*129 Decision will be entered for the respondent.
Share of community income reported for 1942 by wife, not in the armed forces, but which resulted from personal services in that year of petitioner-husband who was in active naval service during 1942-1943, held, in applying section 6 (b), Current Tax Payment Act, not excluded from taxable income by section 6 (d) (1), referring to a "taxpayer * * * in active service."
*77 By this proceeding petitioner seeks a redetermination of a deficiency in income tax of $ 1,119.85 for 1943.
The primary question is the proper method, under the provisions of section 6 (d) (1) of the Current Tax Payment Act for determining the tax of petitioner, who was married and resided in a community property state, whose entire income resulted from his law practice in 1942, and who was a member of the armed forces.
FINDINGS OF FACT.
Petitioner, a citizen of the United States, and his wife, Doris, reside in New Orleans, Louisiana. They were married approximately 15 years ago and have lived together in New Orleans since that time. They have two minor children. Their income tax returns*131 for the years 1942 and 1943 were filed with the collector of internal revenue at New Orleans. They are on a cash receipts and disbursements method of accounting.
Petitioner is a lawyer and has been engaged in practice in New Orleans since 1930. His main source of income since his marriage, except for the period while he was in the United States Navy, has been his law practice. His income has constituted the entire income of the marital community. In 1942 and several years before petitioner and his wife had divided their community income for tax purposes and filed separate returns. In the 1942 returns the personal exemption of $ 1,200 was divided between petitioner and his wife, $ 1,000 being claimed by the latter and $ 200 by petitioner. In 1943 only one return was filed. It was headed "Marion J. Epley, Jr.," and was signed by petitioner only. Under the line in which petitioner's name was placed appears the following: "(Use given name of both husband and wife, if this is a joint return.)" A dash was placed opposite the (a), (b), and (c) subdivisions of question No. 3 calling for the name *78 of husband or wife, personal exemption, if any, claimed, and the collector's *132 office to which sent, if a separate return was made for the current year. It contained all items of income ($ 2,708.66) and deductions ($ 841.64) for the marital community, and constituted the joint return of the two spouses. The 1943 return took the entire personal exemption of $ 1,200 and claimed all of the dependents. Under the deduction for taxes (schedule F) appears "State income (Mr. and Mrs. E.) $ 228.42." This was a reference to the 1942 state income taxes which petitioner had paid to Louisiana on the separate state returns of himself and Doris.
On October 18, 1942, petitioner went on active duty with the Navy and remained in the Navy until June 1945. After leaving New Orleans in October 1942 for training, he returned to the city for several days early in 1943, and then returned permanently to New Orleans in the middle of 1943 for Navy duty.
The 1942 returns disclose that for that year $ 14,509.66 was realized from petitioner's law practice. The returns reported total community net income of $ 14,721.69. Of this amount, Doris reported $ 7,000 as net profit from business or profession. On the face of petitioner's return for 1942 appeared the following:
Note: See *133 community return of Mrs. Marion J. Eplpey, Jr. for remainder of income ordinarily to be reported under item 8.
On the face of Doris' return for 1942 appeared the following: "Note: See return of Marion J. Epley, Jr., for other income."The 1942 returns as filed reflected tax due by petitioner of $ 1,505.90 and by Doris of $ 1,298. The returns were filed with the collector at New Orleans under date of March 15, 1943. A quarterly payment of $ 324.50 was paid by petitioner on the return of Doris; nothing was paid at that time on petitioner's tax liability. The one quarterly payment for Doris was the only payment made for the years 1942 and 1943 for either petitioner or his wife. Pursuant to a request made by petitioner in a letter dated June 15, 1944, refund was made of this quarterly payment after deducting $ 35.81 tax liability reflected in the return for 1943. The refund was placed in the bank account in petitioner's name, which was the only bank account of the marital community.
