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Tuesday, August 20, 2013

DOMA decision, federal taxes and state of marriage

On June 26, 2013, the U.S. Supreme Court found Section 3 of DOMA (the Defense of Marriage Act) to be unconstitutional (U.S. v. Windsor). Basically, the Court found a violation of equal protection of the 5th Amendment to treat a same-sex marriage with less respect than an opposite-sex marriage.

There are a variety of federal tax issues associated with the decision (see this AICPA document for a partial list). The IRS website still says (since the decision was handed down) that they will move swiftly to update guidance on this topic.

One area I'd like to see the IRS address first is to state that for federal tax purposes, marriage is defined per the state of celebration (where performed) rather than the state of domicile.  Some states do not recognize same-sex marriage. So, a couple married, say, in California would not be viewed as married by Texas. If the federal tax law treats a couple as married based on the treatment of their state of domicile, it seems that there would be a problem under the Windsor decision because then the federal government is not treating all marriages as equal. The couple married in California is still married (at least per California law and that of some other states) if they live in a state that does not recognize it. Can the federal government say they are not married based on where they live?  It seems contrary to the Windsor decision.

But, we await guidance from the IRS. Hopefully that "guidance" will be in the form of binding guidance rather than the Chief Counsel Advices and FAQs that currently exist.

Senator Cardin sent a letter (8/14/13) to Treasury and IRS noting some areas in need of guidance including the following.
  • Issue guidance soon because some same-sex couples have their 2012 return on extension until 10/15/13.
  • Marriage should be recognized per the state of celebration. He notes that the IRS took this approach with respect to a common law marriage in Revenue Ruling 58-66.*
  • Give affected taxpayers the option to amend returns still open by the statute of limitations, but do not make adjustments for those who do not amend because these couples were forbidden from filing jointly and applying rules for married couples prior to the Supreme Court's decision in Windsor.
  • "[A]ddress whether civil unions in states that consider parties to such unions as spouses will be treated as marriages for federal tax purposes."
Senator Cardin also suggests that the "IRS’s guidance should be issued as soon as possible and, eventually, be made into a separate IRS Publication."*

* My observations:
  • Hopefully Senator Cardin means he wants the IRS to issue official, binding guidance (such as a revenue ruling or regulations) rather than FAQs, and then summarize that in an IRS publication to make it more accessible to more people. Hopefully we will see IRS guidance in the form of something binding.
  • While Revenue Ruling 58-66 appears to support application of state of celebration to determine marital status, it is not the most completely or clearly written ruling. Also, there is language from the courts that supports use of the state of domicile. For example, in Kang, TC Summary Opinion  2001-97, the Tax Court stated: “For Federal tax purposes, determination of marital status is made in accordance with the law of the State of the marital domicile. See Eccles v. Commissioner, 19 T.C. 1049, 1051 (1953), affd. per curiam 208 F.2d 796 (4th Cir. 1953) ..."  The cited case (Eccles) involved marital status of a couple married in and living in New Mexico. So, it didn't involve deciding which state's law applied. Also, the Kang statement precedes the Windsor decision where the Court says all lawful marriages should be respected the same (one marriage should not be treated with less respect than others).
Meanwhile, H.R. 2523 (and S. 1236) have been introduced to amend Title 1 of U.S. Code, Sec. 7 to provide that marriage for federal tax purposes is per the state of celebration. While this would clarify the law, apparently for all federal statutes, is it needed based on the Windsor holding? It seems to me that if the federal government treats any couple married per the law of any state as not married, then it is not treating that lawful marriage with the same respect it treats other marriages. I have not studied this in depth, but I wonder if there is an effective date issue here as well.  The Supreme Court's decision means that Section 3 of DOMA is unconstitutional and has always been so. Would legislation such as H.R. 2523 mean that only going forward is it definite that federal law follows state of celebration to determine who is lawfully married? If yes there would still be a need to clarify the law prior to H.R. 2523 (unless its change would be retroactive).
With the deadline approaching for filing extended 2012 returns and possibly amending extended 2009 returns (due 10/15/10, with a 10/15/13 statute of limitations), swift guidance from the IRS would be terrific.

The issue is not just with the federal tax laws (Title 26 of the US Code), but other federal provisions as well. The Social Security Administration's recent announcement considers state of domicile and when a benefits claim was filed. More guidance is expected.  For now, see GN 00210.100 Same-Sex Marriage - Benefits for Aged Spouses. This SSA statement includes a helpful table of when states permitted same-sex marriages and when states recognized same-sex marriages performed in other states.

What do you think?

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