Date 19 November 1936
Author unknown
Title Tax Revision 1937: Project No. 3
Description Staff memo, Division of Tax Research, Treasury Department
Location Box 54; Married Couples; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.
                  Tax Revision 1937 - Project No. 3
            Miscellaneous and Administrative Tax Changes

Subject: Proposal to amend Section 51 (b)(2), Revenue Act of 1936, so as to provide specifically for joint and several liability on the part of husband and wife filing a joint return; and counter-proposal to amend this section so as to deny husband and wife the option of having their tax liability determined on the basis of separate returns.

Section 51 (b) reads as follows:

          "If a husband and wife living together have an aggregate
     net income for the taxable year of $2,500 or over, or an
     aggregate gross income for such year of $5,000 or over - (1)
     Each shall make such a return, or (2) the income of each shall
     be included in a single joint return, in which case the tax
     shall be computed on the aggregate income."

The proposal is to amend subsection (2) of Section 51(b) by striking out the period at the end and adding the following:

          "; and both husband and wife shall be jointly and overally
     liable for the total amount of tax (including any deficiency in
     respect thereto) penalties, and interest determined on their
     aggregate income for such taxable year, and the Commissioner
     may assess and collect such tax, penalties and interest against
     and from either the husband or the wife or both of them."

The counter-proposal is to amend Section 51(b) to read as follows: "If a husband and wife living together have an aggregate net income for the taxable year of $2,500 or over, or an aggregate gross income for such year of $5,000 and over, each shall make a return and the income of each shall be included in a single return and the tax shall be computed on the aggregate income; and the tax liability for the total amount of the tax (including any deficiency in respect thereof) penalties, and interest determined on their aggregate income for such taxable year, shall be apportioned to the husband and wife in accordance with the ratio of their separate incomes to the aggregate income taxed."

I.

A ruling by the Bureau in 1923 on a case which arose in 1920 under the Revenue Act of 1918 established definitely that in instances where a husband and wife living together filed a joint return, they are individually liable for the full amount of the tax shown to be due on such a return. (I.T. 1575, Cumulative Bulletin II-1, page 144.)

At least, ever since this decision, the Bureau proceeded on the assumption that a husband and wife living together making a joint return are jointly and severally liable for the full amount of the tax. This procedure seems to have been questioned in the decision of the Circuit Court of Appeals of the Ninth Circuit, in the case of Frida Hellman Cole v. Commissioner, which on December 20, 1935, held that in the case of a deficiency determined on a joint income tax return neither the husband nor the wife is liable for the full amount of the tax, but instead, that the liability for the tax on the joint return must be apportioned to the husband and wife in accordance with the ratio of their separate incomes to the aggregate income taxed.

If it becomes necessary to recognize the procedure suggested in this decision, the tax on joint returns will not be as collectible as under the Bureau's procedure which assumes joint and several liability and this for two reasons: (1) It would load upon the Commissioner the burden of separating the interests of the husband and wife making a joint return; and (2) It would dilute the resources attachable since, instead of the joint resources of the husband and wife, the Commissioner could attach only the resources of each to the extent of their separate liabilities established by prorating the tax over their separate incomes.

The purpose of the proposal is to negative the decision in the case of Cole v. Commissioner by amending Section 51(b)(2) in such manner as will definitely establish joint and several liability of the husband and wife making a joint return. The husband and wife choose the joint return as against separate returns presumably because they can reduce their tax liability by offsetting the losses of the one against income of the other, thereby lowering the separate income of the more fortunate spouse below the level where the high surtax rates grip. The income tax on the joint return is not the tax which would result from a computation based on the separate incomes of the spouses. It is a tax on the joint income rather than the aggregate of the taxes on the separate incomes. The proposal to enact legislation which will remove any doubt that the Cole v. Commissioner case might have cast at the propriety of the Bureau's procedure (which assumes joint and several liability of a husband and wife making a joint return) seems altogether reasonable so long as the law grants husbands and wives living together the option of having their income tax liability determined on the basis of either joint or separate returns; however, the proposal is reasonable only if it is assumed that this option must be continued.

