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IRS Asked to Rule on Same Sex Partnerships

August 12, 2010 · 6 comments

Yet another decision is expected on the legality of same sex marriages (CNN predicts that it will happen between 9am and noon PST today). This one focuses on whether to keep a temporary stay in place following a judge’s decision last week to overturn Proposition 8, the state’s ban on same-sex marriages. As then, I predict that the current ruling won’t mean much. No matter the ruling, I expect that an appeal will be filed.

There is a much more interesting conversation going on about same sex marriages outside of the courtroom. The California Legislature has passed a resolution, AJR29, asking the IRS to issue a Revenue Revenue confirming that same-sex spouses and domestic partners can be taxed the same as heterosexual married couples for federal purposes. If if feels like deja vu all over again, it is. The bill has been introduced – and passed – before. The August 9 vote of 52-9 was considered a “bipartisan concurrence vote.”

Whoa – bipartisan? Sure. If you look beyond the generally partisan lines of the same sex marriage issue, there’s a bigger issue: states’ rights. That’s something that the GOP can (and has) gotten behind, the idea that states should be allowed to make their own laws about families and other important issues.

So here’s what California is asking for:

WHEREAS, The Supreme Court of the United States has held that the IRS must defer to state law determining property ownership, including the existence of community property; and

“Resolved, That the Legislature requests that, consistent with established legal precedents, the IRS defer to California law on treatment of property belonging to registered domestic partners and same-sex spouses, including the existence of community property, so that when filing separate federal income tax returns, each registered domestic partner and same-sex spouse should include in his or her gross income one-half of the community’s income;”

There’s more but you get the gist.

And here’s why the Legislature cares. As of January 1, 2005, under the California Domestic Partner Rights and Responsibilities Act of 2003, same sex partners in the state of California were granted “the same rights, protections, and benefits” as heterosexual couples. There was one teensy omission: the original version did not allow for the filing of joint income tax returns (so much for “same”, huh?). That was specifically addressed in 2006 and adjustments were made for California’s kooky confusing (to most east coasters like me) community property laws.

Prior to the amendment, in 2005, a request was made to the IRS seeking guidance on how to file federal tax returns under the new California law. A Memorandum (200608038) was issued the following year which said that same sex partners were responsible for reporting all of their individual income on their federal returns, irrespective of California community property laws. This was a different result than for heterosexual couples.

Interestingly, the IRS relied on a heterosexual marriage community property case (Poe v. Seaborn, 282 U.S. 101 (1930)), noting that the law only applies to spouses, not same sex partners. It was the view of the IRS that “the relationship between registered domestic partners under the California Act is not marriage under California law. Therefore, the Supreme Court’s decision in Poe v. Seaborn does not extend to registered domestic partners.”

This makes sense. What the IRS was saying is that the law applies to married couples and not simply same sex couples. It’s not the IRS’ job to determine whether the idea that same sex couples may not marry in many instances is fair – that’s up to the courts (and that’s what’s happening now).

What it did do, in my opinion, is open the door for future tax arguments based on the idea of same sex marriage, not same sex partnerships. They are very different creatures under the law – semantics matter.

California hasn’t really pursued the laws on that count, though. What it did was to amend its community property tax law in 2007 to make it more appealing to the feds. With that, the IRS reversed its position on the community property issue in another Memorandum, declaring, “Applying the principle that federal law respects state law property characterizations, the federal tax treatment of community property should apply to California registered domestic partners.” Despite the wild cheering after the Memorandum was passed (“Equal tax rights for same sex couples!”), there are some significant problems. Chief among them: concern about whether the Memorandum will again be reversed (!) and the bigger issue which is that other federal tax benefits afforded to married couples are still not applicable.

So what’s next? The California Legislature has asked the IRS for a Revenue Ruling on the matter. I think it’s a smart move but I don’t think it solves the problem. For those of you who didn’t take Tax Procedure in law school (picture me banging my head against a desk here), let me clarify the difference between a Memorandum and a Revenue Ruling:

Memoranda aren’t necessarily something that you want to rest your head on. A technical advice memorandum, or TAM, is considered to be “guidance” on a very specific issue usually for a specific taxpayer. The IRS states, “[t]he advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued.”

What the California Legislature has asked for is a Revenue Ruling. A Revenue Ruling is an “official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts.”

So, a Revenue Ruling is a better request. But still not enough. The obstacle to tax parity isn’t going to be the IRS, it’s going to be how the IRS can interpret the existing laws under DOMA (Defense of Marriage Act). That will be settled in court. I still maintain that a proper and potentially winnable challenge will come in the form of a legally married taxpayer filing a tax return as legally married for federal tax purposes with a good set of facts (as opposed to “bad fact” cases). It’s coming.

(Hat Tip @kidsparalegal via twitter)

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1 TexasEd August 12, 2010 at 1:08 pm

Just think how much simpler life would be if there were no filing statuses. Each individual would get the same standard deduction regardless of marital status, etc.

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