Ballester-Ripoll v. Court of Tax Appeals of PR

• Decision Date: 05 April 1944
• Docket Number: No. 3918.,3918.
• Citation: 142 F.2d 11
• Parties: BALLESTER-RIPOLL v. COURT OF TAX APPEALS OF PUERTO RICO et al.
• Court: U.S. Court of Appeals — First Circuit

142 F.2d 11 (1944)

BALLESTER-RIPOLL v. COURT OF TAX APPEALS OF PUERTO RICO et al.

No. 3918.

Circuit Court of Appeals, First Circuit.

April 5, 1944.

William Cattron Rigby, of Washington, D. C. (Oscar Souffront, of Mayaguez, P. R., and J. J. Ortiz-Alibran, of San Juan, P. R. (Rigby, Leon & Weill and Fred W. Llewellyn, all of Washington, D. C., of counsel), for appellant.

I. Henry Kutz, Sp. Asst. to the Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. to the Atty. Gen., for appellees.

Before MAGRUDER, MAHONEY, and WOODBURY, Circuit Judges.

MAHONEY, Circuit Judge.

On March 15, 1941, the taxpayer and his wife filed separate income tax returns for the year 1940. Each reported a net income of $19,529.45, that amount being one-half of the income received from the same source, namely: salary from a partnership, directors fees from a partnership, directors fees from a corporation, interest on notes payable by a partnership, profits from an interest in a partnership and corporate dividends, all of which was community property. On August 18, 1941, the Treasurer reliquidated the taxpayer's return pursuant to Acts Nos. 31 and 159 of the Laws of Puerto Rico, 1941, consolidated it with that of his wife and eliminated certain exemptions and credits. The Treasurer notified the taxpayer that he would be required to pay on the combined net income of $39,058.90 an additional tax of $5,661.71, making a total of $6,507.49 for the year 1940. On October 1, 1941, the taxpayer filed a complaint in the Court of Tax Appeals alleging that the levying of such tax was void because the procedure was not in accordance with that authorized in Sections 56 and 57 of Act 74 of August 6, 1925, as amended. On May 27, 1942, the Court of Tax Appeals decided that it was without jurisdiction to entertain the case but on certiorari the Supreme Court of Puerto Rico reversed the order of the Court of Tax Appeals and held that the latter court had jurisdiction and remanded the case for further proceedings. The Court of Tax Appeals decided the case on its merits against the taxpayer and upheld the tax imposed by the Treasurer. This is an appeal from the decision of the Supreme Court of Puerto Rico affirming in part the decision of the Court of Tax Appeals. The statutes are copied in the margin.¹

Section 13 of Act No. 31, Laws of Puerto Rico, 1941, provides that a husband and wife living together must file a single joint return of their income and imposes a tax on the aggregate income. Prior to the amendment the husband and wife living together had the option of making a separate or joint return. The taxpayer contends that under the community property law of Puerto Rico the income for 1940 was owned separately by his wife and by him and that the mandatory joint return prescribed by the income tax act deprived him of property without due process of law in that it taxed him on income belonging to another person, his wife.

In the first important case involving the taxability of income from community property, United States v. Robbins, 1926, 269 U.S. 315, 46 S.Ct. 148, 70 L.Ed. 285, the Supreme Court held that, since under the then existing California law a wife had a mere expectancy in the community property and not a vested interest, the husband was taxable on all of the community property income. The court also enunciated a second ground of decision, namely, that even if the wife's interest were vested the husband's control over the community funds would be enough to subject him to taxation for the entire community income. This second ground of decision was abandoned, however, in Poe v. Seaborn, 1930, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239, where it was held that since a wife had a present vested interest in community property equal to that of her husband under the local law of the State of Washington, she was entitled to treat one-half the income as her own and file a separate return for it.

Thus, as the law stands on these cases, ownership of a present vested interest equal to that of her husband is the sole test of whether a wife may report one-half of the community property income. The fact that the husband has "sweeping powers of management" and control are of no significance, but if, as was the fact in California at the time of United States v. Robbins, supra, a wife does not have a present vested interest in the community property, the entire income from community property is that of the husband and must be reported by him in a single return.

