INCOME OF SEPARATED COUPLE IS MARITAL PROPERTY; MUST BE REPORTED AS JOINT INCOME.

Rev. Rul. 87-13

ISSUE

How must earned income and investment income be reported by married individuals who are domiciled in Wisconsin in 1986 and file separate federal income tax returns?

FACTS

During all of 1986, A and B were married individuals domiciled in the State of Wisconsin. A and B separated during 1986. Prior to the end of 1986 there was no decree of legal separation or separate maintenance. During 1986, A realized $64,000 in wages, and B realized $20,000 in wages and $28,000 in self-employment income derived from a service business. B also received $7,200 in dividends from securities acquired by B before marriage and derived $8,000 in capital gains from the sale of certain publicly held securities, some of which B acquired before marriage and some of which B acquired during marriage by reinvesting the proceeds of property acquired before marriage. A and B filed separate income tax returns for 1986. The provisions of section 66 of the Internal Revenue Code do not apply to them. They have not entered into a marital property agreement.

LAW AND ANALYSIS

The question presented is whether, for purposes of determining their liabilities for 1986 income tax, A and B each realized as income 50 percent of the wages, business earnings, and investment income received by the other.

The Wisconsin Marital Property Reform Act (the Act), Wis. Stat. Ann. sections 766.001-766.97 (West Supp. 1986), was enacted on April 4, 1984, effective January 1, 1986. The Act is based upon the Uniform Marital Property Act and creates a new system of property rights applicable to property owned by married residents of Wisconsin.

Under the Act, each spouse has a present, undivided 50 percent interest in marital property. Generally, marital property consists of property acquired by spouses "during marriage" and on or after the "determination date." The term "during marriage" is defined as the period that begins at marriage and ends at (1) the death of a spouse, (2) termination of the marriage by a decree of dissolution, divorce, annullment or declaration of invalidity, or (3) entry of a decree of legal separation or separate maintenance. Wis. Stat. section 766.01(7) and (8). The "determination date" is the last to occur of (1) marriage, (2) date of establishment of marital domicile in the state, or (3) January 1, 1986.

Marital property includes interest dividends, rents and other income from investment property that is marital property. Marital property also includes income derived during marriage and after the determination date from the individual property of a spouse. Income representing appreciation in the value of the individual property of one spouse, however, remains individual property, unless the appreciation is due to the uncompensated efforts of the other spouse. Wis. Stat. section 766.31.

Generally, individual property is property owned by one of the spouses before the determination date, property acquired by one of the spouses during marriage and after the determination date by gift or inheritance, and property acquired during marriage and after the determination date in exchange for individual property or with the proceeds of its sale.

Although not relevant to the present situation, the Act also provides that spouses and persons intending to marry may make enforceable marital property agreements.

Poe v. Seaborn, 282 U.S. 101 (1930), IX-2 C.B. 202 (1930), holds that where state law gives each spouse a present vested interest in community income and property, the gross income of each spouse includes half of the community income. Commissioner v. Harmon, 323 U.S. 44 (1944), 1944 C.B. 166, adds that each spouse's vested half interest in community property must be dictated by state law as an incident of marriage. Community property laws are in effect in the states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington.

Unless the rights of the spouses are altered by agreement, the Act automatically vests a 50 percent interest in marital property in each spouse. Under the provisions of the Act, therefore, the rights of spouses in Wisconsin are community property rights. Married individuals who are not subject to a decree of legal separation or separate maintenance, who were domiciled in Wisconsin during a year governed by the Act, who file separate returns, and who have not altered their property rights through a marital property agreement must each report 50 percent of the earnings and investment income received by either spouse during the marriage (as that term is defined by the Act.)

HOLDING

Under the relevant provisions of Wisconsin law, A and B must each report as income $59,600 (half of the total wages of $84,000, plus half of the $28,000 self-employment income, plus half of the $7,200 dividend income). B must report the entire $8,000 capital gain as separate income because, under Wisconsin law, income representing the appreciation in value of the individual property of one spouse is itself individual property, unless the other spouse's efforts produced the appreciation.