Mullen v. Commissioner

*1179 The respondent determined deficiencies in the petitioners' Federal income taxes as follows:

*171 Minor corrections made by the respondent in petitioners' returns were not contested, leaving only the following issue:

Whether or not the salary of Francis C. Mullen received while he was in the employ of the American Red Cross in Puerto Rico in 1945, 1946 and 1947, was exempt income under the provisions of section 251 (a) (1) and (3) of the Internal Revenue Code.

FINDINGS OF FACT.

The facts have been stipulated and are so found.

Francis C. and Margaret S. Mullen, the petitioners herein, are husband and wife, with residence in El Paso, El Paso County, Texas.

Francis C. Mullen was in the employ of the American Red Cross during the taxable years. From April 5, 1945, through 1947 he served *1180 in Puerto Rico. During the period herein involved he received the following salary, or compensation:

Margaret S. Mullen, during the same period, was employed as a school teacher in El Paso. She received the following salary, or compensation:

On or about March 15, 1946, the petitioners filed a joint short form individual income tax return for the taxable year 1945, to which was attached "Schedule for Citizens Entitled to Benefits of Section 251 of the Internal Revenue Code."

For the taxable years 1946 and 1947 the petitioners filed separate short form individual income tax returns. Attached to the returns filed for those years by Francis C. Mullen was "Schedule for Citizens Entitled to Benefits of Section 251 of the Internal Revenue Code."

All of the above returns were filed with the collector of internal revenue for the first collection district of Texas, and disclosed 721 N. El Paso Street, Apt. 20, El Paso, Texas, as the petitioners' address.

The respondent determined that less than 80 per cent of the petitioners' gross income for the taxable years was derived from sources within a possession of the United States and that, therefore, section 251 of the code would not apply. The respondent restored to petitioners' gross income the salary of Francis C. Mullen, and deficiencies were asserted accordingly.

Puerto Rico is a possession of the United States*173 within the meaning of section 251 of the Internal Revenue Code.

OPINION.

The sole question is whether or not the salary of Francis C. Mullen received while he was in the employ of the American Red Cross in Puerto Rico in 1945, 1946, and 1947 was exempt *1181 income under the provisions of section 251 (a) (1) and (3) of the Internal Revenue Code. ¹

*174 The percentage requirements in the two subsections (a) (1) and (3) are conjunctive -- it must be shown that 80 per cent of the gross income was derived from sources within a possession of the United States and also that 50 per cent of such income was derived from the active conduct of a trade or business within a possession of the United States. Arnold Bruckner, 42 B. T. A. 3.

The income of petitioners, they being residents of the State of Texas during the taxable years, was community income within the community property laws of that state. Since the income of each is community income, the rights of each of the petitioners in that income are "perfectly equivalent to each other." Hopkins v. Bacon, 282 U.S. 122. Thus the income of Francis C. Mullen is composed of one-half of his earnings and one-half of the income earned by his wife; the income of Margaret S. Mullen is composed of one-half of the income earned by her and one-half of that earned by her husband. The following table compares the earnings of each and source to the total:

*175 *1182 It is apparent from the above, first, that less than 80 per cent of the community income was, in any year, derived from sources within Puerto Rico and, second, that, since Francis C. Mullen's income is composed of one-half of what he earned in Puerto Rico and one-half of what his wife earned in the United States, less than 80 per cent of his income was derived from sources within a possession of the United States.

The petitioners refer us to I. T. 3665, 1944 C. B. 161, which contains the following language from E. R. Kaufman, 9 B. T. A. 1180:

The earnings of the husband from personal services become immediately a part of the community. Any exemption from taxation in relation to those earnings immediately attaches to the total amount, and whatever right the wife may have to report one-half thereof can not affect its taxable status and convert into taxable income that which was exempt when it came into the community.

In that case, however, the earnings of the husband, as an employee of a state, were exempt from Federal income tax under the Revenue Act of 1921 and that exemption applied regardless of the later *176 inclusion of the earnings in the community. There was no other test which the earnings had to meet in order to be exempt. The earnings of the husband in the present case were not exempt when they came into the community, because, in order to be exempt, the requirements of section 251 have to be complied with first. There is no choice as to when section 251 must apply, that is, before or after the amount earned by each spouse is brought into the community. The rights of each spouse in income being equivalent when it is earned, the question of whether or not any part of that income is exempt under section 251 must follow after a hypothetical distribution of the income between the spouses, for it is not until then that their respective rights in the earnings of each are known. In their application to the earnings of the spouses, the principles of community property law do not await the determination of the source of those earnings -- they apply at once.

In our opinion the petitioners have not satisfied the requirements of section 251 (a) (1) of the code, and we so hold.

Decisions will be entered for the respondent.