IRS Guidance Following DOMA Decision
In short, regardless of what state the same-sex couple currently lives in, if they were legally married in a jurisdiction that recognizes same-sex marriages as legal and valid, then same-sex spouses are married for all federal tax purposes. This podcast from Bob Keebler covers Revenue Ruling 2013-17, background on the DOMA decision, income, estate and gift tax planning implications, as well as portability, IRAs and retirement plans.
Robert S. Keebler, CPA, MST, DEP, Partner, Keebler & Associates, LLP. Bob is a 2007 recipient of the prestigious Distinguished Estate Planners award from the National Association of Estate Planning counsels. From 2003 to 2006, Bob was named by CPA Magazine as one of the top 100 most influential practitioners in the United States. He is the past Editor-in-Chief of CCH's magazine, Journal of Retirement Planning and a member of CCH's Financial and Estate Planning Advisory Board. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration.
This audio webcast was originally recorded Sept. 3, 2013.
On behalf of the Personal Financial Planning Division of the AICPA, this is Bob Keebler with Tax and Estate Planning Following the Defense of Marriage Act Decision Updated with Revenue Ruling 2013-17.
In August of 2013, the Internal Revenue Service issued Revenue Ruling 2013-17 addressing the tax and related issues associated with same-sex marriage. For federal purposes, the terms "spouse," "husband and wife," "husband," and "wife" included an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term "marriage includes such a marriage between individuals of the same sex. This includes a qualified retirement plan, which must treat a same-sex spouse as a spouse for purposes of satisfying federal law relating to qualified plans.
For federal purposes, the Internal Revenue Service adopted a general rule recognizing a marriage of same-sex individuals that are validly married under state law to be the same as a -- as a traditional marriage. That is even if the couple is now domiciled in a state that does not validly recognize the validity of same-sex marriages. So if a couple was married in Connecticut and they moved to a state that was a non-recognition state, they would still be viewed for all federal tax purposes as being married.
However, this ruling does not extend to registered domestic partnerships. For federal tax purposes the terms "spouse," "husband and wife," "husband," and "wife"’ do not include individuals who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term "marriage" does not include such formal relationships.
In short, regardless of what state the same-sex couple currently lives in, if they were legally married in a jurisdiction that recognizes same-sex marriages as legal and valid, then same-sex spouses are married for all federal tax purposes. This, of course, includes marriages outside of the United States, as was the case in Windsor.
A little bit of background might be helpful. This all started with the federal Defense of Marriage Act, also known as DOMA. There was a challenge to DOMA by a lady named Edith Windsor. Congress recognized -- and this is what Justice Kennedy wrote. This just shows you the breadth of this. "Congress has enacted discrete statutes to regulate the meaning of marriage in order to further federal policy, but DOMA, with a directive applicable to over 1,000 federal statutes and the whole realm of federal regulations, has a far greater reach.” So the changes by Windsor are very far-reaching.
Now, what happened in Windsor, Miss Windsor and Miss Spyer were married Canada in 2007. Miss Spyer died in 2009 and left her entire estate to Miss Windsor. Section 3 of DOMA barred Miss Windsor, as the executor, from claiming the estate tax marital deduction. Consequently, they paid $363,000 of estate tax, and the IRS denies Miss Windsor's request for a refund.
Miss Windsor brings a suit contending that DOMA violated the Equal Protection Clause of the Fifth Amendment, and we know the rest of the story.
What wasn't addressed in Windsor was Article 2 of DOMA, or Section 2 of DOMA, and that was whether, if you are married in one state your marriage would be recognized in another state. But Section 3 was ruled unconstitutional, and when something is ruled unconstitutional, it's not like the legislature changing a law. It is unconstitutional ab initio, from the beginning, okay? So it's unconstitutional from the beginning, and that's very important to understand.
Now, basically Section 2 may be addressed by the federal government by -- or by the U.S. Supreme Court at a later point in time. And Section involves the interpretation of the Full Faith and Credit Clause of the United States Constitution, which basically provides, "Full faith and credit shall be given in each state to the public acts, records and judicial proceedings of every other state. And Congress may by general laws prescribe the manner in which such acts, records and proceedings shall be proved, and the effect thereof. So basically, if a court in State A issues an order, it's supposed to be respected in State B, and if a couple was married in one state, that marriage should be respected in another state.
What the IRS has done in Revenue Ruling 2013-17 is they basically said no matter where you are married, if your marriage was valid in that state at the moment you were married, then your marriage is going to be recognized no matter where you live.
Now, subsequent to Windsor, there's a little bit of case law that came out. I'm not going to go into that in depth, but I want to touch on it.
