“IRS Ruling Clarifies Tax Treatment for Same Sex Couples”

Lesley M. Mehalick

In the landmark case of United States v. Windsor, issued on June 26, 2013, the United States Supreme Court struck down Section 3 of the Defense of Marriage Act (DOMA) as unconstitutional. That section specifically limited the words “marriage” and “spouse” to legal unions between one man and one woman. The Supreme Court ruled that this federal restriction of marriage to only heterosexual unions violated the Due Process Clause of the Fifth Amendment and was thus unconstitutional.

DOMA’s limitations on the definitions of marriage and spouse affected a myriad of federal laws, including the Internal Revenue Code, ERISA, COBRA, HIPAA, and Social Security benefits. Thus, same-sex couples were ineligible for various forms of legal protections and preferential tax treatment allowed for married couples. For example in Windsor, the petitioner was a surviving same-sex spouse who was subjected to a Federal Estate Tax bill of over $300,000.00 at the passing of her same-sex spouse. The tax was imposed because under DOMA, a same-sex spouse could not claim the marital deduction, which exempts monies passing to a surviving spouse from Federal Estate Tax. The Supreme Court’s holding in Windsor means that this differential treatment is no longer permissible in the sixteen states that allow same-sex marriage, as well as the District of Columbia and as noted below, the IRS has interpreted these marriages to have broad implications under federal law.

As of the date of this article, sixteen states and the District of Columbia allow same sex marriage. Those states are: Massachusetts; Connecticut; Iowa; California; New Jersey; Vermont; New Hampshire; New York; Rhode Island; Delaware; Minnesota; Hawaii; Illinois; Maine; Washington; Maryland; and the District of Columbia. Additionally, other states may put the issue of same-sex marriage to a vote in 2014 or 2016, and in other states, the issue may yet be decided by the Courts.

In the wake of the Windsor case, the IRS has issued Revenue Ruling 2013-17 to further clarify how same-sex spouses will be treated for Federal Tax purposes, including income, gift, and estate tax. The IRS determined that it will use a “place of celebration” rule, under which the IRS will treat a same-sex couple as lawfully married for federal tax purposes if they are married in a state that allows same-sex marriage. This IRS treatment will be given regardless of where that couple resides. Thus, if a couple was married in a state that recognizes same-sex marriage, and the couple later moved to a state that does not authorize same-sex marriage, for federal tax purposes, the couple will be treated as a lawfully married couple. The alternative rejected by the IRS is a “place of domicile” rule, which would only recognize a same-sex marriage if the couple were currently living and domiciled in a state that recognized same-sex marriage.

The IRS found that in light of the Windsor holding, using the place of celebration interpretation was the most natural reading of the tax code and would lead to the most efficient administration of taxes. The IRS noted that given our “increasingly mobile society, it is important to have a uniform rule of recognition” for Federal tax purposes. The failure to maintain such a uniform rule would lead to various and costly challenges for employers, taxpayers and the IRS, including the complex administration of employee-based benefit plans, as well as other potentially adverse consequences and serious administrative concerns.

It is important to note that this tax treatment is for Federal tax purposes only. Thus, if same-sex spouses reside in state that does not allow same-sex marriage, while they will be treated as married for Federal income tax purposes, they may not be treated as married for the State tax purposes. Additionally, Revenue Ruling 2013-17 is clear that its holding is limited to same-sex marriage; the same protections do not extend to same-sex partners who have entered into a registered domestic partnership, civil union, or any other such relationship that may be recognized under state law but that is not marriage. Thus, if a same-sex couple entered into a valid civil union, the IRS will not treat that couple as married, regardless of whether they reside in a state that does or does not permit same sex marriage.

While the IRS has published helpful guidance in regard to the treatment of same-sex spouses, it still remains to be seen how other federal agencies will treat same sex marriages, both for couples who reside in a state that recognizes same-sex marriage and for couples who reside in states that do not authorize same-sex marriage, and many of these issues will likely be litigated in the coming years. Also, it is clear that these issues will continue to evolve, and each couple’s situation must be carefully examined in light of their unique and personal circumstances and the applicable state and federal laws.