II.

In practice, husbands and wives filed either joint or separate returns under the earlier revenue acts, but the option granted husbands and wives living together to file either joint or separate returns was not provided specifically in the law. Such a provision appears for the first time in Section 223 of the Revenue Act of 1918. The procedure under the earlier acts indicates that the returns of husbands and wives living together presented baffling problems regardless of the type of return that they chose to file. These problems centered on the question whether the returns of husbands and wives living together constituted a unit or whether they were returns of two incomes, taxable separately, even if reported on a single return. There was some confusion. At the very beginning, the procedure for determining tax liability in some respects leaned away from the recognition of separation of interests of husbands and wives living together and in other respects seemed to recognize such a separation of interests.

Thus, under the Revenue Act of 1917, the graduated normal income taxes were assessed against the aggregate amount reported by the husband and wife WHETHER JOINT OR SEPARATE RETURNS WERE MADE. A consistent procedure would have required that the graduated surtax under the Revenue Acts, 1913 to 1917, should have been assessed in a similar way, namely against the aggregate amount of income reported by the husband and wife living together, regardless of whether joint or separate returns were made, but the procedure was not consistent.

The surtax under the earlier note was assessed against the separate income of each except when joint returns were made by husbands and wives living together, in which case the surtax was usually assessed against the aggregate amount reported, but the assessment of the surtax on the aggregate income did not seem to derive from any clear conception that a joint return is a taxable unit; it seemed merely to be more convenient in some instances to assess it in this manner. In instances where the income and deduction items reported by the husband and wife were carefully segregated in the joint return, the surtax was assessed separately for each.

The procedure now followed seems to have been moulded during the period 1918-1920 under the Revenue Act of 1918. The practice of joining the returns of husbands and wives even though made separately for purposes of the graduated normal income tax was discontinued and the practice of computing the surtax on the separate incomes when separate returns were filed, but on the aggregate income when joint returns were filed, was definitely established during this period. The Bureau gave up the baffling problem of whether the incomes of husbands and wives living together should be viewed as a unit or as separate incomes regardless of whether they chose to make joint or separate returns. The practice was established that the tax should be computed on the separate incomes when separately reported and on the aggregate income when jointly reported.

III.

The practice is to recognize for purposes of the Federal income tax the basis for the separation of interests of husbands and wives which is prescribed by the State. This results in inequitable taxation. These inequities are accentuated by the option allowed husbands and wives living together to make either joint or separate returns. The inequities as between individuals residing in different States that inhere in this option and in the present recognition of a multiplicity of bases for separating the interests of husbands and wives in the different States have not been adequately appreciated.

The common law does not recognize any separation of interests between the spouses. The wife's property, at date of marriage, and all property and income that she might acquire after marriage, according to common law, belongs to the husband. In eight States, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington, the system of community property is, in effect, the combined property and income of the spouses (subject to certain limitations that vary among the States) becomes one-half that of the husband and one-half that of the wife. Several of the States have enacted statutes that separate the interests of the husband and the wife in other ways.

The Federal Government may recognize in one State the common law basis, in another State some variety of the community property basis, and in still another State some hybrid basis for the separation of the interests of the husband and wife. This procedure, which follows the prescription in the statutes of the different States, means that the husbands and wives as a group in one State, even if they have the same amount and distribution of income, pay substantially different amounts of Federal income tax, say in Michigan, where common law primarily governs the manner in which the interests of the husbands and wives are divided, than they do in the State of California where the community property division of interests between husbands and wives prevails. This would not be so if husbands and wives were denied the privilege of having their income taxes determined on the basis of separate returns. To make the joint return obligatory is tantamount to a refusal to recognize the separation of interests of husbands and wives as established by State statutes for the purpose of determining their total tax.