There was O'Connor v. Tobits, and this is a very interesting case. District court ordered in an interpleader action that a law firm's profit-sharing ERISA-qualified plan would pay death benefits to the surviving spouse of a same-sex couple that married in Canada. So Sarah participated in her employer's profit-sharing plan. In 2006, Sarah legally married Jean in Canada. Sarah and Jean resided in Illinois, which recognized this marriage as valid. Shortly after the wedding, Sarah was diagnosed with cancer and passed away in 2010. The day before Sarah died, she named her parents as the primary beneficiaries of the profit-sharing plan, although -- and Jean did not sign a REA waiver.
So they proceed to court on this, and because your spouse has to sign a REA waiver, the court found that Jean would receive her qualified plan, and not Sarah's parents. Okay? So that basically is following the Windsor decision.
Now, in the second case, Obergefell v. Kasich, the plaintiffs, James and John, were married in Ohio. They were legally married before that in the state of Maryland after living together for more than 20. John was a hospice patient dying from ALS at the time. Maryland law recognizes their marriage as valid, but Ohio did not recognize their marriage as valid. Because of this, John's death record will list his marital status at the time of his death as "unmarried" and will not record James as the surviving spouse. So they head to federal court.
So the brought a -- they sought a court order declaring unconstitutional the Ohio laws forbidding the recognition of same-sex marriages from other states and requiring the Register of Ohio death certificates to record John as married and to record James as his surviving spouse at the time of John’s death. This is actually a much more important case than O'Connor.
At the end of the day, the district court found that they should be listed as married on the death certificate. And when you read the case, you'll see the reasoning. But the court reasoned that Ohio law created two tiers of couples, opposite-sex married couples married in other states, and same-sex married couples legally married in other states. And that violates the Equal Protection, and that was fatal.
Now, let's jump into the things we have to worry about on a daily basis. So the things CPAs are going to confront. Basically, if you represent a couple, they were married in Connecticut, they're living in Connecticut, they are going to be married for all federal tax purposes.
Now, what if they were married in Connecticut, but they're living in a traditional marriage state, a non-recognition state? They would be viewed as married for federal purposes. That's the essence of Revenue Ruling 2013-17.
Now, the effective date. You'll have to read the revenue rulings on your own, but at the heart of this is, any original return filed after September 16, 2013, generally the same-sex spouses must file using a married filing status, okay? Any return that was filed before September 16, 2013, they may choose, but they are not required, to amend their federal returns to file using married separately or married filing status jointly, joint status. Now, this is provided that the statute of limitations has not run, okay? So this is providing that the statute of limitations has not run.
The interesting thing is, you may represent people where the statute has run, and it may be in their interest to file married. And I think in those cases, if the numbers are big enough, you do want to talk to a tax lawyer that does a lot of constitutional-type work, and there's a handful of people out there, to see if -- how do you -- you know, how do you get this into the court system?
Now -- So for open years, page 20, you can file amended returns. And for closed years, there's still a potential refund based on constitutionality. You may want to just file protective claims and stand on the sideline and let other people litigate this, and then once this is litigated, as long as you've told -- told your statute -- Now, this scenario, that is something you want to be careful with, and involve a very strong tax lawyer that does, you know -- does these constitutional-type cases.
Now, what if filing jointly increases the tax liability? Again, this is -- You can elect to file jointly. The government is not going to require you to go backwards and to fix those earlier returns.
Now, other notes that are important when you read the ruling: A taxpayer’s same-sex spouse cannot be a dependent of the taxpayer. A taxpayer who is married cannot file using a head of household status, unless such taxpayer is considered unmarried and meets other certain requirements. If a child of a same-sex couple is a qualifying child under section 152(c) of both parents who are spouses, either parent, but not both, may claim a dependency deduction for the child on their income tax returns. Now, this goes further.
One same-sex spouse cannot itemize while the other same-spouse -- -sex spouse claims the standard deduction. If a child [SIC] adopts the child of his or her same-sex spouse, the taxpayer, the adopting parent, may not claim an adoption credit, because a taxpayer may not claim an adoption credit for expenses incurred in adopting the child of a taxpayer’s spouse. Sections 66 and 469(i)(5), passive loss rules, apply to same-sex spouses the same as they apply to all married taxpayers.
Cafeteria plans. Now, this is very interesting. There's been an unfairness in the law which has been cured here. If an employer sponsored a cafeteria plan under which the employee elected to pay for health coverage for the employee on a pretax basis, and if the employee purchased coverage on an after-tax basis for the employee's same-sex spouse under the employer's health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee's spouse.
So what's happening here, if people were in a same-sex marriage, they would not -- the spouse that was covered under the plan would be covered, but not like a traditional spouse or a child, which would be covered tax-free. You've got to do this on an after-tax basis. Now, so you can file for all years in where the statute of limitations is open.
