UNITED STATES v. MITCHELL
Legal provision: Internal Revenue Code
Argument of William Terry Bray
Chief Justice Warren E. Burger: We’ll hear arguments next in Number 798, United States against Mitchell and others.
Mr. William Terry Bray: Mr. Chief Justice and may it please the Court.
These combined income taxes cases are here on certiorari to the Fifth Circuit.
They involved the Louisiana community property system.
In each case, a husband and wife living in Louisiana realized community income of which each own one-half under the Louisiana law.
No federal income tax returns were filed by either spouse, either separately or jointly.
The marriages were subsequently dissolved and the Government separately assessed each wife for the income taxes on her share of the realized but unreported community income.
The cases present a single question whether where no returns have been filed a Louisiana wife must report and pay the federal income taxes on the one-half share of community income which under the laws of that state she owns.
In each of these cases, the Fifth Circuit held that she need not do so where she neither expressly accepts liability for those taxes nor receives any benefits from the community property upon the dissolution of the community.
We believe that in doing so, that court failed to perceive an important distinction.
One which we feel underlies the decision in this case, that is the distinction between imposition of the tax on one hand and collection of the tax from the individual owing it on the other.
Justice William O. Douglas: Mr. Bray, could you tell me one detail, is the income of the community on which the deficiency was determined due to the wife’s earnings or income from her property at all?
Mr. William Terry Bray: In the Mitchell case, it was partially due to her earnings.
In the Angello case, the record indicates that all of the community income was due to the husband’s earnings.
In neither case, was any significant amount of income due to the wife’s individual separate efforts.
This however, we do not believe determines the case since regardless of who generates the income, under the Louisiana law, each spouse owns an undivided one-half interest of it from the very moment it comes into being.
Justice William O. Douglas: This has to be your position necessarily.
It’s rather reminiscent to the old embezzlement cases, isn’t it?
Mr. William Terry Bray: Yes, sir and even before that, the split income cases in the 1930 term of this Court.
To that, we think those cases decide this case and compel the result for which we here content.
Our position is that this case involves only the imposition of the tax and that because the wife owns her share of community income, she is tax on it.
While we recognize that our position may result in hardships in certain instances to why as residing in community property states.
Yet, we think the law is clear and compels the position that we take.
At least as the statutory law presently exist.
In some, we argue that it is now and for many years prior to this well established that the federal statutes imposed the tax against the owner of the income.
That under Louisiana law, the wife owns outright her one-half interest in community income as of the very moment that it comes into existence.
And that it follows that she must report and pay taxes on her half.
On the other hand, as regards to the collection of these taxes, we think there is no real dispute on our position here.
The state laws exempting the Louisiana wife from community obligations and we would here acknowledge that taxes -- federal income taxes, all community income are indeed a community obligation.
But these state laws exonerating the wife from the community obligation simply are ineffective as against the United States in its efforts to collect the tax from the individual owing it.
The dispute here really is whether the wife’s ownership of her community income -- her share of community income is sufficient under the federal statutes for that statute to impose the tax against her and compel her to return it and pay tax on it.
Justice William O. Douglas: Mr. Bray, is that renunciation Louisiana provision common to all community properties?
Mr. William Terry Bray: It is not, it was common in the Spanish law.
It arose under the Spanish law, but as far as we can tell, Louisiana is the only state which has carried this over from the Spanish law.
I might point out in that regard that even under the Spanish law, it was very clear that during the existence of the marriage the wife owned that right her half of community income.
The renunciation provision was merely one designed to protect her from community creditors.
Again, community creditor or rather a creditor right type of proposition which gave her the right upon determination of the marriage to forego her otherwise vested interest in the community income and for that matter, all community property, and similarly to be relieve of any obligations all community debts.
Justice William O. Douglas: By termination of the marriage, this would include death of the spouse?
Mr. William Terry Bray: That’s correct, in fact in these cases, one dissolution occurred because of death.
Justice William O. Douglas: Does it apply in the reverse?
Does a husband have the same right?
Mr. William Terry Bray: No, the husband does not and this is because again originating from the Spanish law.
The husband has the management generally speaking of the community property.
It was therefore thought that because he manages the property, he ought to be responsible for the community debts regardless.
And indeed, historically, not only was he responsible in the sense that the community property was responsible for the debts, but he personally was responsible for those community debts.
In other words, if the community was not sufficient to take care of the community debts, he had to come out of his own separate property to pay those debts.
Justice Thurgood Marshall: It is also for that same theory that there’s no way the rank could compel the “master” to pay?
Mr. William Terry Bray: Well, --
Justice Thurgood Marshall: Isn’t that a part of a theory?
Mr. William Terry Bray: Yes, that is part of a theory, but I would point out that there are protections for the wife while she can’t perhaps compel the husband to pay the taxes as such.
Yet, she does have protections under state law which are very clearly spelled out not only in the state law cases, but for that manner in the two cases in which this Court has dealt with Louisiana community property.
Bender versus Pfaff, the split income case and Fernandez versus Wiener, the state -- I beg your pardon, the federal state tax case and in both instances it was noted that while the husband had management rights over her half of community property nevertheless, that she had some rather special provisions of state law which protected her interest in that property, including the right to separate her property from her husband’s without terminating the marriage and from that point forward to have complete control over her property.
Justice Byron R. White: Now, as a practical matter, how can she possibly file a return?
Mr. William Terry Bray: As a practical matter, if indeed the husband is unavailable, she --
Justice Byron R. White: And that he is pretty available, he just tells us “it’s none her business.”
You do contend that she is obligated to file the return for both of them, don’t you?
Mr. William Terry Bray: No, not for both of them, just for her.
Justice Byron R. White: Well, in just for her, how much?
Mr. William Terry Bray: She might report --
Justice Byron R. White: On her own income or her share of the community income?
Mr. William Terry Bray: She must report her share of the community income.
Justice Byron R. White: Now, where does she know?
How could she possibly find that out?
Mr. William Terry Bray: This is of course the practical difficulty with which we’re faced in this Court.
Justice Byron R. White: Well, but you’re not faced with any practical difficulties, she is.
Mr. William Terry Bray: I beg your pardon, the practical difficulty of the wife which we must answer in this Court --
Justice Byron R. White: Well, how can she?
Where did she get the information to file a return?
Mr. William Terry Bray: Under a state law, there is the possibility that she could compel her husband to give her this information.
Frankly, I know of no case under Louisiana law for that matter under any other community property state law which would give her this right.
But on the other hand, --
Justice Byron R. White: But how could she ever protect herself from penalty, she can file a return and say, “I don’t -- my husband refuses to tell me what the community income is, but I have income on my own.
I can tell what my contribution is.
Other than this, I’m awfully sorry.”
Would that be a compliant?
Mr. William Terry Bray: No, it would not be a complete compliance.
Now, with regards to your specific question, certainly, she could I think protect herself from penalties in that situation.
By filing a separate return and reporting all that she knew about, she would not be subject to any penalties.
On the other hand, I think it follows from the existing state of a law that she would still be liable for the tax in statutory interest on the --
Justice Potter Stewart: Even though it was practically impossible for her to comply?
Mr. William Terry Bray: Even though it was practically impossible, yes sir.
Now, again, this special situation if indeed it is a problem and we would recognize that it is can be handled in one of two fashions.
One would be amending the present Internal Revenue Code.
This of course has been done quite recently in a situation whereas joint returns have been found.
In that situation, the recent amendments that came into being in January of this year lets the wife or relieves the wife of liability if she in fact is completely innocent and has done everything she can to comply with the requirements of law.
Justice Potter Stewart: But fraud liability relieves her from.
Mr. William Terry Bray: Well, not only fraud but also from the tax liability.
Justice Potter Stewart: Does it?
Mr. William Terry Bray: Yes, sir it does.
But, let me emphasize this, that statute presently applies only where a joint return has been found and thus both spouses are jointly and severally liable for the entire tax.
Now, this highlights the problem we’re faced with here under existing law as we interpreted, the husband is not liable for the taxes on the wife’s share of community income.
Thus, only the wife, thus we may presently only go after the wife.
If indeed, similar legislation is presented to relieve an innocent spouse in a community property state from liability on his or her one-half share of community income of which he or she knows nothing, then we would hope that Congress would impose liability on the guilty spouse with respect to those taxes.
Otherwise, half the income will escape taxation under the present state of the law.
Justice Potter Stewart: Mr. Bray, isn’t the --
Mr. William Terry Bray: Yes, sir.
Justice Potter Stewart: I’m going back to Justice White’s question.
Isn’t the same kind of dilemma presented to the -- to a member of a husband-wife team in a non- community property state if there’s an advantage in filing a joint return and she can’t find out what income he has?
Mr. William Terry Bray: Absolutely, --
Justice Potter Stewart: Of course, it isn’t the same because she could file a separate return and avoid penalties directly?
Mr. William Terry Bray: That’s right and let me say that in that regard, while the present legislation has relieved the wife of liability in certain very limited circumstances, there are two important features of that.