The Supreme Court of Puerto Rico in the opinion below held that the wife's interest in community property is not vested. It quoted its opinion in National City Bank v. De la Torre, 54 P.R.R. 219, 223, 224, to the effect that "the interest of the wife in the conjugal partnership while it exists is a mere expectancy or hope to receive one moiety of the liquid assets that might exist when the partnership is dissolved." Recognizing that in the rehearing in the De la Torre case it had said "we do not doubt in reality, that the interest of the wife is something more than a mere expectancy * * *" (54 P.R.R. 651, 654, 655), it said below, "It is not necessary for us in a taxation case of this sort to go further than to say that the wife during coverture does not have a vested right * * * saying that `the interest of the wife is something more than a mere expectancy' does not go so far as to call the wife's interest a vested one, and that is the only question before us at this time." As we noted in commenting on the statement of the Supreme Court of Puerto Rico in its original opinion in the De la Torre case that "the interest of the wife * * * is a mere expectancy", "there is no doubt that this concept of the nature of the wife's interest has been in vogue among civil law commentators. See the review by White, C. J., in Garrozi v. Dastas, 204 U.S. 64, 78-83, 27 S.Ct. 224, 51 L.Ed. 369; McKay, Community Property, 2d Ed., §§ 1096-1108. General expressions, cited by the court below, from the texts of the Spanish commentators Manresa and Scaevola look the same way. 9 Manresa, Commentarios al Código Civil Español, 4th Ed. 1930, pp. 571, 579. 22 Scaevola, Código Civil, page 236." De la Torre v. National City Bank of New York, 1 Cir., 1940, 110 F.2d 976, 978, certiorari denied 311 U.S. 666, 61 S.Ct. 24, 85 L.Ed. 428.

We may reverse a judgment of the Supreme Court of Puerto Rico on a question of local law only if that judgment is "inescapably wrong". Puerto Rico v. Rubert Hermanos Co., 1942, 315 U.S. 637, 62 S.Ct. 771, 86 L.Ed. 1081; Bonet v. Texas Co., 1940, 308 U.S. 463, 60 S.Ct. 349, 84 L.Ed. 401; Sancho Bonet v. Yabucoa Sugar Co., 1939, 306 U.S. 505, 307 U.S. 613, 59 S.Ct. 626, 83 L.Ed. 946. Since this is a matter of local law, United States v. Robbins, supra; De la Torre v. National City Bank of New York, supra, we need go no further than to say that the judgment below is not inescapably wrong.

The taxpayer urges that Casal v. Sancho, 53 P.R.R. 609 is inconsistent with the opinion below. Although that case quoted some text book language contrary to the opinion now before us, the court properly pointed out that the actual decision in that case was not contrary. Furthermore, as indicated in Waialua Agr. Co. v. Christian, 1938, 305 U.S. 91, 109, 59 S.Ct. 21, 83 L.Ed. 60, on these questions of local law the territorial courts have the broad powers of other appellate courts to overrule or narrow their own prior decisions. Since the wife did not have a vested interest in the community income, there was nothing to prevent the Legislature of Puerto Rico from requiring the husband to report the entire community income in one return.

The taxpayer contends that the decision below is in conflict with Hoeper v. Tax Commission of Wisconsin, 1931, 284 U.S. 206, 52 S.Ct. 120, 76 L.Ed. 248, 78 A.L.R. 346. There a Wisconsin income tax statute which computed in the husband's income the separate income of his wife, although under the laws of that state he had no interest in or control over the property or income of his wife, was held violative of due process since it taxed one person for the property of another. Contrary to the taxpayer's assertion, the Puerto Rican Court was careful to point out that the major ground of its decision was not in conflict with the Hoeper case and it was quite right in doing so. Since under Puerto Rican community property law the income was that of the husband, there is nothing in Hoeper v. Tax Comm. of Wisconsin which would require that the husband and wife be allowed to split this income between them for tax purposes. On the facts of the case at bar that is as far as the decision need go. It is true that the Supreme Court of Puerto Rico also indicated that it felt that the Hoeper case was no longer sound law but it clearly indicated that those statements were no part of its actual decision. That court said:

"We need go no further than to say that nothing has been called to our attention which would require us under our Code to classify any of the items contained in the return involved herein as other than community income. To provide for a joint return under those circumstances is merely to bring income tax law in line with our traditional community property concepts. Only if there were an affirmative showing that one of the spouses had received some separate income in the traditional and technical sense would we be squarely presented with the problem of determining whether there was any validity left in Hoeper v. Tax Comm. of Wisconsin as a controlling authority. Whether the government could argue in that situation that provision for a single joint return was valid on the basis of taxation of husband and wife living together as a single economic unit, we are not called on to decide in this case."

The taxpayer also contends that the progressive rates embodied in the Act are in conflict with the requirement of § 2 of the Organic Act that ...