The 1943 return computed the income and victory tax as follows:
| 1. Income tax net income | $ 1,867.02 | |
| 2. Less: Personal exemption | $ 1,200.00 | |
| 3. Credit for dependents | 700.00 | |
| 1,900.00 | ||
| 4. Balance (Surtax net income) | $ (32.98) | |
| 12. Balance of income tax | None |
| 1. Victory tax net income | $ 1,867.02 | |
| 2. Less: Specific exemption | 624.00 | |
| 3. Income subject to victory tax | $ 1,243.02 | |
| 4. Victory tax before credit (5% of line 3) | $ 62.15 | |
| 5. Victory Tax Credit (44%) | 27.34 | |
| 6. Net victory tax | $ 35.81 | $ 35.81 |
| 14. Total income and victory tax | $ 35.81 | |
| 17. Income tax for 1942 | $ 2,803.90 | |
| 20. Total income and victory tax | 35.81 | |
| 21. Less (b) income tax paid on 1942 income | 324.50 | |
| 23. Refund due | $ 288.69 |
On line 17, page 4, of the 1943 return, the total income tax reported by petitioner and Doris ($ 2,803.90) for 1942 was listed. This was the aggregate of the $ 1,505.90 and $ 1,298 computed by petitioner and Doris, respectively, in their separate 1942 returns. This aggregate tax was not entered on line 18, page 4, of the 1943 return, in computing the 1943 tax liability. Line 18 reads as follows: "Enter line 16 or 17 whichever is Larger. (Members of the armed forces see page 4 of Instructions)." In this connection petitioner wrote a letter to the collector of internal revenue under date of June 15, 1944, stating as follows:
Under my income tax return for the year 1942, Schedule H, I report total receipts from*135 my law practice for that year of $ 26,073.94. This was all earned income. The entire net profit from this source was earned net income, likewise reported on my return under Schedule H.
A separate return was filed by Mrs. Epley, in which nothing was reported or shown as earned under Schedule H, but at line 10 on page 1 of the return Mrs. Epley reported $ 7,000.00 of my earned income as her income for the sole purpose of making a separate return.
A notation was put on the face of my return to show that part of my earned net income was being reported by Mrs. Epley and a notation was placed on the front of the return to show that she was reporting part of my earned income on her return. This was the only source of income shown on her return, and was, of course, to be paid by me out of my earned net income.
Under the tax statute governing 1943 tax returns by members of the armed services, my 1942 income tax exceeds my 1943 income tax by $ 2,768.09. Of this amount one quarterly payment amounting to $ 324.50 was paid under Mrs. Epley's return. The balance was deferred under privilege granted by the Internal Revenue Statutes permitting me to defer my earned income.
It is respectfully*136 requested that this letter be considered as part of my official 1943 income tax return and serve first, as a formal request for recognition of forgiveness of all my 1942 taxes on my entire earned net income, including the $ 7,000.00 reported on Mrs. Epley's return; and second, that the sum of $ 324.50 *80 already paid by me from my earned net income be refunded, after deducting the small tax due under line 16 on page 4 of my 1943 tax return enclosed herewith.
Petitioner's intention in filing the 1943 return was to make every effort to file an individual return to conform to his understanding that that was necessary to take advantage of the 1943 Act. He believed that this was the only way he could take advantage of the act, which he felt was passed for the purpose for which he sought to use it.
Under the law of Louisiana all of 1942 and 1943 income was community income.
In the notice of deficiency respondent stated with respect to the year 1943:
Inasmuch as your spouse, Mrs. Marion J. Epley, Jr., was not in the military or naval forces in 1942, it is held that the earned net income to be excluded from your returns for the calendar year 1942, under the provisions of section 6 *137 (d) (1) of the Current Tax Payment Act of 1943, is limited to your half of the community earned net income.
It is held further that the liability for the tax due by you and/or your spouse, Mrs. Marion J. Epley, Jr., for the taxable year 1943 is joint and several.
With respect to the year 1942, the notice stated:
It has been determined that the net income reported on your return and on your spouse's return constitutes the taxable net income of the marital community. The adjustment here scheduled is to divide the community net income equally between you and your spouse.
