AICPA Tax Insider - August 15, 2013
With the Supreme Court's decision on the constitutionality of part of the Defense of Marriage Act, P.L. 104-199 (DOMA), Edith Windsor, the plaintiff, joins the likes of Beulah Crane (Crane, 331 U.S 1 (1947)), Mary Archer Morris (Mary Archer W. Morris Trust, 367 F.2d 794 (4th Cir. 1966)), and Evelyn Gregory (Gregory v. Helvering, 293 U.S. 465 (1935)), women whose names grace leading tax cases.
In Windsor, the Supreme Court, in a 5–4 decision, held that the definition of marriage in Section 3 of DOMA as a union between a woman and a man violated the principles of equal protection incorporated in the Fifth Amendment of the Constitution. The Supreme Court did not provide same-sex couples the right to marry in states that do not permit such marriages and it did not address Section 2 of DOMA, which allows states to refuse to recognize same-sex marriages entered into in other states.
Same-sex spouses living in states that recognize same-sex marriages are now entitled to, and eligible for, all of the federal benefits, rights, and privileges as opposite-sex spouses. After the Supreme Court decision was issued, the Department of Justice was directed to work with the IRS and the Department of Treasury to expeditiously implement the decision.
Windsor and her wife, Thea Spyer, were married in Canada in 2007 after 40 years together as residents of New York. While New York did not permit same-sex marriages at the time, in 2008, the state recognized those marriages as valid if they were valid where they were performed (Directive of the Governor of New York, May 14, 2008, responding to a state appellate court decision, Martinez v. County of Monroe, 850 N.Y.S.2d 740 (2008)).
When Thea Spyer died in 2009, she left her entire estate to Windsor. Windsor sought to take the unlimited marital deduction on the federal estate tax return. However, because DOMA limited the federal definition of "marriage" to opposite-sex couples, the IRS disallowed the unlimited marital deduction. As a result, the estate incurred an estate tax liability of $363,053, which Edith Windsor paid. She then filed a refund claim on the grounds that DOMA unconstitutionally discriminated against same-sex couples. After her claim was denied, Edith Windsor sued for a refund of the estate tax, arguing that she would have received an unlimited marital deduction under Sec. 2056 for property passing to her, but for DOMA.
The U.S. District Court for the Southern District of New York granted the claim for refund on the grounds that DOMA violated the equal protection provisions of the Fifth Amendment; the Second Circuit affirmed (Windsor, 699 F.3d 169 (2d Cir. 2012), aff'g 833 F. Supp. 2d 394 (S.D.N.Y. 2012)). The Supreme Court, in a split opinion, agreed with the lower courts that DOMA's definition of marriage is unconstitutional.
Unanswered questions in Windsor
While Windsor made clear that same-sex married couples living in states that recognize same-sex marriage are entitled to the same federal benefits as opposite-sex married couples, the decision left unanswered a number of questions, namely (1) the retroactive effect of the decision and (2) which state determines the legality of the same-sex marriage.
Should the case apply retroactively?
Generally, a law that is held unconstitutional will be considered unconstitutional ab initio, from its time of passage. For this reason, the decision will apply retroactively as long as the statute of limitation for those affected returns is still open.
The Windsor decision itself applies retroactively in granting an estate tax refund to Edith Windsor. However, for refund claims by same-sex couples seeking a refund for taxes overpaid as a result of the application of DOMA denying the federal benefits associated with marriage, it is unclear whether the IRS will apply the decision (1) retroactively in those cases where the statute of limitation has not run, (2) only where protective refund claims have been filed, or (3) only prospectively.
If the IRS applies the decision retroactively, will same-sex couples who filed as single taxpayers have to file amended income tax returns reflecting that they were married? If the IRS elects to apply the decision retroactively, will the IRS be able to assess additional taxes that may be owed by individuals in same-sex marriages as a result of marital status, e.g., married couples filing single tax returns?
For more definitive answers, taxpayers will have to wait for the anticipated IRS guidance on the application of Windsor. However, those taxpayers who might have overpaid federal income taxes because of a change in filing status, or overpaid estate taxes and FICA taxes because their spouses were not previously recognized under DOMA, for whom the statute of limitation is still open, should file protective claims for refund or amended returns claiming the refund as soon as possible.
