03/17/30 LUCAS v. EARL
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SUPREME COURT OF THE UNITED STATES
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No. 99
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1930.SCT.193,
281 U.S. 111, 50 S. Ct. 241, 74 L. Ed. 731
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March 17, 1930
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LUCAS, COMMISSIONER OF INTERNAL REVENUE,
v.
EARL
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CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE NINTH CIRCUIT.
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Solicitor General Hughes, with whom Assistant Attorney General
Youngquist and Messrs. Millar E. McGilchrist, Claude R. Branch, Sewall
Key and J. Louis Monarch, Special Assistants to the Attorney General,
were on the brief, for petitioner.
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Mr. Warren Olney, Jr., with whom Messrs. J. M. Mannon, Jr., Robert L.
Lipman and Henry D. Costigan were on the brief, for respondent.
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The agreement is valid under the law of California. Wren v. Wren, 100
Cal. 276; Kaltschmidt v. Weber, 145 Cal. 596; Perkins v. Sunset, etc.,
Company, 155 Cal. 712; Moody v. Southern Pacific Co., 167 Cal. 786;
Cullen v. Bisbee, 68 Cal. 695.
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It necessarily follows from the manner in which the agreement operates
under the California law that the income of both parties, including the
personal earnings of both, is to be taxed as the joint income of both,
and not as community property.
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The basic principle of the income tax law is that it is a tax on
income beneficially received. Applying this principle the income in this
case must be taxed as the joint income of the respondent and his wife.
United States v. Robbins, 269 U.s. 315; see Old Colony Trust Co. v.
Commissioner, 279 U.s. 716.
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The decisions of the Supreme Court of California hold that such
agreements do not operate by way of assignment but by way of
establishing the incidents of property. Even if it were true that the
agreement operated by way of an equitable assignment and there was at
the moment of the receipt of the property an instant of time when the
husband held it as exclusively his own, he would so hold it only as a
naked trustee. The basic purpose of the income tax law is to tax income
beneficially received. Income received as a trustee is taxable as income
of the beneficiary. O'Malley-Keyes v. Eaton, 24 F.2d 436; Young v.
Guichtel, 28 F.2d 789; Bowers v. New York Trust Co., 9 F.2d 548.
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Under the community property system, in a case where husband and wife
agree that the latter's earnings are to be her separate property, the
earnings of the wife are to be taxed as part of her income and not as a
part of her husband's. Louis Gassner, 4 B. T. A. 1071; E. C. Busche, 10
B. T. A. 1345; Francis Krull, 10 B. T. A. 1096; Allen Harris, 10 B. T.
A. 1374.
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The claim that salaries, wages and compensation for personal services
are to be taxed as an entirety and therefore must be returned by the
individual who has performed the services which produced the gain, is
without support either in the language of the Act or in the decisions of
the courts construing it. Not only this, but it is directly opposed to
provisions of the Act and to regulations of the Treasury Department
which either prescribe or permit that compensation for personal services
be not taxed as an entirety and be not returned by the individual
performing the services.
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It is to be noted that by the language of the Act it is not
"salaries, wages or compensation for personal service" that
are to be included in gross income. That which is to be included is
"gains, profits and income derived" from salaries, wages or
compensation for personal service. Salaries, wages or compensation for
personal service are not to be taxed as an entirety unless in their
entirety they are gains, profits and income. Since, also, it is the
gain, profit or income to the individual that is to be taxed, it would
seem plain that it is only the amount of such salaries, wages or
compensation as is gain, profit or income to the individual, that is,
such amount as the individual beneficially receives, for which he is to
be taxed.
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Holmes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone;
Hughes took no part in this case.
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The opinion of the court was delivered by: Holmes
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Under the Revenue Act of 1918, which taxes the income of every
individual, including "income derived from salaries, wages, or
compensation for personal service . . . of whatever kind and in whatever
form paid," the income of a husband by way of salary and attorney's
fees is taxable to him notwithstanding that by a contract between him
and his wife, assumed to be valid in California where they reside, all
their several earnings, including salaries and fees, are to be received,
held and owned by both as joint tenants. P. 113.
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CERTIORARI, 280 U.S. 538, to review a judgment of the Circuit Court of
Appeals which reversed a decision of the Board of Tax Appeals upholding
a tax upon the respondent's income.
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JUSTICE HOLMES delivered the opinion of the Court.
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This case presents the question whether the respondent, Earl,
could be taxed for the whole of the salary and attorney's fees earned by
him in the years 1920 and 1921, or should be taxed for only a half of
them in view of a contract with his wife which we shall mention. The
Commissioner of Internal Revenue and the Board of Tax Appeals imposed a
tax upon the whole, but their decision was reversed by the Circuit Court
of Appeals, 30 F.2d 898. A writ of certiorari was granted by this Court.
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By the contract, made in 1901, Earl and his wife agreed
"that any property either of us now has or may hereafter acquire .
. . in any way, either by earnings (including salaries, fees, etc.), or
any rights by contract or otherwise, during the existence of our
marriage, or which we or either of us may receive by gift, bequest,
devise, or inheritance, and all the proceeds, issues, and profits of any
and all such property shall be treated and considered and hereby is
declared to be received, held, taken, and owned by us as joint tenants,
and not otherwise, with the right of survivorship." The validity of
the contract is not questioned, and we assume it to be unquestionable
under the law of the State of California, in which the parties lived.
Nevertheless we are of opinion that the Commissioner and Board of Tax
Appeals were right.
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The Revenue Act of 1918 approved February 24, 1919, c. 18, §§ 210,
211, 212 (a), 213 (a), 40 Stat. 1057, 1062, 1064, 1065, imposes a tax
upon the net income of every individual including "income derived
from salaries, wages, or compensation for personal service . . . of
whatever kind and in whatever form paid," § 213 (a). The
provisions of the Revenue Act of 1921, c. 136, 42 Stat. 227, in sections
bearing the same numbers are similar to those of the above. A very
forcible argument is presented to the effect that the statute seeks to
tax only income beneficially received, and that taking the question more
technically the salary and fees became the joint property of Earl
and his wife on the very first instant on which they were received. We
well might hesitate upon the latter proposition, because however the
matter might stand between husband and wife he was the only party to the
contracts by which the salary and fees were earned, and it is somewhat
hard to say that the last step in the performance of those contracts
could be taken by anyone but himself alone. But this case is not to be
decided by attenuated subtleties. It turns on the import and reasonable
construction of the taxing act. There is no doubt that the statute could
tax salaries to those who earned them and provide that the tax could not
be escaped by anticipatory arrangements and contracts however skilfully
devised to prevent the salary when paid from vesting even for a second
in the man who earned it. That seems to us the import of the statute
before us and we think that no distinction can be taken according to the
motives leading to the arrangement by which the fruits are attributed to
a different tree from that on which they grew.
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Judgment reversed.
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The CHIEF JUSTICE took no part in this case.
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19300317
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