The Revenue Act of 1948 and the Movement toward Income Splitting

Summary

The community property system has many roots, but the most common American form is based on Spanish law. Community property is associated with civil law, in which marriage is viewed as a contract between spouses as equals and creates a new legal entity. Each spouse has separate property--gifts and inheritances--and the couple jointly owns community property--income and property bought with it during the course of the marriage. Each spouse owns his separate property, and the wife has an equal interest in community property. Upon death, each spouse can dispose of their separate property and half of the community property.

At common law, derived originally from English law, a married couple was one legal entity, personified in the husband. The wife's ability to own and control property was virtually nonexistent; the husband gained her personal property and the use of and profits from her real property. Married women's property acts removed bars to wives' ownership of property but did not give them any interest in their husbands' property.

Originally, eight states--Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington--had community property. Generally, assets held prior to marriage, gifts, and inheritances were separate property, and in some of these states, profits and rents from separate property remained separate. When filing tax returns, couples split their income equally and each claimed ownership of half of it for tax purposes. Early legal challenges to community property systems established wives' legal interests in community property.

Between 1939 and 1949, Michigan, Nebraska, Oklahoma, Oregon, and Pennsylvania switched to community property to obtain tax benefits for married couples. In an era when only one spouse usually worked, married couples paid lower taxes when they could split one income between both partners. These states wished to satisfy courts and the Internal Revenue Service that community property was jointly owned while giving as few property rights as possible to wives. Oklahoma and Oregon were the first states to switch, establishing systems allowing married couples to elect community property treatment. In 1944, the Supreme Court found that this system did not create legal communities, meaning both members of the community did not have a present interest in community property, and that income splitting for tax purposes was impermissible. Both states then established binding community property systems, and the other three states followed.

The end of World War II left the government with a reduced need for high taxes. There was political sentiment for tax cuts. People were moving to community property states to reap the tax benefits. Some common law states tried to devise methods to decrease tax burdens on couples, but most were unsuccessful. As women returned home from work places or found their income reduced after the war, many families took on the income structure that was most aided by community property. Federal income splitting would grant married couples tax benefits without increasing women's property rights, so states lobbied Congress for an income splitting provision.

Congress adopted such a plan in the Revenue Act of 1948. The law allowed married couples to combine their income and deductions, divide the total in half, compute the tax on that figure and then double it. The revenue act proved very beneficial to many married couples. After its adoption, the second wave of community property states repealed their community property laws and reverted to a common law system of marital property.

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