COMMMUNITY PROPERTY STATES AND THE FREEDOM MOVEMENT

 

 

 

Various states such as Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas and Washington follow a community property system.  Under community property law, all property acquired by the husband and wife during marriage and while living together, whether by gift or productive work of either the husband or the wife is community property.  In community property states, the IRS routinely attacks the spouse of an individual who has not filed.  For example, if a man in the state of California receives an assessment for $40,000 in back taxes for the year 1985 (a year in which he did not file a return), his wife (who is a housewife) will receive an assessment of $20,000 which is 50% of the amount the husband allegedly owes.  Now just imagine the hardship that can be created for you if you are involved in the Freedom Movement and you happen to live in a community property state.

 

Currently, various individuals are litigating the IRS' right to proceed in this fashion, but the smart individual will do something to protect himself.  Marriage simply may not be a safe arrangement for individuals who insist in living in community property states.

 

However, if you are married and you insist on staying that way and you also insist on remaining in the front lines of the Freedom Movement, you should at least consider the creation of a community property agreement that earnings remain separate property.  Such an agreement could read as follows:

 

     "1.  Parties.......(husband) and.........(wife) were married on .........,19..., in .........(place of marriage).  As of the date of this Agreement, they are living together as husband and wife.

 

      2. Property.  the parties agree that their respective earnings from any employment in which they may engage during the course of their marriage will remain the exclusive property of the person who earned it, and shall not become community property.

 

.........., 19........

 

                              ............................

                              (Signature of the Parties)   "

 

If such an agreement is signed, the IRS should be notified of such an agreement as the first audit contact.  Later, should the spouse be attacked, an unlawful levy suit could be filed in the District Court, or a Tax Court Petition could allege that the wages were separate property.  If you wish to use this approach, it would be advised for you to go to the law library in your state and check on the law regarding this procedure. You may wish to have a local attorney draft such a contract.

 

No matter which approach you take, remember that the best approach is one that gives you the needed level of comfort and makes the statement you wish to make.  Don't put yourself out on a limb without a parachute.

SOME THOUGHTS ON COMMUNITY PROPERTY LAWS AND THE IRS

 

 

            Many individuals who have run head-on into a confrontation with the IRS have been surprised by the fact that the IRS treats married couples differently in community property states than in the other states.  The community property states are:  Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin (Under the provisions of the Wisconsin Marital Reform Act, the rights of spouses in Wisconsin are community property rights).

 

            Generally, in community property states, property which is purchased with community funds is community property and the income from that property is community income.  Property, which is purchased with separate funds after marriage, is separate property.  The income from separate property is taxable solely to the spouse owning the property in states where that income does not constitute community income.

 

            Generally, community income is income from community property, salaries, wages and other pay for services of either spouse or both the husband and wife during the marriage.  Community income also includes the earnings of unemancipated minor children. (Apparently your minor child could owe taxes on your liability in a community property state if that minor child had wages).

 

            Now get this twist: Income from separate property is income of the partner who owns the property in Arizona, California, Nevada, New Mexico and Washington; but, in Idaho, Louisiana, Texas and Wisconsin income from separate property is community income.

 

            It is generally assumed that property obtained after the marriage is community property whether it is in the name of the husband, the wife or both.

 

            If you are in a community property state, and you are married, and you choose to file separate returns; then each spouse must report one-half of their combined community income and deductions in addition to their separate income and deduction.  You can see, obviously, how dangerous it is to be married in a community property state if you are fighting the IRS.  If husband and wife can remain judgment proof and they both are in agreement with the stand against the IRS; then they are OK; but what if judgment proofing is impossible and what if the wife doesn't approve?  Then the wife, when she files, must declare half the husband's income. The IRS can then use the information on her return to attack her husband both criminally and civilly.

 

            Therefore, if you are in a community property state and you are fighting the IRS, you really have three choices:

 

            1.  Both spouses are on the front line.

     2.  Divorce and live together, then one spouse files as single; the other spouse stays on the front line.

     3.  Stay married and construct a written agreement in accordance with the laws of your state.

 

            Agreements, which change the characterization of property ownership, may be enforced; but they must be written.  In some states oral contracts have been accepted, but I wouldn't recommend that you take that chance.  If the wife of the "taxpayer" relinquishes her rights to any property which the taxpayer then had or might thereafter acquire, then the salary earned or received by the taxpayer after the execution of such agreement was taxable in its entirety to him, because it was his separate property. (Van Dyke v. Comm., 120 F.2d 945 (CCA9, 1941); Ruben v. Comm., BTA Memo Op Dkt 104037 (1942), both of these decisions involve California Law.

 

            You must have a clear cut agreement on the ownership of property. (Helvering v. Hickman, 70 F2d 985 (CCA9, 1934) and Brooks v. Comm., 43 BTA 860. Wehe v. McLaughlin, 30 F2d 217 (CCA9, 1929); Sherman v. Comm., 76 F2d 810 (CCA9, 1935).  If your case ends up in the Tax Court,  your situation will be closely scrutinized.  (Woodhall v. Comm., 38 BTA 97, affd. 105 F2d 474 (CCA9, 1939).

 

            Anyway, hang in there and be sure to cover yourself if you are in a community property state.