First of all, the legislation we feel was absolutely necessary notwithstanding some cases to the contrary to bring about the change in the law, that is relieving the wife of liability.
Secondly, I would point out that again historically under Spanish law, the wife has not been deemed the one-half owner of fraudulently obtained funds.
So that the situation against or to which the amending statute is specifically directed.
That is where the husband has fraudulently obtained funds and the wife knows nothing about this would not under the historical approach of the community property law be a problem in community property states because the wife doesn’t own any part of that fraudulently obtained income.
But to answer your question as directly as I can, yes the situation would be identical in the common law states.
Justice Potter Stewart: In a common law state where a joint return is made and let’s say there’s an understatement of the income that’s negligent, non-fraudulent, non-criminal so that the -- there’s more taxes owing and that’s discovered.
Now, does each spouse -- can each spouse be held liable for the entire common state?
Mr. William Terry Bray: No, in the community property state?
Justice Potter Stewart: No, no, in the common state.
Mr. William Terry Bray: If a joint return has been filed in some, yes.
Justice Potter Stewart: Yes.
Mr. William Terry Bray: Until the amendments of the statute in January of this year.
Justice Potter Stewart: Each spouse can be held liable for the tax.
Mr. William Terry Bray: That’s right.
They were jointly and severally liable for all taxes both those reported and those found to be due upon subsequent audit.
Justice Potter Stewart: And unlike, as I understand it, you told us that in a community property state, the spouse is only liable for half the taxes?
Mr. William Terry Bray: Absolutely.
Now, I think again, this serves to highlight the problem here.
The problem is not one of our making but rather one of the community property laws.
Historically, the community property laws have provided community property husbands and wives with some rather significant advantages.
Before of the day of the joint return and I might add that the joint return came into being essentially because of these advantages.
Before the day of the joint return, the spouses could split their income, report it separately and thus avoid or at least lessen the impact of the graduating income tax.
When this Court held in the 1930 term upheld the right of the spouses to do this in the series of cases are found in Poe versus Seaborn, the advantages were very clear cut and the Court established at that time that taxation follows ownership in so far as the individual taxpayers concern.
We think that that compels the position which we take here that the wife owns her share and she must pay taxes on it.
And I might add that since 1930, that has been a whole basis of the taxation of individuals in the Federal Income Tax Code.
That is its tax the income to its individuals and this has been repeatedly recognized and the Congress has acted on this understanding of the law.
Indeed, the recent amendments serve to emphasize this once more, in those amendments or rather in the legislative history of it.
The congressional reports indicate that except for the amendment, Congress recognized that in the community property state, the wife would be deemed the owner of one-half of all community income and would have to report and pay tax on it.
And because of that, the Congress inserted in this amendment amending statute a provision relieving the wife of liability in the joint return situation or where she otherwise would have that liability not just because she signed the joint return but because she own the income.
Justice Byron R. White: Mr. Bray.
Mr. William Terry Bray: Yes, sir.
Justice Byron R. White: Judge Ainsworth was a member of the panel in the Fifth Circuit, was he not?
Mr. William Terry Bray: Yes sir, he was and he dissented from the decision in both of these cases.
Justice Byron R. White: Did he?
Mr. William Terry Bray: Well, I’m sorry, I think (Voice Overlap).
Justice Byron R. White: I think Judge Ainsworth dissented.
Mr. William Terry Bray: Judge Ainsworth.
Justice Byron R. White: This is what bothers me, Judge Ainsworth is a Louisiana and --
Mr. William Terry Bray: Yes, you’re correct.
I am sorry.
Justice Byron R. White: -- made the majority.
I wondered if you had any comment on it.
Mr. William Terry Bray: No.
No, specific comment on it other than the fact that we view the decision as wrongly grounded and one which is in complete conflict with this Court’s decisions.
Justice Byron R. White: The other two are Floridians and they split.
Mr. William Terry Bray: That’s correct and it continued to do so, I might add.
Justice Thurgood Marshall: Still I have great difficulty Mr. Bray with the “master” not telling to wife anything in doling out a weekly allowance to him and you charged him with possessing something.
Mr. William Terry Bray: Mr. Justice Marshall, if I can say that we don’t charge her with possessing something.
The state law says that she owns that income regardless under our view, the federal law is quite clear it taxes income to its owner.
We don’t have any control over who is the owner that is a matter determined under state law.
Justice Thurgood Marshall: But how is she the owner?
Mr. William Terry Bray: She is the owner --
Justice Thurgood Marshall: Ownership has the right to dispose.
Mr. William Terry Bray: Well that -- this Court again in Poe versus Seaborn distinguished between management on the one hand which we acknowledged that the husband have.
Justice Thurgood Marshall: Bear ownership on them?
Mr. William Terry Bray: And bear ownership on the other and I might add that in a subsequent dissent, Mr. Justice Douglas pointed out that this was the technical distinction made and that now, ownership determines who is liable for the taxes.
As I’ve indicated both state and federal law is important for the question before this Court.
The state law creates the legal interest involved while the federal statute taxes those interests.
In our view, it is clear that the federal statute taxes income to the individual who owns it.
This was decided in the 1930 series of cases and has been bedrock with respect to subsequent revenue legislation.
We don’t see anyway around this at this point in time.
Now, with respect with to the state law, we think it’s equally clear that the wife owns her undivided one-half share of the community income and we don’t think there’s any real dispute either with respect to the respondents or for that matter with respect to the Fifth Circuit on this particular topic.
Indeed, the Fifth Circuit said in its opinion that under the Louisiana law, the wife has a present vested ownership interest in one-half for the community property including its income.
The Court could only say this following not only the decisions -- the many decisions of the Louisiana Supreme Court so stating but also the decisions of this Court in Bender versus Pfaff and in Fernandez versus Weiner so holding.
But the Court went on to say, it rejected what we say must follow that is that the wife must report and pay taxes on her half by saying that under Louisiana law, the wife’s interest in the community is of such a character that she is not personally liable out of her separate property for the tax of her share.
We think in this regard, the Court confused collection of the tax which state law does provide protections that would ordinarily protect the wife from community creditors.
And imposition of the tax, which we think is truly the issue here involved.
The Fifth Circuit rested its decision -- its decision that the wife’s ownership interest was qualified sufficiently that she could not be held responsible for the taxes on her share essentially on two grounds.
First, on the ground that the husband had very broad management rights over the wife’s community property not only over his but also over the wife’s.
And secondly, that the wife’s property was -- I beg your pardon, that the wife’s separate property was generally protected from community creditors.
However, under the state law, again as that law has been recognized in this Court.
These two features of state law simply are ineffective in so far as protecting the wife from the taxation that is listed upon her because she owns the income.
They do not -- these features do not owe to the fact that she owned that right her share of the income.
And we think that she must report and pay her share -- I beg your pardon, the tax on her share of the income based on this Court’s decisions in the 1930 split income tax cases.
Admittedly, these cases did not bring before the Court the question of whether the wife is required to report it, but rather only whether she was entitled to do so.
But we think a case decided along with these cases in that same session of the court made clear that not only may she do so but she must to do so where the spouses have not otherwise reported their income on a joint return.
This is the decision in United States versus Malcolm.
Malcolm was decided some five years after an earlier Supreme Court decision in United State versus Robbins.
In Robbins, this Court had decided that in California at any rate, the husband must report and pay taxes on all of the community income.
In Robbins, the court based its decision on two grounds.
Primarily, on the holdings of the Supreme Court of California that the wife’s interest in community property during the existence of the community was merely an expectancy, she had no present vested interest in the community income.
Alternatively, the Court bounded its decision on the fact that the husband had such broad management powers that this would entitle Congress to tax all of the income to him.
In recognition of this decision, California subsequently amended its laws and stated unequivocally that the wife’s interest in the community during the existence of the community was a present existing interest equal to that of the husband.
Following this amendment and the statutes were not amended significantly with respect to the husband’s management powers, he still manage his wife’s share of the community.
But following the amendment with respect to the vested interest versus expectancy interest, Malcolm versus United States came before this Court and in a per curiam opinion based upon the Court’s split income decisions in Poe versus Seaborn and the other cases.
The Court held that under the federal statutes, the husband need no longer, the California husband need no longer report and pay taxes on all of the community income in California.
They further held that the wife’s interest under state law were such but she should and I use the word “should” because that was the question posed to the Court that she should report and pay the taxes on her share.
We think that this makes clear the position that we’re here taking and indeed every court up until the Fifth Circuit’s decision is here who has considered this question has so held.
Now, in doing so, we would suggest the court abandoned the management ground on which Robbins had alternatively based the decision to tax the husband on all of the community income.
The court instead opted in favor of ownership -- bear legal ownership and made clear that management is not the touchstone under the Code rather ownership is the key and whoever is the owner must pay the taxes.
I might point out that this is not unlike the situation in several other areas of the tax law.
Specifically, the partnership area, the wife’s interest has been compared by the Louisiana Courts to that of a limited partner and a limited partnership just as unlimited partner must pay taxes on his share of partnership income so the wife must.
