Posts tagged as:

same sex marriage

Hey Congress, Why Don’t You…? Gay Marriage

September 2, 2009 · 17 comments

Gideon Alper, who publishes the Gay Couples Law Blog, which discusses new developments in same-sex family law and estate planning, writes:

The IRS should recognize gay marriages not just as a matter of equality, but also to encourage socially beneficial behavior in gay relationships.

Fred Silberberg, a Los Angeles attorney that has practiced family law for over 20 years, wrote in the Huffington Post about the unnoticed effects of the Defense of Marriage Act.

Specifically, he talked about a problem a male client was having with alimony payments to the client from the client’s same sex ex-partner. Because the IRS doesn’t recognize gay relationships, the alimony is not deductible. But if the client had been married to a woman, his wife would be able to deduct alimony payments she makes to him.

The government allows people to deduct alimony payments to encourage ex-spouses to make support payments. The deduction gives one spouse a financial incentive to support the other after a breakup. This behavior is socially beneficial—it lets someone who relied on her spouse’s income to maintain access to it. Fred writes:

“It is the tax-deductibility aspect of spousal support that allows us, as lawyers, to try to come up with creative ways to address the issue if at all possible. We try to maximize the tax benefit and use it in a way that reduces overall income tax liability to maximize the dollars that exist to benefit the now-separated family.”

The impact to Fred’s client and his ex-partner was particularly large because their income levels were high enough that they were paying federal income tax at the maximum rate. Because his ex-partner has no tax incentive to make alimony payments, the client may not receive the support he needs to continue his lifestyle after the dissolution.

But deducting alimony payments is just one of the many income tax deductions available to married (and divorced) couples. These deductions encourage couples to do things that the government believes are good for each other and society in general.

Because the IRS doesn’t recognize gay relationships, the government can’t give the same encouragement to same sex couples. Repealing DOMA, then, would not just put same sex and opposite sex couples on an equal footing–it would also allow the government to use tax laws to encourage gay couples to make socially beneficial choices.

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Ask the taxgirl: Same Sex Couples and the Homebuyer’s Credit

August 4, 2009 · 6 comments

I’ve received a number of “ask the taxgirl” questions related to the first time homebuyer’s credit. I’m hoping to wade through a number of those questions this week in consideration of the IRS’ new emphasis on preventing related fraud.

Enjoy!

Taxpayer asks:

Dear Tax Girl,

I’ve reviewed the information published by the IRS related to the new $8000 first time homebuyer tax credit in the Economic Recovery package. I am a current homeowner, and live in the home with my domestic partner, who is legally just a boarder, has never owned a home of his own, and has no ownership interest in our current residence.

Form 5405 states that an individual cannot qualify for this tax credit if they acquire the home from a related person. However, since federal law doesn’t recognize our relationship, it seems like we are legally unrelated persons.

All this said, do you believe that I could legally sell my home to my partner for its fair market value and he could then qualify for this credit?

It may not be in the spirit of this tax provision, but there are a number of costs that my partner and I have already absorbed (durable POA, trust, etc.) because we cannot get married. Wouldn’t taking advantage of this “loophole” be equitable under the circumstances?

Thanks!

Taxgirl says:

Gosh, this is a really interesting person. It kind of raises the question as to whether IRS can have their cake (make you unrelated for purposes of filing the form 1040) and eat it, too (hold you out as related for purposes of filing the form 5405). So I had to think about it for a bit.

The first thing I did was to check out the instructions again for federal form 5405 (available here as a pdf). The instructions define related persons to include:

a. Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).

b. A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.

c. A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.

So, under those facts, you’re good. But then the IRS directs you to Pub 544 (downloadable here as a pdf). Pub 544 gives you a more exhaustive list of who qualifies as “related” – and again, I think you’d pass muster.

Initially, then, my answer is that I think that the transaction you described would work for purposes of the credit. But I think you have to be really, really careful and think this through for a number of reasons. Among them:

  1. The IRS specifically excludes property that you acquired “by gift or inheritance.” In order to insure that this transfer isn’t considered a gift (which would disqualify for the credit), you’re going to need to document this transaction extremely well. I would suggest an appraisal and a formal closing. Otherwise, you run the risk of it looking like a gift.

