Rev. Rul. 73-391

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the positions set forth in G.C.M. 9422, X-1 C.B. 245 (1931), G.C.M. 9825, X-2 C.B. 146 (1931), and G.C.M. 25642, 1948-1 C.B. 57.

The question presented is, what part of partnership income attributable to a husband and wife residing in California will be treated as the separate income of each spouse and what part of such income will be treated as their community income in arriving at their distributive shares of partnership income.

In 1972, a husband and his wife, residing in California, became members of a partnership located in that State. The husband's investment in the partnership consisted of certain property characterized under California law as "separate property" and other property characterized as "community property." The wife's investment consisted solely of community property. The spouses had no agreement to change any of their community property invested in the partnership to separate property of one or the other, or to change the separate property of the husband to community property. The husband received a salary from the partnership commensurate with the value of his services. The husband, the wife, and the partnership all file their income tax returns on the calendar year basis.

Under California law, all property owned by either spouse before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues, and profits thereof, is his or her separate property. Either spouse, without the consent of the other, may convey his separate property. See sections 5107 and 5108 (operative January 1, 1970) of the Civil Code of California.

Community property is defined as property acquired by husband and wife, or either, during marriage, when not acquired as the separate property of either. See section 687 of the Civil Code of California.

Where a husband and wife enter into a valid agreement under the law of California, whereby any income subsequently earned by either of them for personal services will be his or her separate property, income earned by either of them after the agreement is consummated is treated as the separate income of the spouse earning such income, not as their community income. See Rev. Rul. 73-390, page 12, this Bulletin.

The mere fact that a husband and wife enter into a partnership arrangement does not transmute into separate property that part of the investment in the partnership that was previously community property. Thus, partnership profits attributable to the community property invested in the partnership, as well as amounts paid for the husband's services, constitute community income. Profits attributable to the husband's separate property invested in the partnership are taxable to him as his separate income. See George W. Van Vorst, 7 T.C. 826 (1946), acq., 1947-1 C.B. 4.

Section 702(a) of the Internal Revenue Code of 1954 provides the general rule that in determining his income tax, each partner shall take into account separately his distributive share of certain partnership items of income, gain, loss, deduction or credit.

Accordingly, in the instant case, since there is no agreement between the spouses to the contrary, it is held that the wife's distributive share of partnership income under section 702 of the Code for the calendar year 1972, consists of one-half of the income derived from the community property invested by her and by her husband and one-half of the income from her husband's partnership salary. The husband's distributive share of partnership income consists of one-half of the income derived from the community property invested by him and by his wife, one-half of the income from his partnership salary, and all of the income derived from the separate property invested by him.

G.C.M. 9422, G.C.M. 9825, and G.C.M. 25642 are hereby superseded, since the positions set forth therein are restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.