The IRS issued a ruling on community property laws in 1920, and then modified its stance several times throughout the 1920s.
The IRS originally said only spouses 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. (For more information, see this research paper by Professor Pat Cain.)
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, the husband should report – and pay tax on – all community income, even income earned by the wife.
The Robbins ruling caused the Treasury Department to revisit its stance on community property rules. Now they proposed that community property rules do not apply in any community property state and that husbands 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, which ultimately ended in new guidance being issued — culminating with another Supreme Court ruling.
More on that in Part 8.