  2. Don’t forget about transfer taxes! Sometimes we jump through hoops to get to a favorable tax spot and we forget about other situations that we might be creating. Since this is to be a bona fide sale (see #1 again), you will be subject to transfer taxes on the sale – in most states, domestic partners and same sex couples are not exempt from transfer tax. If that’s the case, you may be subject to a transfer tax amount that would otherwise wipe out any tax credit benefit.
  3. Mortgage and fees. You didn’t mention whether you had a mortgage on the property or whether your partner would require a mortgage. Remember that the mortgage company would need to be involved at the sale – and that your partner would have to obtain a mortgage if he cannot pay you in full. You cannot lend him the money or otherwise exempt him from paying. If so, you would be making a gift (see #1 again).

So, my answer is that, at first blush, so long as your partner otherwise qualifies, he would be entitled to take the credit if you sold him your property. But consider all of the pieces of the transaction before rushing to claim the credit. You want to make sure that your numbers add up.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook!

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Court Rules on DOMA Challenge By Not Addressing DOMA

July 15, 2009 · 5 comments

Last year, while Californians were in the midst of a heated debate on the merits of Prop 8, Charles Merrill took activism into his own hands: he filed papers in Tax Court challenging the Defense of Marriage Act (DOMA). On July 13, the Tax Court ruled that Merrill was not entitled to relief. (Merrill v. Commissioner, T.C. Memo 2009-166).

Merrill is legally married in the state of California to Kevin Boyle, one of nearly 18,000 same-sex unions in state which remained valid after Prop 8 was upheld by courts earlier this year. His court challenge, however, had nothing to do with his marriage.

The question, according to the court was “whether petitioner, who was unmarried but in a committed relationship with another man during the years at issue, is entitled to married filing joint status.” The court found that he was not.

So it feels like the law is settled. Or maybe not.

This case wasn’t really about DOMA even though it was painted as a DOMA challenge. Merrill did not get married until 2008. His case, however, focused on the tax years 2004 and 2005, when he was single. Merrill believes that he should have been able to file as married while a resident of North Carolina since North Carolina does not recognize same sex marriages; the IRS said that he could not because he was not married. Additionally, Merrill believes that he should have been able to file as married when he moved to California; again, the IRS said that he could not because he was not yet married. The court agreed on both counts. In other words, Merrill wasn’t married, so the court found that he couldn’t file as married. Not groundbreaking stuff.

It wasn’t surprising, then, that the court refused to address the bigger issue of the constitutionality of DOMA, claiming that it was not relevant to Merrill’s case. Had they addressed that piece, that would have been interesting. The court would have been required to address DOMA had Merrill filed a federal joint return for 2008 (for which he was legally married). The IRS does not follow state law for recognizing same-sex marriages despite the fact that state law determines marital status for federal filing purposes, including the recognition of common law marriages and legal separations. However, DOMA, which defined marriage as “a legal union between one man and one woman as husband and wife” requires that the IRS not recognize same sex marriages.

In other words, you want to talk DOMA? File a bona fide DOMA challenge.

The rest of Merrill’s case is likewise a bit puzzling. Merrill had actually not filed with the IRS for either of the years in question (2004 and 2005). He has refused to file or pay federal taxes for the past several years as a protest. While I note that constitutional law isn’t my forte, I might have approached this case a little differently. It would make sense to me that, rather than file a case protesting filing status that Merrill never actually claimed (meaning that he never filed as married), a better route from a procedural standpoint would have been to file joint tax returns with his partner and then make the claim if opposed by the Service (which it certainly would have been). Would he have had a different result this way? Probably not. But I think it would have been a better argument and made a bigger statement.

This case may get talked up a bit at cocktail parties (on both sides) but for tax purposes, in the end, it really didn’t offer anything new.

(Hat Tip: Tax Prof Blog)

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