For that year respondent allowed the amount of $ 1,500 of the compensation for active service as a commissioned officer in the Navy as an exclusion from taxable income, of which petitioner had not availed himself.
OPINION.
Whatever doubt there may have been as to the character of the return filed by petitioner for the year 1943 is eliminated by the position of the parties, which removes this as an issue in the present proceeding. Although the return was made only in petitioner's name, and was so denominated, the fact that it includes items of income and deduction of both spouses would strongly suggest its joint nature. *138 Mrs. D. Sydney Smith, 4 B. T. A. 385. But the question need not be labored, since respondent has determined that the return was joint, and petitioner concedes on brief that: "While petitioner intended to file a separate return for the year 1943, it seems clear that he in fact filed a joint return."
The point is important, however, because of its bearing on petitioner's liability in this proceeding for any tax on his wife's income. Under the Current Tax Payment Act, the tax measured by either 1942, *81 or 1943, income, as the case may be, is a 1943 tax. Lawrence W. Carpenter, 10 T. C. 64. That act requires that: "If the taxpayer for the taxable year 1942 or for the taxable year 1943 makes a joint return with his spouse, the taxes of the spouses for the taxable year for which a joint return is not made shall be aggregated for the purposes of subsections (a), (b), and (c) * * *." Section 6 (d) (2). And the liability for the tax due on a joint return is joint and several. Internal Revenue Code, section 51 (b).
It follows that if the income of petitioner's wife for 1942, when separate returns were filed, is not excluded*139 as petitioner claims it is, under section 6 (d) (1) of the Current Tax Payment Act, 1 the tax upon it is to be aggregated with petitioner's, the 1943 tax will be measured by it under section 6 (b), and petitioner will be liable for any deficiency so arrived at. The question is accordingly not moot, as it might otherwise have been if only the wife's tax liability were at issue, she not being a party to this proceeding.
*140 This brings us to the true controversy. Petitioner, a resident of a community property state, and his wife each reported for 1942 a part of the community income, all of which was the product of petitioner's personal services. By 1943 he was a member of the armed forces of the United States. The parties are agreed that in applying section 6 (b) of the Current Tax Payment Act 2 -- which is applicable because *82 petitioner's tax for 1942 would be greater than that for 1943 -- his share of the community income may be excluded under section 6 (d) (1), quoted above, as "earned income" in computing first the 1942, and then the 1943 tax. The disagreement arises as to whether the wife's share of the 1942 community income may likewise be excluded. We think it may not.
*141 There is to this day an open question whether the wife's share of community income resulting from her husband's services is her "earned income." Cf. McLarry v. Commissioner (C. C. A., 5th Cir.), 30 Fed. (2d) 789, with Mrs. Frank Andrews, 26 B. T. A. 642. And see Regulations 111, sec. 29.25-2. But whether earned or not, it is clearly hers, and taxable as such. Bender v. Pfaff, 282 U.S. 127">282 U.S. 127. The result seems equally clear either way. If it is earned income of the wife, it can not well be the "earned income" of a serviceman, and that is what the statute deals with. 3 Mrs. Epley could also have been in the naval service, and in that case the statute would have covered her as well. But she was not. If, on the other hand, the wife's share is not even "earned income" as far as she is concerned, then it was clearly intended to be taxed under section 6 (d) (1), since the exclusion is specific in its limitation to "compensation for personal services," as described in section 25 (a) (4), Internal Revenue Code, the successor to section 209 (a) (1), Revenue Act of 1926, which was involved*142 in such cases as Mrs. Frank Andrews, supra.
If the two spouses had filed separate returns for 1943, as they did for 1942, the question could scarcely have arisen. It would then be a simple matter to demonstrate that the forgiveness of petitioner's tax has nothing to do with that of his wife. Petitioner's undoubted privilege of filing a joint return for the community should not be permitted to obscure what would otherwise be clear. If he is held to be liable for his wife's unforgiven tax, it is purely the result of his voluntary exercise of an option which the law gives him the right to elect, but which carries with it the disadvantage corresponding to its benefits.