The Supreme Court held in Hoeper v. Tax Commission (Wisconsin), (284 U.S. 206) that it is unconstitutional to impose a tax on one person measured by the income of another. The decision in the case of Cole v. Commissioner suggests that this constitutional requirement would be met if the total tax were apportioned to the spouses in accordance with the formula prescribed therein. Instead of enacting legislation to negative the effects of this decision, from the economical viewpoint, it would be better to hitch to the decision and to enact legislation which will rid the Federal income tax of the inequities that flow from the option afforded husbands and wives living together to make either joint or separate returns, and from the present methods that allow a multiplicity of bases for the separation of the interests to affect the taxes on the incomes of husbands and wives. This is the substance of the counter-proposal. If this reform could be accomplished, it would be a greater achievement than the more safeguarding of the revenue from the joint returns that are filed by husbands and wives only in those instances where they find it to their advantage to do so.

IV.

Because the option to file either joint or separate returns and the Federal Government's present method of recognizing any and all of the many bases for the separation of interests of husbands and wives as prescribed in State statutes results in unequal taxation, it is recommended that joint returns should be made obligatory; that the joint income reported should be made the basis for determining their combined tax liability; and in addition, that separate informational returns should be required for the purpose of allocating the liability to each spouse on the basis of their separate interests as is suggested in Cole v. Commissioner.

Separate returns are advantageous to the family where the joint incomes of the spouses are large enough to be affected by the surtax rates. The Treasury suffers a loss in revenue from the option granted husbands and wives to file separate returns. The elimination of this privilege will, therefore, result not only in the elimination of inequities, but in an increase in revenue.

The employment of joint returns may result in a loss of revenue to the Treasury in instances where the spouses find it possible to offset income against loss to a greater extent than would be possible if separate returns were made. This consideration does not affect the position that the enactment of the counter-proposal would result in an increase in revenue from the Federal income tax because those individuals that find it profitable to file joint returns are under the present law already doing so. All the options exercised by husbands and wives under the present law operate to the disadvantage of the Treasury.

Families with identical aggregate incomes residing in different States that recognize different bases for the separation of the interests of husbands and wives will pay different amounts of Federal income tax under the present law and procedure. To illustrate this point, suppose three families, each with an aggregate income of $11,000. Family A resides in a common law State which does not recognize separate interests of the spouses. Family B resides in a State that does recognize the separate interests of the spouses according to their actual separate interests; the husband earns $6,000 and the wife, $5,000 net income. Family C, with the same actual division of interests as Family B resides in a community property State which recognizes a fifty-fifty division regardless of the actual division. The tax liability for these families becomes for A, $526, for B, $336, and for C, $316. In these computations it was assumed that all the income was earned and that each spouse was able to take the full minimum earned income credit.

If the joint return were made obligatory instead of optional, as it is now, it would probably be necessary to give effect to the States' statutory separation of the interests between husbands and wives along the lines of the Cole v. Commissioner decision instead of adhering to the Bureau's present procedure of holding the husband and wife jointly and severally liable for the total amount of the tax on the joint return. As suggested by the decision in Cole v. Commissioner, the total liability determined as the basis of the joint return could be apportioned to the husband and wife in accordance with the ratio of their separate incomes to their aggregate income taxed. These separate incomes entering into the aggregate income would, of course, be in line with the States' statutory requirements. There will still be a multiplicity of bases for separating the interests of the husbands and wives, but this would in no way affect the tax liability which would be uniformly determined for husbands and wives in different States with the same amounts of joint incomes. Only the sharing of the liability between the spouses would be affected, and this sharing would, of course, differ in accordance with the differences in the States' statutory requirements.

It should be remembered that the case of Cole v. Commissioner relates to an optional joint return, whereas the counter-proposal would make joint returns obligatory. The chief constitutional hurdles seem to be: (1) The proper recognition of the separation of interests of husbands and wives as stipulated in the several State statutes; and (2) that the liability of any individual income tax should not be determined by reference to the income of another. If the decision in Cole v. Commissioner meets those requirements, then it would seem best to enact the counter-proposal and to readjust the Bureau's procedure to conform to it despite any reservations one might be inclined to entertain as to whether or not, under a system of progressive rates, the formula prescribed in the decision really does align the tax liability in accordance with the separate interests.

