EXECUTIVE SUMMARY: The U.S. District Court for the Southern District of New York has ruled that same-sex couples can take advantage of the estate tax marital deduction provisions of the Internal Revenue Code. This ruling has far-reaching federal tax implications beyond federal estate taxes.
FACTS: Edie Windsor and Thea Spyer registered as domestic partners in New York City in 1993. In 2007, they married in Canada, as permitted under Canada law. Spyer died in 2009, and her assets were left to Windsor. After paying applicable federal estate taxes, Spyer’s estate sought a refund of $363,053, asserting the use of the federal estate tax marital deduction for amounts passing to Windsor.
Spyer’s claim was that the provisions of Section 3 of the Defense of Marriage Act (DOMA) violated the equal protection clause of the U.S. Constitution. That DOMA provision defines “marriage” under federal law as a legal union between one man and one woman as husband and wife. Thus, such definition would apply under the Internal Revenue Code and its marital deduction provisions. Equal protection clause jurisprudence imports higher judicial scrutiny to laws that disadvantage a suspect class or impinge a fundamental right. Spyer’s estate sought the application of such higher scrutiny, charactrizing homosexuals as a suspect class. The court declined to classify homosexuals as a suspect class. Nonetheless, it still found the DOMA provisions unconstitutional under the lower “rational basis” standard which requires only that a law have a rational basis for its classifications to withstand an equal protection clause challenge. The court determined that the purposed bases of protection of the institution of marriage, protection of childrearing and procreation, consistentcy and uniformity of federal benefits, and conserving the public fisc were not rationally served by the DOMA provisions. The court thus ordered that the refund be paid.
Broad Implications. An appeal of the case is likely. If upheld (and absent contrary rulings in other Circuits or ultimate reversal by the U.S. Supreme Court), then the estate tax marital deduction will be allowed to same-sex persons who are married under applicable law. Of course, not all jurisdictions allow for such marriages, but determined couples can jurisdiction shop to become married if they desire.
There are numerous other federal tax provisions that provide benefits to married persons. Presumably, most, if not all of them, will likewise become available to same-sex married couples if the DOMA provision is invalid. These include (a) the federal gift tax marital deduction, (b) joint tax return filing rates and permissions, (c) favorable “stretch” and rollover provisions for IRA’s and other qualified retirement plan distributions to a surviving spouse, and (d) portability of unified credit amounts between spouses. Other federal law provisions outside of the Internal Revenue Code that turn on marital status may also apply, including those relating to employment benefits and other social service benefits.
Interesting Procedural Aspects. Generally, the Justice Department defends the U.S. in refund cases, and further defends challenges to U.S. laws such as DOMA. However, earlier this year, the Attorney General indicated that the Justice Department would not defend Section 3 of DOMA based on his belief, and the belief of President Obama, that the provision is subject to strict constitutional scrutiny and under such scrutiny the law is violative of the equal protection clause of the Constitution. This left the case in the unusual situation of having no one to defend the U.S.’ case. However, the District Court allowed the Bipartisan Legal Advisory Group of the U.S. House of Representatives (BLAG) to intervene in this case to defend the constitutionality of the statute.
Presumably, BLAG will have or receive standing to prosecute an appeal of the Court’s ruling, although the constitutional questions of whether a group of U.S. Representatives has automatic or permissive standing to do so is beyond the expertise of this author.
What to Do In the Meanwhile. Same-sex married couples that have overpaid taxes by reason of not being treated as “married” under the Internal Revenue Code should contemplate filing refund claims before any applicable statute of limitations expire. This applies both in the income tax and transfer tax arenas.
In regard to new filing and tax payment positions, taxpayers will need to explore whether it is better to file as unmarried, pay tax, and then seek a refund, or not pay the extra taxes in the first instance. The refund route is more conservative since it avoids the running of interest and potential penalties if Section 3 of DOMA is ultimately upheld. However, avoiding penalties in that eventuality will probably be easier to accomplish now in the case of an original filing asserting marriage per the holding in this case than it was beforehand. This is because there is now judicial support for treatment as married - except perhaps in other jurisdictions with case law that has rejected the rejection of Section 3 of DOMA, if any.
CITES: Windsor v. U.S., 109 AFTR 2d ¶ 2012-870 (DC N.Y. 6/6/2012)