistic venture was to support the arts and not to earn a profit); Allison v. Commissioner, T.C. Memo. 1976-248 (absence of a joint profit motive was fatal to a claim of partnership status). See also Jacob Mertens, Law of Federal Income Taxation, section 35.04 (1983).

106 See Calif. Civ. Code section 720 (2010) (husband and wife contract toward each other obligations of respect, fidelity, and support); Idaho Code section 32-901 (2010) (same); N.M. Stat. Ann. section 40-2-1 (2010) (same); DeFuniak and Vaughn, supra note 68, at section 11.1 (the community system was instituted to further the economic, moral, and social goals of the marriage).

107 Kalinka I, supra note 8, at 677.

108 Sturiale, supra note 5, at 219.

109 Seaborn, 282 U.S. at 117.

110 Dunn, 802 P.2d at 1322.

111 Seaborn, 282 U.S. at 117-118 (citations omitted).

112 Sturiale, supra note 5, at 215, n.6; see Act of July 1, 1947, No. 317, 1947 Mich. Pub. Acts 517 (codified as amended at Mich. Comp. Laws sections 557.201-557.220 (1947)) (repealed 1948).

113 Sturiale, supra note 5, at 215, n.7; see Act of June 12, 1947, ch. 156, 1947 Neb. Laws 426 (codified as amended at Neb. Rev. Stat. sections 42-601 to 42-616 (1947)) (repealed 1949).

114 Sturiale, supra note 5, at 215, n.8; see Act of May 10, 1939, ch. 62, 1939 Okla. Sess. Laws 190 (codified as amended at Okla. Stat. sections 51-65 (1941)) (repealed 1945).

115 Sturiale, supra note 5, at 215, n.9; see Act of Mar. 29, 1943, ch. 440, 1943 Ore. Laws 656 (codified as amended at Ore. Rev. Stat. sections 63-2A01 to 63-2A16 (1945)) (repealed 1945); Act of Apr. 19, 1947, ch. 525, 1947 Ore. Laws 910 (codified as amended at Ore. Rev. Stat. sections 63-2B01 to 63-2B16 (1947)) (repealed 1949).

116 Sturiale, supra note 5, at 215, n.10; see Act of July 7, 1947, ch. 550, 1947 Pa. Laws 1423 (to be codified at Pa. Stat. Ann. section 201-15 (1947)); Willcox, 55 A.2d 521.

117 DeFuniak and Vaughn, supra note 68, at 56.

118 Sturiale, supra note 5, at 215, n.8; see Act of May 10, 1939, ch. 62, 1939 Okla. Sess. Laws 190 (codified as amended at Okla. Stat. sections 51-65 (1941)) (repealed 1945).

119 Okla. Stat. section 51.

120 Sturiale, supra note 5, at 215, n.9; see Act of Mar. 29, 1943, ch. 440, 1943 Ore. Laws 656 (codified as amended at Ore. Rev. Stat. sections 63-2A01 to 63-2A16 (1945)) (repealed 1945).

121 323 U.S. 47.

122 Id. at 47-48. This was despite the fact that original community property states, including California and Washington, allowed married couples to contract out of the community property system. See Brief for the Petitioner, Commissioner v. Harmon, 5-9.

123 Harmon, 323 U.S. at 48.

124 Id.

125 Sturiale, supra note 5, at 225.

126 Id. at 215, nn.6-10; see Mich. Comp. Laws sections 557.201-.220 (1947) (repealed 1948); Neb. Rev. Stat. sections 42-601 to 42-616 (1947) (repealed 1949); Pa. Stat. Ann. section 201-15 (1947); Ore. Laws 1943, ch. 440; Ore. Laws 1945, ch. 270; Ore. Laws 1947, ch. 525; Hawaii Rev. Laws, 1945, ch. 301A.

127 "Oregon Tax Balm," supra note 69; Moshofsky, supra note 69.

128 55 A.2d 521.