If an employer-provided health coverage for an employee's same-sex spouse -- Same thing. You can go back and file a claim for -- for refund on that for all the years in which -- which remain open.
Now, when we transition over to gift and estate tax planning, there's a lot of interesting things going on here. First thing is, recall, same-sex spouses are married for all federal tax purposes, which actually, on a going-forward basis, makes this very, very easy. There's nothing to think about. It's no different than any other married couple you represent.
However, on a -- Looking backwards, on a retroactive basis, what are we going to do? There are a number of difficult issues that we have to confront. First of all, for open years, file amended returns or file protective claims. I'd file -- I'd just file amended returns. For closed years, very complex constitutional issues. But what if you represent someone whose same-sex spouse died five years ago and they haven't filed protective claims? Can you go back and try to get that into the system? And you're going to, again, need to find a tax lawyer who does a lot of constitutional work who knows exactly how to bring that forward.
Now, one other thing to confront is gift splitting. A married couple is allowed to gift split, and that's basically -- That's when you treat all gifts made by one spouse, is made half by each spouse. Now, each spouse must be a citizen or resident of the United States. That's easy enough. If -- An individual considered as the spouse of another individual only if he or she is married at the time of the gift and does not remarry during the calendar year. So we can gift-split. Be very careful with gift-splitting. Especially if you've filed prior returns, you're going to have to -- You can't always go back and amend those returns, so you want to read those regulations about late-filed returns. Now, if you've never filed returns, you certainly can go back and gift-split.
Portability issues. Keep in mind, under the 2010 Tax Relief Act, if -- for three years, now -- 2011, '12 and now '13, we have portability. That means that if I die, my exemption moves over to my wife, giving her today a $10,500,000 exemption from the federal estate tax. So my wife is allowed to trans -- If she dies, I receive her exemption. If I die, she receives my excuse me.
Now, this election, though, to move the exemption between spouses at death must be made on a timely filed estate tax return. Now, what if your client died on January 1st, 2011. They were in a same-sex marriage. What do you do now? What you do is you go back to the IRS and you ask them, even though you didn't file a timely return, can they give you 9100 relief? And there have been a number of rulings with respect to portability. I have almost no doubt that, especially in a case involving DOMA, that the IRS would be very gracious, and they would probably give you that type of relief, okay? They would give you that type of relief. So that, that is a very important issue. Now, again -- But that means that we have to be filing the return. So on a going-forward basis, we must file timely returns.
Keep in mind, the statute of limitations remains open forever in the case of portability. In other words, I die today, my wife lives another 50 years, her statute remains -- my statute remains wide open until my wife -- three years after my wife's death.
IRAs and qualified plans. Broadly, qualified plans are required to comply with the following rules: A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal laws relating to qualified retirement plans. That includes REA waivers, all of the ERISA rules.
For purposes of satisfying the federal laws related to a qualified plan, a qualified plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. So a couple living in a non-recognition state goes to Connecticut for the weekend, okay? They go to New York for the weekend. They go to Canada for the weekend, and they, they -- they're married. In that instance, what is going to transpire is that marriage is going to be recognized, because it's recognized for federal law. So that marriage is now recognized for federal -- all federal tax purposes.
Now, basically, a person who's in a domestic partnership or civil union is not considered to be a spouse for these purposes. So it's strictly individuals that are married.
Qualified plans must comply with these rules as of September 16, 2013. The revenue ruling does not allow taxpayers to file amended returns that relate to prior periods with respect to matters relating to qualified plans. And there will be further guidance, okay? They're going to provide further guidance on qualified plans.
So we have covered a lot of ground. The other things you have to keep in mind, there are in the area of IRAs, if A and B are married, A is working, B is not, B can borrow from A's wages to make contributions to an IRA or Roth IRA. Very important.
The other thing we want to remember in the world of IRAs, if A dies, if his IRA is payable to B, B would be allowed to roll that IRA into his own name, okay? B would be allowed to roll his -- that IRA into his own name. So these are very -- Some of these issues are fairly straightforward. If you -- If you think of the easiest way to get your mind -- wrap your mind around this is to think of it no different than any other couple you've ever represented. All of the rights under the federal tax law, whether it's gift and estate or whether it's for income tax, that apply to your traditional married couple will apply to your same-sex couple as long as they are in a valid marriage under the laws of the state where they were married. So, again, as long as they're in a rec -- they were married in a recognition state, their marriage is valid, that marriage is going to be respected for federal tax purposes.
We've covered a lot of ground today. I hope this was helpful. On behalf of the PFP Division of the AICPA, this has been Bob Keebler, and thank you for joining us today.