Commissioner of Internal Revenue v. Harmon/Opinion of the Court

by Owen J. Roberts

United States Supreme Court

323 U.S. 44

Commissioner of Internal Revenue  v.  Harmon

 Argued: Oct. 18, 19, 1944. --- Decided: Nov 20, 1944

The question posed by this case is whether, upon a state's adoption of an optional community property law, a husband and wife who elect to come under that law are entitled thereafter to divide the community income equally between them for purposes of federal income tax.

July 29, 1939, Oklahoma adopted a community property law, 32 O.S.1941 § 51 et seq., operative only if and when husband and wife elect to avail of its provisions. In conformity to the requirements of the statute, the respondent and his wife filed, October 26, 1939, a written election to have the law apply to them. From November 1 to December 31, 1939, they received income consisting of his salary, dividends from his stocks, dividends from her stocks, interest on obligations due him, distribution of profits of a partnership of which he was a member, and oil royalties due to each of them. The Act constitutes all of these receipts community income. The taxpayer and his wife filed separate income tax returns for 1939 in which each reported one half of the November and December income. The Commissioner determined a deficiency in the view that the respondent was taxable on all of the income derived from his earnings and from his separate property, but on none of that derived from his wife's separate property.

The Tax Court sustained the method adopted by the respondent and his wife. ^[1] The Circuit Court of Appeals, one judge dissenting, affirmed the decision. ^[2] Both courts relied on Poe v. Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239. They concluded that, after election to take the benefit of the law, the wife became vested with one half of all community income as therein defined. And, since this court held in Poe v. Seaborn that the community income there involved was, as to one half, the income 'of' the wife within the intent of what is now Sec. 11 of the Internal Revenue Code, ^[3] because she had an original and not a derivative vested property interest therein, it must follow that, under the Oklahoma law, one half of the income is the wife's for income tax purposes. They overruled the petitioner's contention that, as the statute permits voluntary action which effects a transfer of rights of the husband and wife, the case is governed by Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, and other decisions of like import. ^[4] We hold that the petitioner's view is the right one.

Under Lucas v. Earl an assignment of income to be earned or to accrue in the future, even though authorized by state law and irrevocable in character, is ineffective to render the income immune from taxation as that of the assignor. On the other hand, in those states which, by inheritance of Spanish law, have always had a legal community property system, which vests in each spouse one half of the community income as it accrues, each is entitled to return one half of the income as the basis of federal income tax. Communities are of two sorts,-consensual and legal. A consensual community arises out of contract. It does not significantly differ in origin or nature from such a status as was in question in Lucas v. Earl, where by contract future income of the spouses was to vest in them as joint tenants. In Poe v. Seaborn, supra, the court was not dealing with a consensual community but one made an incident of marriage by the inveterate policy of the State. In that case the court was faced with these facts: The legal community system of the States in question long antedated the Sixteenth Amendment and the first Revenue Act adopted thereunder. Under that system, as a result of State policy, and without any act on the part of either spouse, one half of the community income vested in each spouse as the income accrued and was, in law, to that extent, the income of the spouse. The Treasury had consistently ruled that the Revenue Act applied to the property systems of those States as it found them and consequently husband and wife were entitled each to return one half the community income. The Congress was fully conversant of these rulings and the practice thereunder, was asked to alter the provisions of later revenue acts to change the incidence of the tax, and refused to do so. In these circumstances, the court declined to apply the doctrine of Lucas v. Earl.

In Oklahoma, prior to the passage of the community property law, the rules of the common law, as modified by statute, represented the settled policy of the State concerning the relation of husband and wife. A husband's income from earnings was his own; that from his securities was his own. The same was true of the wife's income. Prior to 1939, Oklahoma had no policy with respect to the artificial being known as a community. Nor can we say that, since that year, the State has any new policy, for it has not adopted, as an incident of marriage, any legal community property system. The most that can be said is that the present policy of Oklahoma is to permit spouses, by contract, to alter the status which they would otherwise have under the prevailing property system in the State.

Such legislative permission cannot alter the true nature of what is done when husband and wife, after marriage, alter certain of the incidents of that relation by mutual contract. Married persons in many noncommunity states might, by agreement, make a similar alteration in their prospective rights to the fruits of each other's labors or investments, as was done in Lucas v. Earl. This would seem to be possible in every State where husband and wife are permitted freely to contract with each other respecting property thereafter acquired by either.

Much of counsel's argument is addressed to specific features of the Oklahoma community property law and comparison of those features with the laws of the traditional community property States. We lay this aside and assume that, once established, the community property status of Oklahoma spouses is at least equal to that of man and wife in any community property State with whose law we were concerned in Poe v. Seaborn. To cite examples: We think it immaterial, for present purposes, that the community status may or may not be altered by contract between the parties, may or may not be avoided by antenuptial agreements, or that certain assets of a spouse may or may not be classed as 'separate' property excluded from the community. The important fact is that the community system of Oklahoma is not a system, dictated by State policy, as an incident of matrimony.

Our decisions in United States v. Robbins, 269 U.S. 315, 46 S.Ct. 148, 70 L.Ed. 285, and in United States v. Malcolm, 282 U.S. 792, 51 S.Ct. 184, 75 L.Ed. 714, do not, as respondent argues, require an affirmance of the judgment. Those cases dealt with the community property law of California. The receipt of community property came to California from the Spanish law, as it did in other States whose territory had once been a part of the Spanish possessions on this continent. 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 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. Then came the Malcolm case in which the Circuit Court of Appeals for the Ninth Circuit certified to this court two questions: First, whether in view of the law of California the husband must return the entire income, and, second, whether the wife, under the Act of 1927, had such an interest in the community income that she should separately reprot and pay tax on one half thereof. In a per curiam opinion this court answered the first question 'No' and the second question 'Yes.' Two circumstances must be borne in mind in connection with that decision. The incidents of the system had been the subject of litigation for years. The final action of the legislature could well be taken as declaratory of what it involved and implied as respects the interests of husbands and wives. Thus the court was not required to meet any such question as is presented here by the permissive initiation of community property status. In addition, inspection of the briefs and of the report will show that the court's action was bottomed on a concession by the Government that 'with respect to the particular income here in question, the interests of the husband and wife were such as to bring the case within the rulings' in Poe v. Seaborn, and related cases 'because of amendments of the California statutes made since United States v. Robbins, 269 U.S. 315, 46 S.Ct. 148, 70 L.Ed. 285, was decided.' It is apparent, therefore, that our decisions dealing with California law do not answer the question presented in this case.

The judgment is reversed.

Reversed.

Mr. Justice DOUGLAS, with whom Mr. Justice BLACK concurs, dissenting.

Notes

1. T.C. 40.
2. 10 Cir., 139 F.2d 211.
3. 26 U.S.C. § 11, 26 U.S.C.A. Int.Rev. Code, § 11. The section provides that the tax shall be levied 'upon the net income of every individual.' The language has been the same in each of the Revenue Acts.
4. See also Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665; Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81.