129 McMahon, supra note 69, at 616.

130 Id. at 585 and 599.

131 H.R. Rep. No. 80-1274 (1948); see also S. Rep. No. 80-1013 (1948).

132 Section 51(b)(1) (1949).

133 Section 12(d) (1949) ("In the case of a joint return of husband and wife . . . the combined normal tax and surtax . . . shall be twice the combined normal tax and surtax that would be determined if the net income and the applicable credits against net income provided by section 25 were reduced by one-half.").

134 H.R. Rep. No. 80-1274 (1948).

135 Sturiale, supra note 5, at 227.

136 Id. at 213.

137 370 U.S. 65.

138 See Committee Reports on P.L. 98-369 in CCH Standard Federal Income Tax Reporter (2011), 2250.021.

139 See Ore. Rev. Stat. section 107.105(f). Similar statutes were enacted in Illinois, Kansas, Minnesota, Missouri, and North Carolina.

140 See Commissioner v. Collins (Collins V), 412 F.2d 211 (10th Cir. 1969) (remand decision); Wallace, 439 F.2d 757; Wiles, 499 F.2d 255; Imel, 523 F.2d 853; McKinney, 64 T.C. 262; Bosch, 590 F.2d 165.

141 46 T.C. 461 (1966).

142 Okla. Stat. section 12.1278 (1961).

143 388 F.2d 353 (10th Cir. 1968).

144 Collins v. Oklahoma Tax Comm'n, 446 P. 2d 290 (Okla. 1968).

145 Id. at 297.

146 393 U.S. 215 (1968).

147 Sanditen v. Sanditen, 496 P.2d 365 (Okla. 1972).

148 McDaniel v. Oklahoma Tax Comm'n, 499 P.2d 1391 (Okla. 1972).

149 60 T.C. 56 (1973), aff'd, 499 F. 2d 255 (10th Cir. 1974).

150 See Kan. Stat. Ann. section 23-201(b).

151 Collins V, 412 F.2d at 212.

152 Id. See also McIntosh v. Commissioner, 85 T.C. 31 (1985).

153 375 F. Supp. 1102 (D. Colo. 1973).

154 Id. at 1118 (U.S. district court concluded that Davis and Collins V, when coupled with the Colorado Supreme Court's answers to the certified questions, mandated a judgment in favor of the taxpayer that the transfer was nontaxable); In re Questions Submitted by U.S. District Court, 517 P.2d 1331, 1335 (Colo. 1974) (Colorado Supreme Court, answering certified questions in Imel, holding that a vesting takes place at the time of the filing of the dissolution action in which the division of property will be later determined). See also Imel, 523 F.2d at 856 ("In applying Delaware law in Davis the Court did not define the time when the interest of the wife had to vest. . . . Both the Oklahoma and Colorado courts said that the vesting occurred at the time of the filing of the divorce suit."); Cook v. Commissioner, 80 T.C. 512, 528 (1983); McIntosh, 85 T.C. at 39, 45 (Montana law held that the transfer of property resembled more a division between co-owners than a release of a legal obligation and thus was not taxable. The Tax Court noted that in Cook, it had concluded that the transfer was more in the nature of a division of property and that the divorce court judge believed the wife had an interest in the property that vested when the marriage dissolved.); Serianni v. Commissioner, 80 T.C. 1090 (1983) (Tax Court followed the Fifth Circuit's Bosch opinion, which held that a special equity interest recognized by the Florida cases differed materially from the property interest involved in Davis and that an award of such an interest was not a taxable transaction). The Uniform Marriage and Divorce Act provides: "Each spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action."

155 Cook, 80 T.C. at 528.

156 Katherine Podris Black and Gary J. Podris, "Internal Revenue Code Section 1041 Repealed U.S. v. Davis: Now How to Fix the Cure," Taxes (Aug. 1990); see Black and Podris, "Internal Revenue Code Section 1041 Is Not a Model of Tax Reform Legislation," Taxes (June 1991).