The Federal Government is not primarily interested in the proper separation of interests between husband and wife. It is primarily interested in taxing the husbands and wives residing in the several States on an equal basis. If it could, it probably would take the common law viewpoint with reference to the separation of interests. Since it is doubtful whether the Federal Government could constitutionally disregard the State statutes in this matter, it would seem preferable to align the Federal Government's procedure with the decision in Cole v. Commissioner.

The following table indicates the extent that husbands and wives avail themselves of the option to file separate returns. From the data as made available in the Statistics of Income, it is not possible to determine the amount of the income reported by husbands filing separate returns, because these figures are included with the amount of income reported in joint returns. If the income reported in community property returns is added to the income reported by wives making separate returns, and allowance is made for what in all probability is a substantially larger amount of income which is reported by husbands making separate returns, it becomes clear that the problem under discussion is of substantial importance.

           Individual Returns for 19?? Net Income Classes,
              Showing Number of Returns and Net Income
                       by Family Relationship

              Joint returns of
              husbands and wives                            Wives
Net income    with or without      Community   filing    men and men
 classes      children, and the     property   separate     single
(thousands    returns of husbands   income     returns     women --
of dollars)   whose wives, though     /1/        from      heads of
               living with them,               husbands    families
             file separate returns
____________________________________________________________________

                          NUMBER OF RETURNS

Under 5
(Est.) /2/         1,310,512              -      25,695      405,519
Under 5              431,154              -      41,033       27,866
  5-6 /2/              5,239             86         378          846
  5-6                 80,220          5,753       3,058        5,190
  6-10               126,054          9,962       7,405       10,124
 10-25                65,638          6,290       6,986        5,978
 25-50                11,863          1,251       2,022        1,113
 50-100                3,288            376         655          326
100 and over             978             72         248           81

Total              2,034,946         23,790      87,471      455,403

                             NET INCOME

                        (Millions of dollars)
100 and over             978             72         248           81
Under 5
(Ist.) /2/             3,074              -          40          679
Under 5                1,588              -          96           98
  5-6 /2/                 28            /3/           2            5
  5-6                    438             31          17           28
  6-10                   944             76          57           76
 10-25                   956             93         107           88
 25-50                   401             42          69           38
 50-100                  219             24          44           22
100 and over             216             12          57           10

Total                  7,866            279         489        1,052

                             Single
                             men and
                             single          Grand
                             women --        total
                            not heads
                               of
                            families
_____________________________________________________

                          NUMBER OF RETURNS

Under 5
(Est.) /2/                   552,045        2,291,774
Under 5                      879,947        1,379,999
  5-6 /2/                        179            8,728
  5-6                         12,914          107,138
  6-10                        23,419          176,968
 10-25                        18,000          102,892
 25-50                         4,682           20,931
 50-100                        1,448            6,098
100 and over                     528            1,907

Total                      1,493,165        4,094,420

                             NET INCOME

                        (Millions of dollars)

Under 5
(Ist.) /2/                       624            4,417
Under 5                        1,597            3,379
  5-6 /2/                          1               37
  5-6                             71              685
  6-10                           178            1,331
 10-25                           270            1,514
 25-50                           159              709
 50-100                           97              406
100 and over                     115              419

Total                          3,112           12,797

 

FOOTNOTES TO TABLE

/1/ Excludes separate returns of community property income of husband and wife in which the net income is under $5,000 and joint returns of husband and wife which show net income under $10,000. In tabulating joint returns of community property, net income of $10,000 and over, the data are divided to represent the separate returns of husband and wife, the net income class for each of the separate returns being one-half of the combined net income of the joint return. Returns of community property income not included under this heading are classified either under joint returns of husbands and wives, etc., or wives filing separate returns from husbands.

/2/ Nontaxable returns. Specific exemptions from normal tax and surtax exceed net income.

/3/ Less than $500,000.

END OF FOOTNOTES