And this, mind you whether or not the partner is around at the time the partnership returned and the individual returns should be filed and whether or not the partner has ever made distributions of the partnership income.
Thus, if the partner absconds with all of the partnership funds this does not relieve the limited partner in any respect from his obligation to pay federal income taxes on his share of the partnership income.
Similarly, in the situation where a grantor creates a trust and because he is also the beneficiary of the trust, he is taxed on its income.
If the trustee absconds with all of the trusts income, the grantor beneficiary would not be relieved of his obligation to pay taxes on the trust income.
Thus, we can see no reason to suggest that taxing the wife on the share of her income is unconstitutional as a violation of the Fifth or Fourteenth Amendments.
There is just no basis for this as far as we can tell.
We have been able to find no cases suggesting that this would be such an unfair and invidious tax system of taxation as to render it unconstitutional and we note that while our opponents suggested that it would be unconstitutional.
They do not either cite any authority for this proposition.
Justice Byron R. White: Mr. Bray, does Texas have community property?
Mr. William Terry Bray: Yes sir, it does.
Justice Byron R. White: You are a Texan.
Mr. William Terry Bray: Yes sir, I am.
Justice Byron R. White: I’m still bothered by this renunciation provision.
I think, it’s 2410 under the Louisiana statutes.
Mr. William Terry Bray: Yes sir, that’s correct.
Justice Byron R. White: Is this one that can be exercise only after the community is dissolved, could it be exercised prenuptially for example?
Mr. William Terry Bray: Alright, not under that provision but prenuptially the parties may determine not to be bound by the community property laws under Article 2399, which provides that absent on agreement, the marriage super induces a partnership of right between the spouses “unless, they otherwise agree.”
And it’s clear I think under Louisiana law that they can otherwise agree, but to enunciate the Article 2410, if I’m not mistaken does not go specifically to prenuptial arrangements rather only to dissolution.
Justice Byron R. White: You do not have it in Texas?
Mr. William Terry Bray: No, we don’t but I might add that the Fifth Circuit didn’t base its decision on renunciation per se.
The Angello case makes this quite clear as thus the subsequent Ramos case, which comes out of Texas.
In Angello, there was no form of renunciation.
There, the husband died and the wife merely -- there’s no evidence that she got anything from the community that previously existed between the spouses.
She did not formally renounce her interest in the community under Article 2410.
Ramos as I say, comes out of Texas and there, there is no renunciation.
However, in both Angello and Ramos, the Fifth Circuit based on its Mitchell holding found that because the spouse -- the wife had not received any benefits from the community and had not expressly agreed to be bound by her share, on her share of the taxes.
She could not be made the pay that share of the taxes.
If the Court accepts what we think is the clear law, one that the wife is the owner of the tax and two, that as the owner, she must report and pay the taxes on it.
I beg your pardon, one, that the wife is the owner of her share of the income and two, as the owner, she must report and pay the taxes on it.
Then, we think it follows that the Government is entitled to collect those taxes from any property she has.
Including after acquired separate property such as, is in involved in these cases.
I don’t understand the respondents to seriously object to our propositions in this regard which we have set out fully in our brief.
Rather, their objection just as the Fifth Circuit’s opinion is to whether or not the wife’s ownership is sufficient to impose the tax against her in the first instance.
If indeed, she -- the tax is imposed against her and she owns it then it’s clear that the federal collection statutes prevail over state exemption laws and entitle us to collect the tax for many property that she owns except there’s --
Justice Harry A. Blackmun: You’re struggling on hard cases factually, aren’t you?
One is an insurance proceeds the case, the other one is the husband apparently who isn’t around anymore.
Mr. William Terry Bray: Unfortunately, Mr. Justice Blackmun, we can’t claim the equities in this case and we recognize that only too well, but we come here because we think the law is clear and has been for some 40 years now.
Ever since, the split income cases and that law is that in the individual tax herein -- the individual who owns the income must report and pay the taxes on it.
Further, if we have a means of going at to the husband, this might not be quite so much of concern to us, but under the existing state of the law, as I’ve explained, we can’t go after the husband.
Again, we think the Malcolm case and the cases that have come along since it make that very clear.
Chief Justice Warren E. Burger: Is it very like you that you never get a case in this area that was not a hardship case?
Mr. William Terry Bray: Not on this subject, I don’t believe we would, but I might point out that of course the wife as I mentioned earlier realizes some rather significant benefits under the community property laws which she doesn’t have in the common law states.
Those benefits were before the Court in the split income cases and this is merely the other side of the coin from state law.
Now, of course the state can change its law just as Congress could amend the revenue statutes with respect to these specific hardship areas.
Indeed, my understanding of California law is that there, if the husband abandons the wife, the income which she subsequently owns which is the Ramos case is his separate income and the wife has no interest -- no ownership interest in that.
And thus, would not be obligated to report and pay taxes on it.
There’s nothing to preclude, I presume Louisiana from doing the same where that the -- and that’s truly the hardship case more so and I think than Arms where the wife was residing with the husband and indeed in all probability shared with him whatever earnings he had.
And today is where all, the wife does indeed spend quite a bit of the income which even her husband makes and I think it’s only realistic to recognize that.
But in the area where that Mr. Justice White deposited where she has no knowledge of what’s going and can’t because her husband has abandoned her for instance.
Then there’s nothing to suggest that Louisiana couldn’t modify its laws to say in that circumstance the husband owns that right, his income and the wife has no interest in it.
Justice Potter Stewart: You read the hypothetical case on page 11 of the Angello brief?
Mr. William Terry Bray: Yes sir, I did.
Justice Potter Stewart: Which is true hardship case?
Mr. William Terry Bray: Yes sir, it is.
Justice Potter Stewart: And you agree that that would be the result in the hypothetical case if your argument is accepted do you?
Mr. William Terry Bray: Presuming that the funds there were legally obtained and I presume that they were.
Justice Potter Stewart: However obtained by hypothesis of the gambling tables in Las Vegas?
Mr. William Terry Bray: And I understand that to be legal.
Justice Potter Stewart: $100,000.00
Mr. William Terry Bray: Then indeed, it would follow under -- what we consider to be the established law that she must report and pay the taxes on her one-half share of that $100,000.00 if a joint return or her husband’s separate return has not included that income earning.
Justice Potter Stewart: Well, by hypothesis, he went to Mexico with the paramour and then died soon thereafter and that she was left peni -- and squandered all the money and she was left penniless and then later inherited a little money from her father which she was using to support her children and under your argument the Government gets all that?
Justice Byron R. White: It was cut the same thing --
Mr. William Terry Bray: There’s no way I can get around that, yes.
Justice Byron R. White: Can’t the same thing be said of the embezzlement cases, and I think Jones, the holding of this Court?
Mr. William Terry Bray: Except as I try to say in the embezzlement area, historically at any right to community property law has not recognized the wife as the one-half owner of moneys illegally obtained by her husband.
Thus, we would not be faced, I don’t think in the community property state with quite the same problem in the embezzlement area.
Now, I might add that it’s for this very reason that Congress so fit to amend the provisions of the Internal Revenue Code this January to relieve the wife of liability in this hardship case.
Justice Byron R. White: But not in this one?
Mr. William Terry Bray: Not in this one, I’m sorry.
In the hardship case where the husband has illegally obtained money or otherwise fraudulently misled the wife into accepting joint in several liability on a joint return.
And the Court -- I beg your pardon.
And the Congress there again confirm its understanding that income is taxed to its owner and that in the community property states, the wife is the owner and thus is the tax payer of her share.
And we of course would have no objection whatsoever to the Congress doing the same for hardship cases in community property states where no return is filed if they can also devise if Congress can also devise a means for imposing liability against the husband in that circumstance.
I would like if I may --
Justice Thurgood Marshall: Will you give me a hypothetical thing, is there any instance you know in the tax law where somebody’s tax or some of the -- he never knew he had?
Mr. William Terry Bray: He never knew he had?
Justice Thurgood Marshall: Yes.
Mr. William Terry Bray: Well, again I would presume --
Justice Thurgood Marshall: They are so.
Mr. William Terry Bray: I would presume that a limited partner might not know what he had.
Justice Thurgood Marshall: That’s what I thought.
Mr. William Terry Bray: I would also presume that a beneficiary of a trust might not know what the trustee is doing.
Again, in the second instance presuming a rather significant appreciation, there’s no reason why the trustee couldn’t sell the property and leave with the appreciation then being recognized but the tax is not under the partner.
Justice Thurgood Marshall: That’s right and the partner who made the picks up a little money long since that what he’s going to pay.
Mr. William Terry Bray: Exactly.
And that is the whole basis of the individual taxation portions of the Code.
Justice Byron R. White: Yes, but the limited partner has remedies under local law.
Mr. William Terry Bray: Well, certainly --
Justice Byron R. White: When you find out it impairs the partnership.
Mr. William Terry Bray: But Mr. Justice White, I might add that this would of course be after the fact just like it is in our case or in the hypothetically any rate would be.
