On August 29, 2013, the Internal Revenue Service (“Service” or “IRS”) issued guidance on how same-sex spouses will be treated for Federal tax purposes, in the wake of the Supreme Court’s ruling, in US. v. Windsor, that Section 3 of the Federal Defense of Marriage Act was unconstitutional. The guidance, announced here, takes the form of Revenue Ruling 2013-17 and two FAQs – one for legally married same sex spouses, and one for persons in domestic partnerships, civil unions, and other formal relationships other than marriage. This post discusses the Revenue Ruling; a future post will cover the FAQs which describe tax refund procedures related to same sex spousal coverage, and begin to address the impact of US v. Windsor on retirement plans.
Section 3 of DOMA – the part struck down in US v. Windsor – provided that, for all federal law purposes, the word “marriage” meant only a legal union between one man and one woman as husband and wife, and the word “spouse” referred only to a person of the opposite sex who is a husband or wife. In US v. Windsor the Supreme Court determined that, with respect to individuals in same sex marriages, that provision violated the principles of due process and equal protection under the law guaranteed by the 5th Amendment to the US Constitution.
The question that the new IRS guidance answers is whether, in determining whether a same sex marriage is valid for Federal tax purposes, the IRS will look to the laws of the state where the marriage was performed or “celebrated” (the “celebration” rule), or the laws of the state where the couple resides (the “domicile rule”).
Traditionally, ERISA case law has determined married status based on the domicile rule. However it quickly became clear, after the Supreme Court decision, that employers with employees in multiple states would face significant administrative hardship –particularly with regard to health and retirement benefit plan coverage – if they needed to look to each employee’s state of residence in order to determine whether spousal benefits applied. Thus, it was hoped that a same sex marriage legally performed in any state or other jurisdiction would constitute a valid marriage for Federal tax purposes in all states, including those that do not recognize same sex marriage.
Under Revenue Ruling 2013-17, that is indeed the case. In it the Service concludes that, for Federal tax purposes (including income and estate tax purposes), the following is true:
- The terms “spouse,” “husband and wife,” “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes a same sex marriage. “State” for these purposes means a U.S. state or the District of Columbia, as well as any foreign jurisdiction.
- The gender-specific terms “husband” and “wife” apply, for Federal tax purposes, to members of a same-sex couple regardless of their actual gender.
- This is the case even if the state where the same sex couple resides does not recognize the validity of same-sex marriages.
- The terms “marriage,” “spouses” and “husband and wife” for federal tax purposes will not, however, include domestic partnerships, civil unions or other formal relationships – short of marriage – between same-sex or opposite sex individuals.
Revenue Ruling 2013-17 is effective as of September 16, 2013 and subsequent, however the accompanying FAQ for same sex spouses describes how individuals who included same sex spouses in their employers’ benefit plans, and who received “imputed income” as a result, may seek tax refunds and credits back to 2010. As mentioned, I will cover those points in a separate post in the very near future.
The IRS describes Revenue Ruling 2013-17 as an “amplification and clarification” of 1958 Revenue Ruling (Rev. Rul. 58-66, 1958-1 C.B. 60) which concluded that persons who enter into a common law marriage in a state that recognizes common law marriage could file a joint Federal tax return even after they moved to a state that did not recognize common law marriage. And, in fact, following the laws of the state of domicile for purposes of common law marriage would present the same difficulties in the context of same sex marriage:
“A rule under which a couple’s marital status could change simply by moving from one state to another state would be prohibitively difficult and costly for the Service to administer, and for many taxpayers to apply.”
The IRS notes that it may provide future additional guidance on this rule and on the application of US v. Windsor with respect to Federal tax administration, and that other agencies may discuss its impact on other federal programs that are affected by the Internal Revenue Code. It will also be interesting to see how the new rule is squared with the traditional “domicile” rule used to determine marital status in ERISA case law. (Interestingly, the first post-Windsor (but pre-Rev. Rul. 2013-17) decision on same-sex benefits under ERISA, Cozen O’Connor, P.C. v. Tobits, 2013 WL 3878688 (E.D. Pa., July 29, 2013), followed the domicile rule in order to award survivor benefits to a same sex spouse. A good discussion of the case is found here.)
Revenue Ruling 2017-13 also stands in contrast with still-in-effect Section 2 of DOMA, which permits each state to ignore, for state law purposes, same sex marriages officiated in other states:
“No State, territory, or possession of the United States, or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship.”
As a consequence, imputed income will continue to apply to same sex spouses for state tax purposes in states that do not recognize same sex marriages, despite its abolition at the federal level. Additionally, state law will continue to govern group health insurance and HMO contracts, and states that do not recognize same sex marriage generally do not require that policies sold in the state cover same sex spouses.
Clearly, further guidance from the IRS and other federal agencies will be needed to address the complicated benefit compliance issues raised by US v. Windsor.
A final note – this post is my 100th at EforERISA, a bit of a milestone, and I want to thank my readers and subscribers for their support and helpful comments and suggestions along the way.