*83 Respondent was authorized to issue regulations for the application*143 of the Current Tax Payment Act. He has dealt with the present situation specifically: "If * * * the husband and wife were domiciled in a State recognized as a community property State for Federal tax purposes and rendered separate income tax returns on the community income basis, each reporting thereon one-half of the earned income, the wife is not entitled to the benefit of the exclusion provided by section 6 (d) (1) with respect to her share of the community earned income. * * *" (T. D. 5300, Regulations under the Current Tax Payment Act.)
For the reasons stated, we think the interpretation so given the act is reasonable. It should be approved. There is no greater inequity than if the wife had earned the income in a separate property state, as, indeed, petitioner concedes, or than if it had been derived from the investments of one spouse or the other. In either of these situations it seems to us reasonably clear that a taxpayer could not claim that it was his earned income and should hence be excluded. The same result seems to us required here.
Decision will be entered for the respondent.
Footnotes
1. (d) Rules for Application of Subsections (a), (b), and (c). --
(1) Application of subsection (b) to members of armed forces. -- If the taxpayer is in active service in the military or naval forces of the United States or any of the other United Nations at any time during the taxable year 1942 or 1943, the increase in the tax for the taxable year 1943 under subsection (b) (1) shall be reduced by an amount equal to the amount by which the tax for the taxable year 1942 (determined without regard to this section) is increased by reason of the inclusion in the net income for the taxable year 1942 of the amount of the earned net income (as defined in section 25 (a) (4)↩).
2. (a) Tax for 1942 Not Greater Than Tax for 1943. -- * * *
(b) Tax for 1942 Greater Than Tax for 1943. -- In case the tax imposed by Chapter 1 of the Internal Revenue Code upon any individual (other than an estate or trust and other than a nonresident alien not subject to the provisions of sections 58, 59, and 60 of such chapter) for the taxable year 1942 (determined without regard to this section, without regard to interest or additions to the tax, and without regard to credits against the tax for amounts withheld at source) is greater than the tax for the taxable year 1943 (similarly determined), the liability of such individual for the tax imposed by such chapter for the taxable year 1942 shall be discharged as of September 1, 1943, except that interest and additions to such tax shall be collected at the same time and in the same manner as, and as a part of, the tax under such chapter for the taxable year 1943. In such case the tax under such chapter for the taxable year 1943 shall be increased by --
(1) the amount by which the tax imposed by such chapter for the taxable year 1942 (determined without regard to this section and without regard to interest and additions to such tax) exceeds the tax imposed by such chapter for the taxable year 1943 (determined without regard to this section, without regard to interest and additions to such tax, and without regard to credits against such tax under section 466 (e) or under section 35 of such chapter), plus
(2) if the tax for the taxable year 1943 (determined without regard to this section, without regard to interest or additions to the tax, and without regard to credits against such tax under section 466 (e) or under section 35 of such chapter) is more than $ 50, an amount equal to 25 per centum of the tax for the taxable year 1943 (so determined) or the excess of such tax (so determined) over $ 50, whichever is the lesser. Such amount shall in no case exceed 25 per centum of the tax for the taxable year 1942 (determined without regard to this section and without regard to interest and additions to such tax) or the excess of such tax (so determined) over $ 50, whichever is the lesser.
This subsection shall not apply in any case in which the taxpayer is convicted of any criminal offense with respect to the tax for the taxable year 1942 or in which additions to the tax for such taxable year are applicable by reason of fraud. An individual who becomes subject to tax for the taxable year 1943 under this subsection shall be an individual required to make a return for the taxable year 1943 under section 51 of the Internal Revenue Code↩.3. "* * * The effect of this last provision is to abate the higher year 1942 instead of the year 1943, with respect to the tax on the earned net income of servicemen. * * *" (Senate Finance Committee Report No. 221, 78th Cong., 1st sess., p. 11.)↩