The wife in our case has after the fact remedies --
Justice Byron R. White: In case, she never finds out.
Mr. William Terry Bray: But she has after the fact remedies and she would certainly find out at the time the Government find out and made an assessment against her just as the wife here did.
Justice Byron R. White: And what did she do?
Mr. William Terry Bray: She can sue the husband for -- now, I’m not as clear on Louisiana law on this as I am on California law because of the recent case.
Justice Byron R. White: No, we’re talking about Louisiana.
Mr. William Terry Bray: Okay, it would be my understanding that Louisiana law is identical to California law on this subject and that is that the wife has a right over against her husband for his failure to pay community debts when he should have.
That is exactly what comes says and that is what I believe the Messersmith Louisiana Supreme Court decision suggests that the husband is primarily liable on community obligations if he does not pay those obligations, the wife would have a claim over against him.
Justice Byron R. White: So, she is -- this woman now has an obligation as her husband?
Mr. William Terry Bray: Yes.
That would be my understanding --
Justice Byron R. White: Under Louisiana law?
Mr. William Terry Bray: Under Louisiana law now again presuming limitations or something else doesn’t bar him from going after. Of course in Angello the husband is dead and the record would indicate that the estate is himself.
But under state law she does have a remedy against her husband if he fails to pay the community obligation that is the tax is on the community income.
But, let me emphasize that unlike the suggestion in the Fifth Circuit below, the community simply is not a tax paying entity just as the partnership and the trustee is not rather it’s merely a flow-through device.
The individual spouse is under local law.
It’s very clear own individually their interest in the community property and its income and thus are required to report and pay the taxes on it.
If I may, I would like to reserve whatever time I have left rebuttal.
Chief Justice Warren E. Burger: Very well, Mr. Bray.
Argument of Paul K. Kirkpatrick, Jr.
Mr. Paul K. Kirkpatrick, Jr.: Mr. Chief Justice and may it please the Court.
This Court has said that individuals who have command over income may be taxed on that income even though they do not have title to it.
We ask this Court to hold that the respondent Mrs. Anne Goyne Mitchell that it cannot be taxed on income -- community income which she just said she owns but over which she has no command.
We ask this because to interpret Section 1 of the Code which taxes income of individuals.
As imposing a tax on her would make it unconstitutional as applied to her and secondly, irrespective the constitutional argument.
And the issue in Section 1, Section 1 should not be interpreted as imposing a tax on her because her vested interest in the community is insufficient to cause her to be required and the treat that the income of that community as her own income.
Under Louisiana --
Justice Potter Stewart: Does Louisiana have an income tax?
Mr. Paul K. Kirkpatrick, Jr.: It does Your Honor.
Justice Potter Stewart: The problems are akin to this or they are just precise problem that ever arise in a state law -- state income tax?
Mr. Paul K. Kirkpatrick, Jr.: I have never been able to find any record of it having occurred, made it inquires with the state revenue people.
I find to more instance.
It does not mean they aren’t or not.
Under the community proper regime of Louisiana, the wife has no present rights to deal with the community.
During the existence of the community she cannot sell the property.
She cannot more of its property.
She cannot obligate the community in her own right.
She cannot compel an accounting from her husband or she cannot require him to furnish any information to her.
He has complete control of the property.
Justice Hugo L. Black: How long has that been the law of Louisiana?
Mr. Paul K. Kirkpatrick, Jr.: It has been a law of Louisiana, Your Honor, at least since it became a state and prior thereto under the Spanish and French.
Justice Byron R. White: Then I take it you disagree with Mr. Bray’s inference to the contrary that she could compel him to disgorge her share of the income?
Mr. Paul K. Kirkpatrick, Jr.: I do disagree.
There is one instance at which she can’t ask for a separation of property.
The only time during the existence of community -- the community can terminate at death or divorce or separation or if at one point she may ask for a termination of the community.
That is when his mismanagement of the community is endangering her separate property.
Justice Byron R. White: Well, that’s this situation, isn’t it?
Mr. Paul K. Kirkpatrick, Jr.: In this particular situation, Your Honor she had no separate property at the point that, which she might have ask for termination of the community.
Justice Byron R. White: Do you mean, he can’t terminate that even she can show that he is squandering her contribution in the community?
Mr. Paul K. Kirkpatrick, Jr.: Our courts have held that if the result of his squandering the community funds, is to make her support put in jeopardy and that she is working she might get a termination of the community so that her future earnings would be her separate property.
That is not the situation Your Honor.
She could not show that she was not being supported during the continuation of this community.
It was after this community --
Justice Byron R. White: (Voice overlap) both parties supported obligations to pay the tax.
Mr. Paul K. Kirkpatrick, Jr.: Our courts have not at this point interpreted support that broadly.
I can’t say what they would interpret us for, but it intends to be what it takes to subsist food, clothing, shelter, etcetera.
The wife herself -- our courts would treat the wife as agent of the husband if she would go buy food, but when you get much pass that, you get into the great controversy as to whether that is supported or not in our state.
The wife -- the husband has complete control of community.
He may sell the property, he may spend the money virtually as he pleases but he may spend the money as he pleases.
He -- subject to certain restrictions, he can make gifts of the community property to others.
He is not a fiduciary and he is not required to account his wife during the course of the community or thereafter for his administration.
The restrictions upon him are that he can not donate the immovables or a quota such as one-fourth, one-half of the movables to anyone other than the children of the marriage.
If he may give a sum of money which is not -- it’s not described as one-fourth of all our personal property to anyone he chooses.
He may not sell property which has been designated as the family homestead without the wife joining in the deed.
He cannot take the community property and steal it so to speak and make it his separate property and --
Unknown Speaker: What about other real estate that it is not a homestead, can that be?
Mr. Paul K. Kirkpatrick, Jr.: He can sell it as he chooses, he can sell it --
Unknown Speaker: Without the wife’s signature?
Mr. Paul K. Kirkpatrick, Jr.: He does not need her signature at all.
He may --
Justice Thurgood Marshall: Presume that the communities in existence don’t have any personal property of his own?
Mr. Paul K. Kirkpatrick, Jr.: He would have -- he could have property which he owned before marriage, he could have property which was the result having sold that property and reinvested it gives an inheritance.
Justice Thurgood Marshall: Are you attacking the constitutionality of the entire system?
Mr. Paul K. Kirkpatrick, Jr.: No, Your Honor, I’m attacking by an interpretation of Section 1 of the Code as imposing a tax on the wife in community, when she has not assume that liability by filing return or accepting the community.
The husband may not fraudulently dispose of the community with the intent to the prior the wife albeit.
We contend Your --
Justice Byron R. White: On the other hand, he can squander it, can’t he?
Mr. Paul K. Kirkpatrick, Jr.: Without any control whatsoever.
Justice Byron R. White: This is the content of your hypothetical?
Mr. Paul K. Kirkpatrick, Jr.: That is correct.
We contend that in term Section 1 of Code as imposing a tax on the wife violates the Dues Process Clause of the Fifth Amendment because it is arbitrary and unreasonable and that she has no control and it has no -- and the husband at the same time has power to deny her the property.
If she is required to report, it is legally impossible for her to do so unless her husband -- she can only do so unless her husband gives her the information.
If she does not have separate property and he will not advance the funds, it is impossible for her to pay.
Whether or not she pays are of course depends upon his whim and we contend that to pay to require her to pay community taxes with her separate funds is to confiscate her separate property.
But Section 1 does not require.
Justice Byron R. White: Let me interrupt you, wouldn’t that seem comment however apply to the fraudulent income and embezzlement cases that went the other way?
Mr. Paul K. Kirkpatrick, Jr.: Your Honor, when you’re comparing a wife in a separate property state who have signed a joint return and made herself liable by signing the joint return she made it possible for the family to split the income, that the Congress makes her liable, makes her agreed to be liable for all the taxes by virtue of signing the return.
Now, the question whether fraudulently income -- money is income or not and this Court has decided twice and at this moment it is income.
I doubt seriously that we can avoid taxation to the wife in Louisiana because our state law said, that embezzle money was not the property of the community.
Justice Byron R. White: Well, you’re distinguishing those cases I take it on some kind of theory or waiver certainly in the criminal field we’d looked pretty sharp any such of waiver these days and I think your precedent against you is all and --
Mr. Paul K. Kirkpatrick, Jr.: I don’t understand, Your Honor.
Justice Byron R. White: Well, I think the case is that you just attempted to distinguish by saying that a wife when she signs a joint return in effect consents to be liable for income of which she has no knowledge, embezzled income of her husband.
That’s the way you distinguish that case (Voice Overlap).
Mr. Paul K. Kirkpatrick, Jr.: She would not be liable at all if she had not filed a return.
She was not required to file a return and she would not be liable under any circumstances had she not filed a return.
Justice Byron R. White: Well, all I’m saying is she is in as hard the position as your client is here.
Mr. Paul K. Kirkpatrick, Jr.: Right, yes she is and just as hard part of the position, but the Government says here, “You must file return.
