Same-Sex Couples Should Take Exception With The Missing Exemption


In the wake of the recent determination of the unconstitutionality of the Defense of Marriage Act, the mind of a tax attorney begins to wonder about the practical income tax implications for same-sex couples. A recent case seems to demonstrate that there are inequities in how the Internal Revenue Code is applied – completely aside from the DOMA decision - depending on the nature of the taxpayer's personal relationships.

Recently, I represented an individual who was undergoing an IRS exam. As part of the adjustments made by the examiner, the taxpayer was denied an exemption for his significant other who, as it happens, is of the same gender as the taxpayer. As a former attorney for the Office of Chief Counsel for the IRS, this initially seemed to me to be the right decision, since the exemption normally applies to the taxpayer’s children, spouse, or elderly parents. Setting aside any moral judgments, why would a well-to-do man be entitled to take an exemption for his adult, same-sex partner? The answer is surprisingly simple – the Internal Revenue Code.

Before I give away the ending, a brief primer on IRS Code is in order. In the case of an individual taxpayer, an exemption is allowed for that individual and for any dependent of the individual. The Code provides that a dependent is either a “qualifying child” or “qualifying relative.” In this case, the taxpayer’s partner was not a child, so to claim the exemption, he must meet the definition of a qualifying relative.

According to the Code, a qualifying relative is an individual: (1) who bears a certain type of relationship to the taxpayer; (2) whose gross income for the calendar year in which the taxable year begins is less than the exemption amount; (3) with respect to whom the taxpayer provides over one-half of his or her support for the calendar year; and (4) who is not a qualifying child. In my client’s case, the second, third, and fourth elements were met. The question that remained was whether his domestic partner had that “certain type of relationship” necessary to qualify.

In general, taxpayers and return preparers view “typical” family relationships as meeting this standard: brothers, sisters, fathers, mothers, stepparents, nieces and nephews, and in-laws. But according to the Code, an individual who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household is also in a valid relationship, even if they are not related by blood or marriage.

It now seemed clear that the taxpayer’s partner did indeed meet the definition of  “qualifying relative” and therefore was eligible for the dependency exemption. The examining agent was not convinced, however, and, citing the Code, declared that “[a]n individual shall not be treated as a member of the taxpayer’s household if at any time during the taxable year of the taxpayer the relationship between such individual and the taxpayer is in violation of local law."

This is the crux of the matter, and where I question the logic of the Revenue Agent’s position. As a resident of the State of Michigan, I am not aware of any local laws which make same-sex relationships illegal. In fact, many municipalities have enacted ordinances which prohibit discrimination on the basis of sexual orientation. Michigan does not currently allow same-sex couples to marry, but marriage is not an issue here.

For my client, the plain language of the Code provides a strong argument at appeal, and we are appealing the matter. Despite the outcome for my client, however, the question remains: does the Code discriminate against same-sex couples? As a tax professional and advocate for my clients, I am relegated to interpreting the law as it stands. Despite what this particular Revenue Agent proposes, which is that a same-sex relationship is allegedly unlawful in Michigan, I am confident that the Appeals Officer will find our argument persuasive. If not, we are ready to take this issue head-on. Same-sex couples are entitled to take a dependency exemption for their partners – assuming they meet the other requirements.  Stay tuned.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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