The IRS issued its eagerly awaited guidance of how the Supreme Court’s Windsor decision would be applied overall in federal taxes in Revenue Ruling 2013-17 (http://www.irs.gov/pub/irs-drop/rr-13-17.pdf).
The ruling specifically looked to answer three questions that were not necessarily clear under the IRC following the Windsor decision:
- Would the IRS use, to borrow Justice Scalia’s terms from his dissent, the state of current domicile, state of celebration or state of domicile at the time the marriage is entered into to determine marital status for federal tax purposes?
- Would there be a difference in dealing with IRC provisions that refer specifically to “husband,” “wife,” or “husband and wife” as opposed to those that refer only to “spouse” or similar gender-neutral terms?
- Does the treatment as married extend to couples in relationships defined by state law that are not denominated as marriage (such as registered domestic partners or civil unions) but may grant rights “as if” the couple were married?
To answer the first question (which state’s laws control) the IRS turned initially to its analysis of common-law marriage issues found in Revenue Ruling 58-66. Under that ruling if a couple established a common-law marriage in a jurisdiction that recognizes the same, a later relocation to a state that refuses to recognize a marriage unless the couple has a formal marriage ceremony does not change their status as married for federal tax purposes.
The IRS notes, first, that this “once married, always married even if the couple relocates” has been used successfully for common-law marriages for over 50 years. The IRS also finds that a uniform rule gives a simpler tax administration than would be true under alternative treatments, including changes in “related party” status under various IRC provisions (for instance, IRC §318) for a couple merely by relocating to a state that did not recognize the marriage and complications for employers that operate in more than one state, greatly complicating administration of employee benefit plans.
Thus, the IRS has amplified Revenue Ruling 58-66 (the common-law marriage ruling) to cover same-sex marriages as well. So long as the marriage is valid in the state in which it is entered into, it will be recognized for federal tax purposes. A footnote to the ruling clarifies that the same rule would apply if the marriage were celebrated in a foreign jurisdiction that recognized the marriage.
The IRS also decided that it would not attempt to differentiate those provisions that contain a gender specific reference to parties in a marriage (that is “husband” and/or “wife”) and rather treat all such references in a gender neutral form. Effectively this means that where such words are found, the adviser should simply read “spouse” or “spouses” instead of the gender specific wording.
Finally, the IRS also ruled that if a state establishes a status that is not deemed married under state law (such as a registered domestic partnership or a civil union) the parties will not be treated as married for federal tax purposes. This holding is contrary to an information letter issued back in 2011 by the IRS regarding Illinois civil unions involving opposite sex couples issued to a national tax preparation firm.
Finally there arises the question about what do about returns already filed or 2012 returns on extension and either not yet filed, or filed after the issuance of the Windsor decision. And, unfortunately, the ruling leaves some of these questions open.
The ruling clearly allows a taxpayer to rely on this ruling to file original returns, amended returns or claims for refund for any return for which the statute of limitations remains open. The ruling notes that if a taxpayer does file such a claim for refund, the return must consistently treat the couple as married for all purposes—so the taxpayer cannot “cherry pick” to exclude the value of medical insurance paid for a same-sex spouse from income but ignore dealing with negative consequences that arise due to being required to use a rate schedule of either married filing joint or married filing separately.
The ruling does note that the ruling will be applied prospectively as of Sept. 16, 2013. The IRS in its FAQ released along with the ruling holds that if a 2012 return is not actually filed by Sept. 16, 2013, the taxpayer must file using either married filing jointly or married filing separately. However, a taxpayer who files before that date has the option of filing using either the married status or filling as if DOMA had not been overturned (that is, as not married).
Since a “marriage penalty” occurs in most (but not all) cases for income tax purposes, some taxpayers may now be facing a filing deadline one month earlier than they believed would apply.