You don’t have a choice of whether to file a return and be liable or not file return and not be liable.”
The Government says, “Here, you must file a return and be liable.”
I think, that this is a greater -- the greater problem.
Justice Byron R. White: Well, they say that because of their theory of who’s in company?
Mr. Paul K. Kirkpatrick, Jr.: That’s correct and it’s our contention that it is not her income that Section 1 of the Code when it imposes the tax on the income of individuals does not impose the tax on the wife.
Now, the argument goes that since she has a vested interest in the community, she owns a community’s income, but this ignores a basic fundamental concept of community property law.
The community is in an entity.
Community property is not a form of co-ownership, co-tenancy.
The community property is the property of the community.
It is not owned one-half by one and one-half by the other.
Community property is the community is separate from the husband and the wife.
The problem is, the tax problem arises from the fact that the community is not a tax paying entity and -- or define an individual or individuals who will pay its tax, the community’s income must be attributed to some person.
The question then it really and truly is not whose income is it, but to whom should it be attributed Now, Poe v. Seaborn, did not, which held that the husband and wife in split income was not based upon the concept that the husband and the wife own the income.
It was based upon the rational that neither owned it and sets one -- the case said, that the opinion said that it could not be said that one owned it more -- any more than the other.
And as a result, they were permitted to split the income, but that is not the same thing it saying that one owns the income or the other or both own it.
Mitchell says, that Seaborn permitted both to file returns and split the income that this is a -- that the whole rational of Seaborn if they did not and if we do not look -- Mitchell said, that if the husband and wife do not split the income and file returns, they say, if they do the wife has assumed the liability by virtue of filing the return that return.
Because Seaborn said, she could file the return.
But if they did not split the income and file returns that the court should then look to see to whom should the income be attributed.
The Fifth Circuit said, “The income should be attributed to the husband because he had control of the property and because to treat it any other way was to reap up the community property law unnecessarily by the use of the tax law.”
It said, “The husband was liable for the debts of the community, that this was by its nature a community debt and the husband was the logical person to pay the tax.”
Mitchell does not conflict with Seaborn unless, that the import of Seaborn laws that the husband could only be required to pay on one-half or that the wife was liable for one-half of the tax on her separate property without regard to anything else.
If that is what Seaborn meant although it did not say that, we suggest that this Court should overrule Seaborn because that is an illogical interpretation of Section 1.
It creates an unnecessary problem with state law and it causes the collection problems that the Government complains of here.
It is unnecessary for this Court to overrule Seaborn, to affirm Mitchell.
But if this --
Justice Hugo L. Black: But what did Seaborn hold?
Mr. Paul K. Kirkpatrick, Jr.: Seaborn held that the husband and wife in the community property States could file separate returns and return one-half income on each.
Justice Hugo L. Black: On a constitutional basis?
Mr. Paul K. Kirkpatrick, Jr.: No, Your Honor, that the rational of Seaborn as I read it or it was based upon two rationales.
One that the revenue service had permitted it in its regulations and that the income tax law had been reenacted in the interim, and therefore that they would accept administrative construction.
Justice Hugo L. Black: At any rate it was a ruling on Louisiana law?
Mr. Paul K. Kirkpatrick, Jr.: Seaborn was ruling on Washington law but after that case, it was quickly followed by California, Arizona, Louisiana and Texas cases.
Basically, relying on Seaborn.
Justice Hugo L. Black: Well, if we were wrong in that case of state law, should we as again go wrong and overrule it?
Mr. Paul K. Kirkpatrick, Jr.: Well, Your Honor, I do not think that the Court was wrong in its characterization of Washington community property law.
The Court acknowledge that the community was in entity and --
Justice Hugo L. Black: The ruling was on state law?
Mr. Paul K. Kirkpatrick, Jr.: Your Honor?
Justice Hugo L. Black: Its ruling was on state law you have?
Mr. Paul K. Kirkpatrick, Jr.: That the ruling was on the state law that the Court found that the wife have a vested interest in the community.
That is the entity and that as such she was entitled to report one-half of the community the entity’s income as her own.
Justice Hugo L. Black: I suppose Congress has passed the law and say, that can’t be the law in the state of Washington.
Mr. Paul K. Kirkpatrick, Jr.: Whether or not that the Congress has the power to require state to adopt other than the community property system, I don’t know.
But I do contend that Congress --
Justice Hugo L. Black: Not generally considered that.
Mr. Paul K. Kirkpatrick, Jr.: Well, I would not think they would, but I do not think if Congress could tax -- if Congress could tax the income of the community to one or the other of the husband or wife.
We would acknowledge that Congress can tax to the husband.
United States v. Robbins said that it could.
But we would contend that they cannot tax it to the wife.
Justice Hugo L. Black: And you’d still say that Congress then couldn’t pass the law?
This Court could pass a law which might change the effect?
Mr. Paul K. Kirkpatrick, Jr.: No, Your Honor.
I say that if this Court does say that Seaborn which said they could split the income that they might -- could split the income.
If this Court were to say that as a naturals result of that decision that the wife must split the income and report one-half and pay the tax on it, then we say that violates the Fifth Amendment.
That -- if that interpretation of Section 1 of the Code would make Section 1 unconstitutional.
Justice Hugo L. Black: (Voice Overlap) they can’t do it and you say Congress couldn’t do it and violate the Fifth Amendment?
Mr. Paul K. Kirkpatrick, Jr.: Yes Your Honor.
We say that it is unconstitutional to tax the wife on one-half of the community income and we do not think that it compares at all with the partnership or a trust.
If a partner absconds with the partnership money presumably there is a theft deduction.
Justice Byron R. White: What’s that -- if we have Constitution to tax us?
Mr. Paul K. Kirkpatrick, Jr.: Because this -- but first of all, this Court has said it could tax the husband but this Court has said over and over again.
Justice Byron R. White: That the husband said, this Court said that the -- that you can’t tax eve the wife.
Mr. Paul K. Kirkpatrick, Jr.: It did not say that, Malcolm does not say that Your Honor.
Justice Byron R. White: Yes, but what would be unconstitutional to tax?
Mr. Paul K. Kirkpatrick, Jr.: Because he has control, he has the possession for this --
Justice Byron R. White: But while counsel often says, it’s none of your business, whatever.
Mr. Paul K. Kirkpatrick, Jr.: The state law gives him the power to take her income.
Justice Byron R. White: I know but she just says she’s awfully sorry.
Mr. Paul K. Kirkpatrick, Jr.: But we can get into a -- what he can do is practical matter as a legal matter.
As a matter of right, he can do it -- he can require her employer.
Justice Byron R. White: I think I’m supporting that when you can’t have (Inaudible) that I have no power to do it and take some oral argument.
Mr. Paul K. Kirkpatrick, Jr.: We’re talking about practical powers as against legal power.
He has the legal power.
The State of Louisiana gives him.
It vests in him from the moment of marriage.
It vests in him the power to take control of that money and take it from her.
Justice Thurgood Marshall: Mr. Kirkpatrick, if a genuine resident adopts Louisiana law, do you mean that will automatically make me the boss of all my money?
Mr. Paul K. Kirkpatrick, Jr.: This Court has said that at least in the case of Oklahoma that you cannot achieve these results because it would be an assignment.
Justice Thurgood Marshall: (Inaudible)
Mr. Paul K. Kirkpatrick, Jr.: If I may sum up in just a moment, that the essence of our argument is, is that the only reason that anyone has suggest the tax in the husband and the wife is that the community is an entity which is not a tax paying entity.
No one has suggested and Poe v. Seaborn does not say or none of the cases have ever considered this problem except from the tax court cases have said.
None have said that the wife owns the cash in bank, what they have said is she has a vested interest in this conjugal partnership which means if when this community terminates, she gets one-half of what is left.
Nobody has suggested that she owns the furniture of the car or anything else.
Justice Potter Stewart: (Voice Overlaps) the word “title” in the Messersmith case that to lawyers’ means ownership doesn’t it?
Mr. Paul K. Kirkpatrick, Jr.: I beg your pardon Your Honor.
Justice Potter Stewart: They used the word “title” in the Messersmith case.
They said, the community has a partnership and which the husband and wife own equal shares there title there to vesting at the very instance such property is acquired.
Mr. Paul K. Kirkpatrick, Jr.: Right.
Justice Potter Stewart: Title mean ownership?
Mr. Paul K. Kirkpatrick, Jr.: Yes, but it isn’t -- we are not talking about the title to this property.
This property has now fallen into the community and the community owns it and it will -- and as long as it is in the community it is our property.
Community property could had the title in the wife’s name but that would not make her the owner of it, it would not -- her husband could require that it be transferred from her to someone else.
Justice Byron R. White: What do you suppose the Supreme Court of your State was talking about when it talked about title vesting at the very instant the property is acquired?
Mr. Paul K. Kirkpatrick, Jr.: Lawyers of our State are so used to dealing with the community is not -- we do not need to reiterate the entity theory as we discuss it.
