Rev. Rul. 54-206

Advice is requested relative to the manner of determining the amount of Federal income tax under section 107(a) of the Internal Revenue Code, attributable to compensation received for personal services under the facts and circumstances set forth below.

In 1953, the taxpayer-husband received more than 80 percent of his total compensation for personal services he rendered to one individual during the period 1942 to 1947. He and his wife propose to file a single return jointly for the taxable year 1953. The taxpayers have at all times since 1941 resided in a noncommunity property State, and have filed their returns on the calendar year basis.

The pertinent provisions of the Code are as follows:

Section 12(d) provides:

(d) TAX IN CASE OF JOINT RETURN.--In the case of a joint return of husband and wife under section 51(b), the combined normal tax and surtax under section 11 and subsection (b) of this section shall be twice the combined normal tax and surtax that would be determined if the net income and the applicable credits against net income provided by section 25 were reduced by one-half.

Section 51(b)(1) provides:

(b) HUSBAND AND WIFE.--

(1) IN GENERAL.--A husband and wife may make a single return jointly. Such a return may be made even though one of the spouses has neither gross income nor deductions. If a joint return is made the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several.

Section 107(a) provides:

(a) PERSONAL SERVICES.--If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more * * * is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.

Section 12(d) and section 51(b)(1) were not applicable for calendar years prior to 1948.

The services for which the compensation under consideration was received were performed prior to the effective date of the income-splitting provisions of section 12(d) of the Code, and the compensation was received after the effective date of that section. Therefore, the question arises whether the provisions of section 107(a) of the Code shall be applied to such compensation without regard to the provisions of section 12(d) of the Code or whether the compensation shall be split equally between the husband and wife before applying the provisions of section 107(a) of the Code.

For the purposes of section 107(a) of the Code, the sole fact that the wife performed no services is not determinative. It is important, however, to determine who received or accrued the compensation, for in computing the tax attributable to income subject to the provisions of section 107(a) it is necessary to determine the tax that would have been paid on such income had it actually been included in the recipient's gross income ratably in the prior years. See Edward C. Thayer et ux. v. Commissioner, 12 T. C. 795, acquiescence, C. B. 1950-1, 5; Arthur T. Schmidt v. Commissioner, 10 T. C. 746, acquiescence, C. B. 1949-1, 3; William F. Knox v. Commissioner, 10 T. C. 550, acquiescence, C. B. 1949-1, 3; and IR-Mim. 43, C. B. 1952-2, 112. Accordingly, if within the meaning of section 107(a) of the Code the compensation was all "received" by the taxpayer-husband the computation under section 107(a) must be made as though the husband alone received the compensation in the prior years, and the taxpayers may not split such compensation in determining the tax attributable thereto unless they could have done so in the prior years had it actually been received then.

A wife in a noncommunity property State does not receive or accrue one-half of the income of her husband. It does not follow from sections 12(d) and 51(b) of the Code that a husband and wife each receive or accrue one-half their combined income for Federal income tax purposes, but merely that if they are permitted to and do file a joint return their tax shall be computed as if they each received one-half of their combined income. Thus, a husband and wife in a noncommunity property State may not split their income if they file separate returns. Section 51(b) of the Code itself indicates that a wife does not "receive" one-half of her husband's income, for that section states that a joint return may be filed even though a spouse has no gross income and the tax shall be computed on the "aggregate" income.

Accordingly, it is held that for the purposes of section 107(a) of the Code a husband and wife who reside in a noncommunity property State may not split income which constitutes compensation received by the husband for personal services rendered by him during a taxable year prior to the effective date of section 12(d) of the Code. The tax attributable to such income must be determined as though it were included in the recipient's gross income ratably during the period in which the services were rendered.

In view of the foregoing, the Internal Revenue Service is constrained not to follow the decision in IIofferbert v. R. E. Lee Marshall et ux., 200 Fed. (2d) 648.

The opinions expressed herein in no way conflict with the decisions in Maurice H. Van Bergh v. Commissioner, 18 T. C. 518, acquiescence in the decision on the issue related here, C. B. 1953-1, 6, or Federico Stallforth v. Commissioner, 6 T. C. 140. The Van Bergh decision holds that section 107(a) income is included in "gross income" for the purpose of section 275(c) of the Code in the year it is received or accrued, notwithstanding that the tax is computed as if it were received pro rata in the prior years. This decision follows from the fact that section 107(a) affects only the computation of the tax. The Stallforth decision holds that in computing the tax attributable to prior years, section 107(a) income is not exempt merely because it would have been exempt if received in the prior year. In other words, the character of section 107(a) income is determined in the year it is received or accrued, but in computing the tax attributable to the prior year the taxpayer must follow the method of computation of the prior year.