Back in 2014 and into 2015, I posted a multi-part series of posts about the history of marriage in the tax code. In 2016 I was asked to condense that series into a CPE presentation. Here are excerpts from that presentation. This series of posts will cover a lot of the same ground as was covered three years ago, but hopefully with a little bit fresher perspective.
Now let’s look at what the IRS and the courts had to say about the issue of filing separate tax returns and community property law in the 1920s.
The IRS issued a ruling on community property issues in 1920, and then modified its stance several times throughout the 1920s. The IRS originally said only couples in Texas and Washington could apply community property laws, and then only on non-wage income (dividends, interest, etc.). The U.S. Attorney General then jumped in and concluded that community property laws applied to all income in every community property state – except California.
A couple from California named Robbins challenged the Attorney General’s ruling. The couple had, in 1918, filed separate returns using community property law, even though Mrs. Robbins had no income herself.
The couple was victorious in Federal District Court in 1925. But the government appealed to the U.S. Supreme Court, and the Supreme Court ruled against the couple and in favor of the government in 1926.
The Supreme Court ruling was based on an interpretation of California community property law as giving the husband complete control over all community income. Therefore, according to the Court, the husband should report – and pay tax on – ALL community income, even income earned by his wife.
The Robbins ruling caused the Treasury Department to revisit its stance on community property rules. Now they proposed that community property rules did NOT apply in ANY community property state and that husbands in community property states should be taxed 100% on all income, even if the wife had her own separate earnings. Taxpayers and elected officials in community property states protested. The Attorney General responded by holding public hearings.
After the hearings, the Attorney General issued another opinion, in 1927. In this latest opinion, the Attorney General said he was withdrawing his earlier opinion that said community property law applied in all community property states except California. Since each community property state has different laws, the AG instead said the issue would be decided in a series of test cases that would go before the U.S. Supreme Court.
Professor Pat Cain picks up the story from there:
In August of 1928, spouses from four community property states, Arizona, Louisiana, Texas, and Washington, filed test cases in federal district court. In every case, the spouses had reported community income by allocating half to the husband and half to the wife. In every case, the Internal Revenue Service refused the returns and instead assessed a tax against the husband, allocating 100% of the community income to him. The husbands in each case paid the tax and sued the local Collector of Internal Revenue in federal district court, claiming a refund in the amount of the additionally assessed tax. Ultimately these cases were consolidated and heard by the Supreme Court. In the lead case, taxpayer/husband Seaborn sued Burns Poe, the Collector of Internal Revenue for the District of Washington.
Poe v. Seaborn, which was decided in 1930, would become a landmark case in taxation of community property. Indeed it is still referenced today in issues relating to taxation in community property states – including a key IRS ruling in 2010 that affected same-sex married couples and registered domestic partners in community property states.
The Supreme Court sided with the taxpayers in Poe v. Seaborn, and also sided with taxpayers in the other companion cases, including California. The result was, income splitting between spouses in ALL community property states was allowed.
While there were protests from the government and from married couples in common-law states, the wheels of governmental change can move slowly. It would take another 18 years after Poe v. Seaborn before filing statuses were created and equality would be achieved between married couples in common law and community property states.
“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”