Justice Thurgood Marshall: But she couldn’t sell, could she?
Mr. Paul K. Kirkpatrick, Jr.: She could not -- no, she could not sell it.
Justice Thurgood Marshall: And the part of title is the right to self so I guess it’s really confusing.
Mr. Paul K. Kirkpatrick, Jr.: Well, as one rather said it is almost necessary to be born and bred in the community system to feel its new onsets.
But be that is it may, it is a fundamental principle of community property.
I say in every community property state that the community is an entity.
Justice Thurgood Marshall: Well, what about Government’s argument that the State does not have the power or authority to by any set up a community problem anything else to arrange that somebody who owe something not paying taxes on it?
Mr. Paul K. Kirkpatrick, Jr.: We agree -- we do not -- we contend that she does not owe it.
There’s no contention on the part of the respondent that if she became liable for a taxes or for anything else that the State could cause her to escape liability from it.
We say she was not liable.
Justice Thurgood Marshall: Well, if the -- under Louisiana law, if the husband takes off with everything then she has nothing, right?
Mr. Paul K. Kirkpatrick, Jr.: She ends up with nothing.
Justice Thurgood Marshall: And there’s nothing she can do about it?
Mr. Paul K. Kirkpatrick, Jr.: There’s nothing she can do about it.
If a trustee took her property, she might sue that trustee, if she took the property to trustee, she might sue the trustee and if he stole it and she couldn’t recover, she can probably get an offset on income tax against that for theft laws.
The thing is the same as probably true of the partnership, but it is not true of the community.
Justice Byron R. White: But then she can -- the creditors can go after her if she renounces?
Mr. Paul K. Kirkpatrick, Jr.: If she renounces the community, then the community is after her under state law as if it had never existed.
Justice Byron R. White: So, once the debts then occurred she can escape them and the community terminates?
Mr. Paul K. Kirkpatrick, Jr.: That’s correct.
Justice Byron R. White: And similarly you suggest the tax?
Mr. Paul K. Kirkpatrick, Jr.: No.
If she -- if this Court meant in Poe v. Seaborn that this was a separate debt of hers that one-half the taxes on one-half of the community’s income were her separate debt.
If that what this Court meant beyond that holding being and we say an unconstitutional interpretations of Section 1, she could not escape it under our law.
We don’t say that our law relieves her of any liability.
Justice Byron R. White: But according to your position that by renouncing, she can escape liability for a community debt that otherwise she would be liable?
Mr. Paul K. Kirkpatrick, Jr.: No, Your Honor she would never become liable for any community debt unless she accepted the community.
Justice Byron R. White: Well, that’s what I say.
Mr. Paul K. Kirkpatrick, Jr.: Whether renunciation --
Justice Byron R. White: The renounce?
Mr. Paul K. Kirkpatrick, Jr.: She is not liable from at the point of inception to debt.
The renunciation is the point at which puts it out of question whether she will or will not assume liability.
Justice Byron R. White: Alright, let’s assume that the community terminates, she does nothing about renouncing?
Mr. Paul K. Kirkpatrick, Jr.: Then she -- well, let me say that prior to the 20’s she had 30 days in which it was presumed if she did not renounce in 30 days, it was presumed she had renounced.
Under this law, she is not required to come in now and renounce.
If she takes hold of the community and takes any of its property and uses it.
Then she is presumed to have accepted the community and then she becomes liable for its debts, but if she renounces at that point it’s put out of question that she -- that is a statement that she will not become liable for its debts.
But if she has a separate debt, which is what the Government has argued that she has a debt, if she can -- you understand that during the existence of community, she can contact debts that are on her own separate debts which are not -- cannot be paid out of the community, cannot go to the husband and ask you and pay them.
Justice Byron R. White: Can’t she have income that’s hers?
Mr. Paul K. Kirkpatrick, Jr.: Yes, she can have income from separate paraphernalia property provided that she had reserved that income to herself.
Justice Thurgood Marshall: What happens if all of the community property is in a joint bank account under Louisiana law?
Mr. Paul K. Kirkpatrick, Jr.: If the --
Justice Thurgood Marshall: That can be ownership, wouldn’t it?
Mr. Paul K. Kirkpatrick, Jr.: If the wife has been that the result of putting into the joint -- well, let me say first of all Your Honor.
Justice Thurgood Marshall: This is all community property money?
Mr. Paul K. Kirkpatrick, Jr.: Under our conceptually under our law it is not, it is the husband’s money, but the banking laws are amended so that if the bank honors a check that the wife has drawn then she will be treated as if the husband had authorized her to draw that check.
But conceptually, that is not a joint bank account if the husband were to die, she would find out that she would not be able take anything from him or anything that would terminate the community like that, she would not be able to draw from that account.
Justice Potter Stewart: Let’s see, just out of curiosity, how do you pronounce the word A-C-Q-U-E-T?
Mr. Paul K. Kirkpatrick, Jr.: Acquets.
Justice Potter Stewart: Acquets?
Mr. Paul K. Kirkpatrick, Jr.: Yes, Your Honor.
Justice Potter Stewart: And that means gains or acquisitions?
Mr. Paul K. Kirkpatrick, Jr.: Yes sir, correct.
Justice Potter Stewart: Profits?
Mr. Paul K. Kirkpatrick, Jr.: You see -- Your Honor, under our law, there is never any reason to ask who owns the community.
There are bundles of rights and we don’t find it necessary to characterize something as ownership.
It is this Court that found it necessarily characterized something as ownership.
They have to find the ownership and they said that the ownership is not the property but it is community.
It is the interest in the community.
They found her interest to be “vested” meaning, present.
Meaning, that if she dies it will go to her heirs, that if she dies, she can leave a will and it will pass by that will nothing more.
Justice Byron R. White: Well, your own court has talked a little bit about ownership though in Messersmith.
Mr. Paul K. Kirkpatrick, Jr.: We learned to talked about ownership, Your Honor when the split income that came a possibility.
Justice Byron R. White: Well, you are responsible for this split income possibility.
Mr. Paul K. Kirkpatrick, Jr.: But not Mrs. Mitchell.
Justice Byron R. White: And by you, I mean the community property states?
Mr. Paul K. Kirkpatrick, Jr.: Yes, Your Honor.
Justice Byron R. White: Let me ask of you the question I asked Mr. Bray perhaps unfairly because he is not a Louisiana.
Do you have any comment about the renunciations statute as to when it is effective and may it be exercised prenuptially?
Mr. Paul K. Kirkpatrick, Jr.: No.
Justice Byron R. White: And may a wife renounce only when the community has been disrupted?
Mr. Paul K. Kirkpatrick, Jr.: That’s correct.
That’s correct, the husband and the wife that before marriage it is not necessary that they elect to come out of the community property system.
They may record a marriage contract in the public records which eliminates the community property system as to them.
But once they come under that system if the wives grant a renunciation comes about only at the termination of the community.
That’s the debt separation been barred, divorced and that action for separation of property.
At this point, --
Justice Byron R. White: Has vested him action for?
Mr. Paul K. Kirkpatrick, Jr.: An action for separation of property.
At this point, she either -- she has three choices.
She will say, “I will take the community with benefit of inventory.”
Meaning, husband clean it up, pay the debts. If there’s anything left over, I will take a half of it, I will take half of it.
Or she can take the community, she can accept the community unconditionally and which --
Justice Hugo L. Black: Do you mean she can write a check and get it all?
Mr. Paul K. Kirkpatrick, Jr.: Yes, her half community.
Justice Hugo L. Black: What?
Mr. Paul K. Kirkpatrick, Jr.: Her half community.
In other words, she can take an in rem out of these.
Everything is in rem as to her if she takes it with benefit of inventory.
And if she takes the community with benefit of inventory, the property of the community must be first use to satisfy the debts and if there be anything left, she gets one-half of that.
That’s the --
Justice Hugo L. Black: Do you mean the wife has theoretically the power to use offhand and write a check on every bit of it and yet it excels if she just don’t have any at all?
Mr. Paul K. Kirkpatrick, Jr.: No, Your Honor, no.
At the termination of the community that they -- at the debt of the husbands, at this point community no longer exist.
The wife of this --
Justice Hugo L. Black: But he is still living.
Mr. Paul K. Kirkpatrick, Jr.: At a divorce it has to be appointed which the community terminates under our law.
But if we reach it for where the community terminates under our law the wife has the choice.
Justice Hugo L. Black: Suppose she draws it all out, is that termination?
Mr. Paul K. Kirkpatrick, Jr.: No, Your Honor.
You’re talking about the joint bank account?
The husband made to invest her with the power, the power to act with community property.
He may make her the agent of the community in which case she may have the powers, but when she has that agency it is agent for the community, alone.
She is not acting as on her own right nor is she acting as agent for her husband.
She is acting as agent for the community.
Justice Hugo L. Black: Can he draw it out?
Mr. Paul K. Kirkpatrick, Jr.: Yes Your Honor without any question.
Justice Byron R. White: Would you say it’s unconstitutional to tax her, to make her file income tax or tax her at least to the extent that she had income of her own which went into the community?