157 Revenue Act of 1948, P.L. 471; House Ways and Means Committee, Individual Income Tax Reduction Act of 1947; H. Rep. 80-180 at 7 (1947).

158 Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials 9 (2d ed. 2007).

159 Id.

160 Id.

161 Kalinka II, supra note 23.

162 704 F. Supp.2d 921 (N.D. Cal. 2010).

163 P.L. 104-199 (1996); 28 U.S.C. section 1738C.

164 Section 2(b)(3)(B) provides that the dependent must meet the actual relationship test under the qualifying relative test.

165 See Perry, 704 F. Supp.2d 921.

166 Turner v. Safely, 482 U.S. 78, 95 (1987), quoted in Perry, 704 F. Supp.2d at 991. See also Zablocki v. Redhail, 434 U.S. at 384 (1978) ("This Court has long recognized that freedom of personal choice in matters of marriage and family life is one of the liberties protected by the Due Process Clause of the Fourteenth Amendment."); Cleveland Board of Education v. LaFleur, 414 U.S. 632, 639-640 (1974) (same); Loving v. Virginia, 388 U.S. 1, 12 (1967) ("Freedom to marry has long been recognized as one of the vital personal rights essential to the orderly pursuit of happiness by freemen.").

167 Zablocki v. Redhail, 434 U.S. at 384.

168 Perry, 704 F. Supp.2d at 992; Griswold, 381 U.S. at 486.

169 Katherine D. Black, Mary K. Black, and Julie M. Black, "The Bias Against Single Parents in the Internal Revenue Code," Tax Notes, Mar. 15, 2010, p. 1397, Doc 2010-2467 , 2010 TNT 52-10 .

170 Perry, 704 F. Supp.2d at 992; Griswold, 381 U.S. at 486.

171 Perry, 704 F. Supp.2d at 997-999.

172 Black et al., supra note 169.

173 Perry, 704 F. Supp.2d at 992, quoting Romer v. Evans, 517 U.S. 620, 633 (1996); U.S. Dept. of Agriculture v. Moreno, 413 U.S. 620, 534 (1973); Palmore v. Sidoti, 466 U.S. 429, 433 (1984).

174 Commissioner v. Newman, 159 F.2d 848, 850-851 (2d Cir. 1947) (Hand, J., dissenting).

175 See Utah Code Ann. section 30-2-5(2).

176 Reg. section 1.1014-2.

177 Rev. Rul. 55-605, 1955-2 C.B. 328 (Nev.).

178 Id. See also Rev. Rul. 87-98, 1987-2 C.B. 206; LTR 6708105270A.

179 Section 1014(b)(6); reg. section 1.1014-2.

180 Section 1014; reg. section 1.1014-1; section 2040.

181 Reg. section 1.1014-2(a)(5).

182 Damner v. Commissioner, 3 T.C. 638 (1944); Katz v. United States, 382 F.2d 723 (9th Cir. 1967), rev'g 255 F. Supp. 642 (S.D. Calif. 1966). See also Rev. Rul. 87-98, 1987-2 C.B. 206.

183 Calif. Fam. Code sections 850-853; Calif. Civ. Code section 5103; Nev. Rev. Stat. section 123.070; Wash. Rev. Code section 26.16.120; Texas Cons. Art. XVI, section 15.

184 LTR 6708105270A, supra note 178.

185 See, e.g., Kalinka II, supra note 23; and John A. Miller, "Federal Income Taxation and Community Property Law: The Case for Divorce," 44 Sw. L.J. 1087 (1990).

186 Kalinka II, supra note 23.

187 Kalinka I, supra note 8, at 700. See note, "The Case for Mandatory Separate Filing by Married Persons," 91 Yale L.J. 363, 379 n.61 (1981) (observing that mandatory separate filing would result in a tax increase for about 60 percent of married couples).

188 Kalinka I, supra note 8, at 669, n.175.

189 Id. at 700 (footnotes omitted).


END OF FOOTNOTES

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