Poe v. Seaborn
282 U.S. 101, 1930 U.S. LEXIS 7, 51 S. Ct. 58 (1930)
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Rule of Law:
State law determines the ownership of income for federal income tax purposes. In a community property state where each spouse has a present, vested one-half interest in community income, the spouses are entitled to file separate tax returns with each reporting one-half of the community's total income.
Facts:
- Seaborn and his wife were citizens and residents of Washington, a community property state.
- During and prior to 1927, they accumulated property, including real estate, stocks, and bonds, all of which constituted community property under Washington law.
- The couple owned no separate property and had no separate income.
- Their 1927 income consisted of Seaborn's salary, interest, dividends, and profits from property sales.
- For the 1927 tax year, Seaborn and his wife each filed a separate federal income tax return, reporting one-half of the total community income and deducting one-half of the community expenses.
Procedural Posture:
- The Commissioner of Internal Revenue determined that all community income should have been reported on Seaborn's return and made an additional assessment against him.
- Seaborn paid the additional tax under protest and filed a claim for a refund, which was rejected.
- Seaborn (the plaintiff) sued the Collector in the U.S. District Court for a refund.
- The District Court entered a judgment for Seaborn.
- The Collector (the appellant) appealed to the U.S. Circuit Court of Appeals.
- The Circuit Court of Appeals certified the legal question to the U.S. Supreme Court, which then directed the entire case record be sent up for its review.
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Issue:
Does the Revenue Act of 1926 require a husband in Washington, a community property state, to report the entire community income as his own, or may he and his wife each report one-half of it on separate tax returns?
Opinions:
Majority - Mr. Justice Roberts
No. The Revenue Act does not require the husband to report the entire community income; the spouses are entitled to each report one-half. The Revenue Act imposes a tax on the net income 'of' every individual, and the word 'of' denotes ownership, which is determined by state law. Under Washington law, the wife has a present, vested property right in community property equal to her husband's, meaning she is a co-owner of the community income from the moment it is acquired. The husband's extensive power to manage community property does not equate to ownership; rather, he acts as an agent for the community. This situation is distinct from cases like Lucas v. Earl, where income was earned by one person and then assigned, because here, Washington law dictates that the earnings never belong solely to the husband but to the community from their inception.
Analysis:
This decision established that state property law dictates ownership for federal income tax purposes, creating a significant tax advantage for residents of community property states. By allowing 'income splitting,' couples in these states could often achieve a lower effective tax rate than couples in common law states where income was taxed to the earner. This geographic disparity in federal tax treatment prompted Congress in 1948 to create the joint income tax return, extending the benefits of income splitting to married couples in all states and making the specific holding of this case less impactful.
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