Mr. Paul K. Kirkpatrick, Jr.: I would because the law of our state makes that a property under the control of her husband.
Justice Byron R. White: There she would at least know what she had?
Mr. Paul K. Kirkpatrick, Jr.: That’s correct.
Justice Byron R. White: She would at least know what went in the community.
Mr. Paul K. Kirkpatrick, Jr.: The hardship would not be as great, but as far as the legal -- her legal rights, her legal rights are just as great -- I mean her legal disabilities are just as great under that situation as under any of that.
Justice Byron R. White: What if she earns separate income?
What if her teaching school, the tax paid out to her and she (Inaudible).
And says, I am awfully sorry but I don’t trust you for anything and I’m just keeping my money.
Mr. Paul K. Kirkpatrick, Jr.: Through whatever step it takes, he can take it away from her.
She is not permitted to keep that money as her own.
Justice Byron R. White: I suppose about that time that the community would (Voice Overlap)
Mr. Paul K. Kirkpatrick, Jr.: They would terminate. (Laughs)
Justice Hugo L. Black: And she is a flat community owner but she is not permitted to have any evidence of her possession.
Mr. Paul K. Kirkpatrick, Jr.: This Court -- not this Court, the Revenue Department says she is the owner and our courts have attempted to characterize her as such.
The statute of California which it took to make -- to turn her interests from an expectancy into a vested ownership was no more than adjective.
It said, “From this day forward, her interest will be vested.”
Present and vested whatever that meant.
It is upon that that this Court decided in Malcolm.
Justice Hugo L. Black: Present expectancy --- present ownership.
Mr. Paul K. Kirkpatrick, Jr.: Prior to that statute, this Court had found as it had used the characterization of the Supreme Court of California that the wife’s interest was a mere expectancy because she had no rights of control.
Following the amendment of the California statute to say that her right was vested, this Court said that she can file a return and pay one-half on it.
Chief Justice Warren E. Burger: Mr. Schott.
Argument of Patrick M. Schott
Mr. Patrick M. Schott: Mr. Chief Justice and may it please the Court.
I’m here on behalf of the other respondent Frances Angello and Your Honors if you would indulge me for just one moment, I cannot stand here and launch on my argument without noting that after almost 20 years before the Bar.
This has to be the one of the greatest moments of a professional career to argue a case before this High Court.
And I do thank the Court for allowing us this few additional minutes to make this argument.
Your Honors, the policy that we have submitted in the Government’s position in this case is in and all the simple of occasion of an issue and in a failure to consider that which this Court has held must to be considered in order to make a determination such as this.
For instance, my opponent made the statement a moment ago that state law creates a legal interest while federal law taxes those interests so created.
That statement is incomplete, that is not with this Court has held and if that were a complete statement of the law, the logic of the Government’s position may very well follow.
But what this Court has held and what this Court has said, I think it’s more accurately put in the Government’s brief on page 14 and 15 where they said that -- excuse me Your Honor.
The Government has cited the case of Morgan versus Commissioner on page 14 of its brief and in that case, the Supreme Court held that state law creates illegal interests and rights.
The federal revenue acts designate what interests or rights so created shall be taxed.
Now, in Seaborn and in Bender versus Pfaff --
Justice Potter Stewart: And what do you say Mr. Schott, I missed it and it was my fault but I -- excuse me.
Your Honor is saying that a certain statement was incomplete and erroneous?
Mr. Patrick M. Schott: Yes.
Justice Potter Stewart: And what was that statement?
Mr. Patrick M. Schott: That statement is “that the federal government taxes interests that are created by the state, but state law determines what those interests are.”
Now, what I have said is that if that standing alone were under consideration before the court then the logic of the Government’s argument might follow that therefore, such things as the exemption if you will of the wife separate property from vulnerability of seizure by a community creditor or mere exemption statutes.
But that is not what the law is, what I say the law is that federal law indeed does designate the interests to be taxed but also the rights that the state law creates.
Federal law designates the rights that are to be taxed also and I say that in that omission by the Government of a look at what is the right of the wife to renounce the community.
In that omission, is the crux of the Government’s error in this case.
Under Louisiana community property law, it is true that the wife has a present vested interest in the property.
However, that law says that she has a right to renounce the community and under our holdings of our Supreme Court, it is as though the community never existed as far as she was concerned.
Now, the reasons for this of course have already been touched upon by my colleague Mr. Kirkpatrick in talking about the almost unlimited control that the husband has over the community property.
For instance, an answer to a question by the Chief Justice, the question was, can the husband alienate the homestead?
The answer for that question is yes.
Now, there is a provision in the state law which gives the right to the wife to file a declaration of homestead and prevent the husband from doing so.
This is not usually exercise and if the ownership or title of the property is taken in the name of the husband alone even though it is the homestead.
And the wife and children live in the home, the husband is free to alienate that property and he cannot be forbidden from the wife in doing so or he cannot be call upon to account to the wife after he has done it.
So, I say to the Court that because of this great power of control and because of the very effects that would flow from the hypothetical which we have inserted in our brief, which I think is a good analysis and a sound analysis or an analogy excuse me.
I think the Government has admitted that the effect of their position would be that where the husband earns his money, squanders it.
They can come back to the wife and ask the wife to pay on half of the income that she never saw, never controlled, never enjoyed it could not do anything about it.
Justice Byron R. White: Would you say then the Government could collect the entire trans bill for the entire community from her husband?
Mr. Patrick M. Schott: I think that the logical extension of Louisiana community property law if it’s left understood in this case is that the husband owes all of the community income tax because the husband under Louisiana law does not have that same right than the wife.
Justice Byron R. White: Does this require any modification of prior cases in this Court?
Mr. Patrick M. Schott: No, I don’t believe it would Your Honor.
Mr. Justice White, I think the only prior cases that the Government relies upon being Seaborn and Bender are cases that stand only for the proposition that if the wife chooses to file a separate -- joint return or separate return, split income in other words, she has enough a sufficient vested interest in the community to do so.
The Government would have you extend that to mean that because she has that sufficient vested interest, she therefore we just all look her rights.
That is the right to renounce in the event that she chooses to do so under our law.
Now, the other point that I would like to make to the Court --
Justice Byron R. White: But there no case or intimation in our cases that the Government may not collect the entire tax bill from the husband?
Mr. Patrick M. Schott: I find none Your Honor.
I find none.
Justice Byron R. White: How about the Malcolm case?
Mr. Patrick M. Schott: No, Your Honor Malcolm is a case of course that he is --
Justice Byron R. White: Because number one the Malcolm case?
Mr. Patrick M. Schott: That is a per curiam decision and --
Justice Byron R. White: Certified questions?
Mr. Patrick M. Schott: That case was -- a case in which the husband and wife had filed a joint return and I think that does make all the difference in the world because in effect, the wife in signing the joint return makes herself automatically liable under the tax laws.
Now, I might add to Your Honors that even under Louisiana community property law.
For instance, if the husband borrows money and he signed his name on a note.
Under the law, he obligates the community, but he does not make the wife individually liable so that her separate property can be seized to satisfy that debt.
Justice Byron R. White: Well, is the end-result then of your position is that the husband should -- is responsible for the entire tax bill for the community?
Mr. Patrick M. Schott: That is correct Your Honor.
Justice Byron R. White: And the wife has no really substantial present interest in it?
Mr. Patrick M. Schott: She doesn’t have anyway of controlling it, Your Honor.
Justice Byron R. White: And therefore, it should be no division of income for purposes of the tax rates?
Mr. Patrick M. Schott: If she has a sufficient interest under Poe and Bender in order to split the income for tax purposes but to say to the wife now that even though you’re renounce the community --
Justice Byron R. White: Do you think that Louisiana law though still gives her or not of an interest so that the husband doesn’t need to pay as though he is a single taxpayer?
Mr. Patrick M. Schott: I think that it does.
In fact, Your Honor I was going to add that the Malcolm situation and the thought that I was trying to make here and answer to Mr. Justice Stewart’s question was this.
That under Louisiana law, if a husband and wife both signed that same note to the finance company.
In other words, the wife has not joined in signing that note, under Louisiana law; she has voluntarily then obligated herself personally to pay the debt so that then her separate property can be reached.
But the point is that the husband can actually endanger the community, all of the wife’s interest in the community when he signs that note.
And it’s under that condition and we say that the law has provided for the wife to renounce.
And Your Honor, the only have a point I want to make for the Court is that the Government’s characterization of what I have called the wife’s separate property is immunity if you will from vulnerability to seizure by the Government for tax purposes.
That has been characterized by the Government as a state exemption statute.
The way you would exempt for instance insurance proceeds under law or the way you might exempt the tools of trade from seizure that type of thing.
Your Honor, I think that that is almost a crest characterization.
This is an integral part of our community property system which flows logically from the others that since the wife can renounce and since she doesn’t have control, therefore her separate property cannot be seized by a community creditor.
And I say to the Court that that is not merely an exemption statute that the federal law preempts more than that.
