Hofferbert v. Marshall, 6516.

Decision Date16 December 1952
Docket NumberNo. 6516.,6516.
PartiesHOFFERBERT v. MARSHALL et ux.
CourtU.S. Court of Appeals — Fourth Circuit

Robert B. Ross, Sp. Asst. to Atty. Gen. (Charles S. Lyon, Asst. Atty. Gen., Ellis N. Slack and A. F. Prescott, Sp. Assts. to Atty. Gen. and Bernard J. Flynn, U. S. Atty., Baltimore, Md., on brief), for appellant.

George Cochran Doub, Baltimore, Md., for appellees.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

PARKER, Chief Judge.

This is an appeal by a Collector of Internal Revenue from a judgment in favor of taxpayers in a suit brought to recover income taxes paid by them in response to a deficiency assessment. Taxpayers are husband and wife, who filed a single return jointly under the provisions of section 51 (b) of the Revenue Act of 1948. The controversy arises with respect to the treatment to be accorded an item of income amounting to $134,890.43 collected by the husband, an attorney at law, in the year 1948, but representing more than 80% of the payment of services performed by him for one client between March 1938 and March 1945. In their return taxpayers split this item of income in accordance with the provisions of 26 U.S.C. §§ 51(b) and 12(d) and computed the tax in accordance with the formula of 26 U.S.C. § 107(a). The examining officer of the Bureau of Internal Revenue disallowed the return in so far as it accounted for one-half of this item as income of the wife and held that the entire item should be accounted for as income of the husband alone. Computing the tax on this basis and applying the formula of 26 U.S.C. § 107(a) to it, the Commissioner assessed against taxpayers a deficiency of $8,129.09. They paid this amount to the Collector, and, upon the denial of a petition for refund, instituted this action for its recovery. The trial court sustained the position of taxpayers and the Collector has appealed. Only one question is presented for our consideration, viz.: do the provisions of the act of 1948 permitting the splitting of income in a return by husband and wife apply to an item of long term income earned prior to that year and subject to the computation formula prescribed by 26 U.S.C. § 107(a)? We think it perfectly clear that this question should be answered in the affirmative.

It should be noted in the beginning that there is no question as to the application of 26 U.S.C. § 107(a) to the item of income in question, which represents more than 80% of the compensation for services rendered between 1938 and 1945. That section provides:

"(a) Personal services. If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual."

And nothing in the section requires that the application thereof be limited to computing the tax of the one who rendered the services for which the compensation has been paid. Under the terms of the section as originally enacted its application was so limited. Ralph G. Lindstrom, 3 T. C. 686, affirmed Lindstrom v. Commissioner, 9 Cir., 149 F.2d 344. The section was amended to its present form, however, by section 139(a) of the Revenue Act of 1942; and the purpose of the amendment was thus explained in Senate Report No. 1631, 77th Congress, 2d Session, page 109, where it was said:

"In order for section 107(a) to be applicable it is not necessary that the individual who includes in his gross income compensation for such personal services be the person who rendered such services. For example, a partner who shares in compensation for such personal services rendered by the partnership may be entitled to the benefits of section 107(a), notwithstanding that he took no part in the rendering of such services. Likewise, in community property states, the spouse of a person who renders such personal services may be entitled to the benefits of section 107(a)". (Italics supplied.)

That the section as amended in 1942 is applicable to income not earned by the taxpayer does not admit of question. See Elder W. Marshall, 14 T.C. 90, affirmed Commissioner of Internal Revenue v. Marshall, 3 Cir., 185 F.2d 674; Federico Stallforth, 6 T.C. 140, 158. It is perfectly clear, therefore, that the formula prescribed by the section 107(a) applies to the item of income here which, while received in 1948, was more than 80% of the compensation for legal services rendered over a prior five year period, and it is equally clear that the fact that the wife did not participate in the earning of the income is no reason why it should not apply to the portion of the item taxable as income for the wife, if a portion of it is so taxable. The only question, then is whether the item of income was properly split between husband and wife in making their return of the year 1948. We think that such splitting was clearly permitted by section 26 U.S.C. § 12 (d) which provides:

"Tax in case of joint return. In the case of a joint return of husband and wife under section 51(b), the combined normal tax and surtax under section 11 and subsection (b) of this section shall be twice the combined normal tax and surtax that would be determined if the net income and the applicable credits against net income provided by section 25 were reduced by one-half." (Italics supplied.)

This provision allowing splitting of income between husband and wife was introduced into the revenue laws by Revenue Act of April 2, 1948, sec. 301, 62 Stat. 114. It was thus explained in Senate Report No. 1013 which accompanied the bill that became law (U. S. Congressional Service 80th Congress, vol. 2, p. 1214):

"This section amends section 12 of the code relating to surtax on individuals, by adding a new subsection (d) which provides for computation of tax under the plan for the so-called income splitting between husband and wife. This subsection applies only if a joint return for the taxable year involved is made as provided under section 51(b) of the code as amended by the bill. Under the provisions of section 12(d), the combined normal tax and surtax under section 11 and section 12(b) of the code in the case of the husband and wife making the joint return shall be twice the combined normal tax and surtax that would be determined if the net income and the applicable credits provided by section 25 of the code were reduced by one-half."

The purpose of this change in the law was to equalize the tax burden on married couples in community property and common law states and to give in common law states the advantages of splitting income which the community property states had enjoyed and which was leading to widespread attempts to change the laws of the common law states. The effect of the change was also to permit splitting of individual income in community property states. The Senate report accompanying the bill said (U. S. Congressional...

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