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Lucas v. Earl

U.S.
Mar 17, 1930
281 U.S. 111 (1930)

Summary

holding that the predecessor tax statute taxed salaries "to those who earned them" and that "the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised."

Summary of this case from S.E.C. v. Bilzerian

Opinion

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE NINTH CIRCUIT.

No. 99.

Argued March 3, 1930. Decided March 17, 1930.

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. 30 F.2d 898, reversed.

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.

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.

Mr. Warren Olney, Jr., with whom Messrs. J.M. Mannon, Jr., Robert L. Lipman and Henry D. Costigan were on the brief, for respondent.

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.

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.

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.

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.

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.

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.

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.


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.

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.

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.

Judgment reversed.

The CHIEF JUSTICE took no part in this case.


Summaries of

Lucas v. Earl

U.S.
Mar 17, 1930
281 U.S. 111 (1930)

holding that the predecessor tax statute taxed salaries "to those who earned them" and that "the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised."

Summary of this case from S.E.C. v. Bilzerian

holding that husband's entire salary was taxable notwithstanding agreement with wife to hold any acquired property as joint tenants

Summary of this case from Subway Real Est. Corp. v. Dir. of Taxation

concluding that, based on an earlier version of the federal tax code, "[t]here is no doubt that the statute could tax salaries to those who earned them"

Summary of this case from Holt v. Department of Taxation Revenue

concluding that, based on an earlier version of the federal tax code, “[t]here is no doubt that ... salaries [are taxable] to those who earned them”

Summary of this case from Lacey v. Indiana Department of State Revenue

rejecting the suggestion that somehow "fruits are attribut[able] to a different tree from that on which they grew" and holding that a husband had to report 100% of his salary as his own income for tax purposes, even though he and his wife had agreed that 50% would belong to her

Summary of this case from Garner v. P.J. Trucking, Inc. (S.D.Ind. 12-2-2010)

In Lucas v. Earl, 281 U.S. 111, the validity of the contract to transfer sums earned was not significant to the inquiry as to who earned the compensation.

Summary of this case from Lusthaus v. Commissioner

In Lucas, the Supreme Court held that a taxpayer's salary may not escape tax "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.

Summary of this case from Cole v. C.I.R

In Earl, the husband and wife may, in fact, have agreed to share assets not out of a desire to avoid taxes, but rather out of a sense of marital equity.

Summary of this case from Raymond v. U.S.

In Lucas, the taxpayer assigned one-half of his future salary to his wife to avoid paying taxes on the entire salary, and argued in litigation that because he had never actually received the income before distributing it to his wife, it was not income to him.

Summary of this case from Banks v. C.I.R

refusing to allow a taxpayer to escape taxes through "anticipatory arrangements and contracts however skillfully devised to prevent the [income] . . . from vesting even for a second in the [one] who earned it"

Summary of this case from Banaitis v. C.I.R

In Lucas, the Supreme Court held that a man who contracted with his wife to give her half of everything he earned could not avoid paying taxes on that income, as "the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it."

Summary of this case from Foster v. U.S.

In Earl, Justice Holmes reasoned that the Internal Revenue Code "tax[es] salaries to those who earned them" and does not allow a party to escape taxes through "anticipatory arrangements and contracts however skillfully devised to prevent the salary... from vesting even for a second in the man who earned it."

Summary of this case from Young v. C.I.R

In Lucas and Horst, each taxpayer earned and created the right to receive and enjoy the benefit of the income before any assignment.

Summary of this case from Est. of Clarks ex Rel. Brisco-Whitter v. U.S.

In Lucas and Horst, the assignees were the object of gifts and not subject to income taxation themselves if the income was taxed to their assignor or donor.

Summary of this case from Est. of Clarks ex Rel. Brisco-Whitter v. U.S.

In Lucas and Horst, the income assigned to the assignee was already earned, vested and relatively certain to be paid to the assignor.

Summary of this case from Est. of Clarks ex Rel. Brisco-Whitter v. U.S.

In Lucas, taxpayer Earl assigned one half his right to salary and fees earned by him to his wife in order to avoid paying taxes on the whole, Lucas, 281 U.S. at 113-14.

Summary of this case from Est. of Clarks ex Rel. Brisco-Whitter v. U.S.

In Lucas v. Earl, 281 U.S. 111 (1930), the Supreme Court held that income is taxable to the person who earns it. The Court held that Earl, the taxpayer, could be taxed for the whole of his salary and attorney's fees earned by him, even though he had executed a contract whereby half of his earnings were to become the property of his wife.

Summary of this case from Kochansky v. C.I.R

In Earl, the taxpayer husband contracted with his wife that they would share all property, including income from future personal services.

Summary of this case from C.M. Thibodaux Co., Ltd. v. U.S.

In Lucas, the Supreme Court held that "the tax could not be escaped by anticipatory arrangements and contracts, however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it."

Summary of this case from United States v. Russell

In Lucas a wage earner assigned half of his earnings to his wife; the Court held that he was liable for the taxes on all. A trust was formed to pay alimony in Douglas; the Court held that the settlor must pay tax on the trust's income even though he did not receive the money.

Summary of this case from Matter of Kochell

In Lucas v. Earl, 1930, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, involving an assignment of earnings valid under state law, the Court held that salaries are taxed to those who earned them. There is no reason to distinguish assignment by private agreement from assignment by operation of law.

Summary of this case from Bagur v. C. I. R

In Lucas the taxpayer had the right to receive his salary and fees and would have received them but for the anticipatory contract with his wife.

Summary of this case from Basye v. United States

In Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, the test was first applied whether the assignor had "earned" payments that he had assigned in advance to his wife; but that was founded upon the words of the statute.

Summary of this case from J. Ungar, Inc. v. Commr. of Internal Revenue

In Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, the court held that one could not achieve freedom from liability for taxation by assigning his salary before it was paid.

Summary of this case from Commissioner of Internal Revenue v. Slagter

In Lucas v. Earl, 281 U.S. 111, 50 S. Ct. 241, 74 L.Ed. 731, a husband assigned a portion of his salary and earnings to his wife, which was paid to her pursuant to the terms of a written contract.

Summary of this case from Galt v. Commissioner
Case details for

Lucas v. Earl

Case Details

Full title:LUCAS, COMMISSIONER OF INTERNAL REVENUE, v . EARL

Court:U.S.

Date published: Mar 17, 1930

Citations

281 U.S. 111 (1930)
50 S. Ct. 241

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