It is an integral part of our community property system which I believe would have to be respected in determining what her rights are for the imposition of federal income tax.
Justice Byron R. White: Why shouldn’t we -- why shouldn’t the federal government take you seriously then to say to the husband when he says, when they try to collect from him all of the taxes at single taxpayer’s rates, why should the Government say, will you tell me that this doesn’t belong to the wife, she has no interest in it?
How do you --
Mr. Patrick M. Schott: Your Honor, certainly that the federal income tax laws could be amended so as to require the husband to pay all the taxes as Mr. Bray pointed out in his address to the Court.
There’s no doubt that they could amend the federal tax law if that needs to be done to make the state law consistent in this case.
But what I’m saying is that an analysis of Louisiana state community property law does lead to the conclusion.
One, that the wife may renounce and avoid the payment of that tax and two, that the husband himself would be the one who would owe the tax with the Seaborn decisions injunction.
Justice Byron R. White: At the full rates?
Mr. Patrick M. Schott: At the full rate unless, under the --
Justice Byron R. White: Full single taxpayer rate.
Mr. Patrick M. Schott: That is correct except for the federal regulation which permit her to sign that joint return as she did in Malcolm and make herself liable for half of it.
And of course the decision in Seaborn, which says merely that she has sufficient vested interest in the community to go ahead and declare half of the taxes and return half of the income.
Justice Byron R. White: Mr. Schott, help me a little bit with your renouncement argument.
Has it none always been the case that the renunciation of income doesn’t necessarily lead to non-liability for tax on that income?
Mr. Patrick M. Schott: Your Honor, in Louisiana a renunciation of the community by the wife is a peculiar aspect of our community property law which gives the right to the wife, the right to renounce not only the benefits of the community but also the obligations of the community to the extent that the community as far as she was concerned never existed.
She can disassociate herself from all of the assets as well as all of the liabilities on a renunciation or a refusal if he will to accept that community.
Now, I don’t think that that is the same as a renunciation of income in a state for instance which would not have this peculiar concept that gives the wife the right to do this.
Justice Byron R. White: What’s the difference?
Mr. Patrick M. Schott: Well, I think Your Honor as Mr.-- as my colleague pointed out I think that you are looking at a bundle of rights here.
And to say that she has a sufficient interest in the community to go ahead the return the half of the income and then to ignore her right to that statute -- that renunciation under our law which our court has held would place are in this position as though the community never existed is to simply ignore one part of our property rights system and to put undue emphasis on the other.
Chief Justice Warren E. Burger: Thank you Mr. Schott.
Mr. Patrick M. Schott: Thank you very much.
Chief Justice Warren E. Burger: Mr. Bray, you have about eight minutes left.
Rebuttal of William Terry Bray
Mr. William Terry Bray: Thank you.
I would like to respond to four or five items brought out in the argument.
First, it’s our position that the federal statute at this point in time is very clear that it taxes income to the owner and that this is been the law since this Court handed down its decisions in the 1930 term in split income cases.
Thus, the inquiry under state law is who is the owner and we think the law of Louisiana is equally clear that the wife owns her one-half share of the income and thus it follows that she must report and pay the taxes on it.
The taxpayer’s arguments essentially are that the various state law rights to which they refer so qualify the wife’s ownership that she can’t be obligated to pay the tax that the ownership does not rise to the level which the federal statutes tax.
Listening to that argument, it duplicates almost verbatim of the Government’s brief in the Poe versus Seaborn cases.
All of these arguments were made by the Government in the 1930 cases in support of their position that the husband must report and pay taxes on all of the community income.
We argued there that he was the in fact owner of all the income because of his practical powers, management powers albeit over that income and of course not only did we argue his management powers but we also pointed to the wife’s protections under state law, specifically her renunciation power.
And we argued in our brief that this renunciation power was inconsistent with the wife being a sufficient “owner” to entitle her separately to report and pay taxes.
Notwithstanding our arguments, the court very clearly held and this contrary to the assertions of respondents that the income is tax to the owner.
It did not tax it to the community as an entity but rather to the owner and found that individual spouses each of them owned their respective shares of the community income.
This was the very clear holding not only in Poe versus Seaborn, the Washington case but also in the Louisiana case where the court said, if the test to be as we have held that it is ownership then the Louisiana case is probably the strongest of those presented to us in favor of the wife’s ownership of one-half of that income.
It went on of course to hold that because she was the owner, she was entitled separately to report it and pay taxes on it.
The wife indeed has protections under state law but these protections do not affect her basic ownership right.
They are outlined in the Weiner opinion to which we refer on page 10 of our brief in support of the court’s decision there, the Louisiana Supreme Court’s decision there showing that the husband’s management powers are not so extensive as to destroy the wife’s ownership.
These protections indeed limit the husband’s powers.
The husband not only has these rights with respect to management but has a duty to manage the community property for the benefit of the community.
So that duties go along with the rights.
I might add that the provision of Louisiana law dealing with separation of property without dissolving a marriage, provide not only for the separation of property where the wife’s, I beg your pardon -- where the husband’s activities endanger the wife’s separate property but go on to say or win the disorder of his affairs induces her to believe that his estate may not be sufficient to meet her rights and claims.
And of course it’s our position that one of her rights and claims would be the right to receive her share of community property upon dissolution of the community.
And thus, if the husband was furthering away the community income, obviously this would be -- entitle her to a separation of property under Louisiana Civil Code.
With respect to the right of renunciation, let me say that this of course occurs only after the community is dissolved and as in the cases here long after the tax years in which income is realized.
At the very moment, the income is realized and this is the clear law of Louisiana.
The wife owns her share of that income, it would certainly be an unusual and in fact unique in the tax law if many years later because of some act she took with respect to the state’s definition of creditor’s rights she could remove the liability which otherwise is imposed on her by the Federal Taxing Statutes for her tax on her share of the income.
Now, let me emphasize too that the decision below opens up also many non-hardship cases or at least it poses a problem in such cases.
Under that decision, there is nothing to keep why is now from just not reporting their share of income and to the husband filing a separate return and paying the tax on his half of the community income.
Under the decisions of this Court and we think Malcolm in contrast to our respondents is quite clear that we cannot collect the wife’s taxes from the husband.
Thus, the taxes on her share would escape taxation under the decision below.
Let me mention that perhaps Judge --
Justice Byron R. White: Why can’t the -- why couldn’t the Government’s theory -- the Government to collect the husband’s share for the -- even if the income of the wife’s set of property?
Mr. William Terry Bray: Because the wife has no obligation on the husband’s -- on the taxes on the husband’s share of the income.
Justice Byron R. White: You mean, it isn’t the same reason that you could collect?
Mr. William Terry Bray: Well, certainly with respect -- yes to answer that directly yes.
It’s not her taxes and just as it’s not his taxes and thus we can’t collect her taxes from the husband.
Justice Potter Stewart: That was if they, I suppose if a joint return is made in a community property state just as a matter of federal law of each spouse --
Mr. William Terry Bray: Each spouse is then jointly and severally liable and we can go after --
Justice Potter Stewart: For the whole bill?
Mr. William Terry Bray: We can and go after either or both of them for all of the taxes and from any property they may own community or separate and of --
Justice Potter Stewart: So the rule is just a matter of federal law (Voice Overlap)?
Mr. William Terry Bray: That’s a matter of federal collection, Your Honor.
Justice Potter Stewart: If a joint return was made.
Mr. William Terry Bray: That’s correct, I think --
Justice Potter Stewart: It’s not different from a common law state?
Mr. William Terry Bray: That’s correct and I think the best case makes very clear that in that situation we’re not bound by a state exemption laws.
Justice Potter Stewart: Right.
Mr. William Terry Bray: But the characterization of the wife’s ownership is something less than sufficient for federal tax purposes is simply not with this Court has recognized or what the Louisiana courts have held time and again.
And this may explain Judge Ainsworth joining in the majority opinion here.
Perhaps, she was too influenced by the parochial views of Louisiana law having been a Louisiana lawyer for many, many years and he failed to see that the federal law taxes the owner and the state law in Louisiana makes the wife the owner.
The other peculiar taste of that law do not diminish in any regard her ownership and this regard the case --
Justice Thurgood Marshall: If she is bound, can she sell it?
Mr. William Terry Bray: Can she sell it?
Justice Thurgood Marshall: Yes, sir.
Mr. William Terry Bray: Alright, she has no right to convey the property during the existence of the community.
I know of no reason why she couldn’t assign whatever rights she might have at such time as those rights can be.
Justice Thurgood Marshall: She doesn’t have ownership the way I understand ownership, does she?
Mr. William Terry Bray: No, sir.
Not in terms of conveyances.
Now, I might answer that by saying that the husband’s right of conveyance are restrictive wherever the wife’s name is own community property. He can’t convey without her consent.
So, in that regard his rights of conveyance are restricted too.
Chief Justice Warren E. Burger: Thank you Mr. Bray.
Mr. William Terry Bray: Thank you.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.