Determining whether a same-sex couple is married
The Windsor decision left it up in the air which state should be looked to in determining whether a same-sex couple is married—the state where the ceremony was held, the state where the couple resides, or the state with the most significant relationship to the same-sex couple. The facts of the Windsor case are not helpful. Although Edith Windsor and Thea Spyer were married in Canada in 2007 when New York did not recognize or permit same-sex marriages, in 2008 New York had decided to recognize same-sex marriages performed in other jurisdictions. (Same-sex marriage was legalized in New York in 2011.)
Federal agencies have different approaches as to which state's laws are looked at to determine if a marriage is valid for federal purposes. The IRS and the Social Security Administration (SSA) typically look to the laws of the state of residency to determine whether a couple is validly married. Other federal agencies, such as the U.S. Citizenship and Immigration Services, look to the laws of the state where the marriage ceremony was performed to determine the validity of the marriage, while other agencies and programs look to the state "with the most significant interest" in the marriage.
In all likelihood, the IRS will choose the state where the marriage ceremony was celebrated to determine the validity of a same-sex marriage, since the standard provides certainty, clarity, and stability. In addition, choosing the state of the marriage celebration is consistent with the standard applied to determine the validity of common law marriages. In Rev. Rul. 58-66, the IRS was presented with the issue of whether a common law married couple was considered married for federal purposes upon moving to a state that required a marriage ceremony for legal marriages within the state. The IRS ruled that if the couple were considered husband and wife in a state that recognized common law marriages, they would be considered married regardless of where they moved, even to a state where a ceremony is required and common law marriages are not valid. For federal law purposes, a common law married couple will be considered married wherever they reside.
With respect to immigration matters and visa applications, the United States recently announced that same-sex couples legally married in a state that permits same-sex marriages will be treated in the same manner as opposite-sex couples, regardless of where the same-sex couple resides. This treatment is a good indication of which state law will determine the legality of a same-sex couple's marriage with respect to all federal benefits (see U.S. State Department, "U.S. Visas for Same-Sex Spouses").
Effect on a variety of provisions
A 1997 U.S. General Accounting Office (GAO) report listed 198 Code provisions tied to the determination of marital status. A 2004 update to the 1997 GAO report discovered a total of 1,138 federal statutory provisions in the U.S. Code in which marital status is a factor in determining or receiving federal benefits, rights, and privileges. Summarized below are a few of the many provisions of the Code potentially affecting married same-sex couples now that DOMA has been invalidated.
Federal income taxes
Same-sex couples found to be legally married will be entitled to file joint federal income tax returns and will be subject to the rules with respect to married filing separately.
Same-sex married couples will be entitled to exclude up to $500,000 in gain upon the sale of their primary residence while a single taxpayer is entitled to exclude only up to $250,000.
Same-sex married couples should be able to use pretax dollars to pay premiums on employer-provided health insurance for an employee's spouse and to exclude from income the value of the premium paid by the employer (same-sex couples whose companies provide health insurance coverage for spouses previously had to pay federal income tax on the benefit).
Property transferred between same-sex spouses because of a divorce should not be subject to income or gift taxes.
Same-sex spouses who divorce should be able to take a deduction for alimony that is included in the recipient spouse's income.
The transfer of all or a part of an IRA to a same-sex spouse or former spouse under a qualified divorce decree will not be a taxable transfer.
Estate and gift tax provisions
Married same-sex couples can now claim the unlimited marital deduction from gift or estate tax.
The surviving spouse of a same-sex marriage will be entitled to use the unused exclusion amount of the deceased same-sex spouse (commonly called the portability election).
Same-sex spouses will be entitled to split gifts so that one-half of the transfer by one spouse is treated as made by the other spouse of the same-sex marriage.
Employer provided benefits, Social Security, etc.
Same-sex spouses will be able to roll over benefits from a qualified plan upon the death of their spouse to their own IRA or another employer plan and defer distributions from their deceased same-sex spouse's plan until that spouse would have reached 70½, and they will be entitled to hardship withdrawals from their same-sex spouse's plan.
For employer provided benefits, same-sex spouses of employees will be entitled to spousal coverage under employer-provided health plans, entitlement to spousal coverage under COBRA continuation rules, and subject to the spousal consent and election rules under qualified pension plans.
Social Security retirement spousal benefits will be available to same-sex spouses upon the retirement of one spouse, the disability of one spouse, or the death of a spouse. It should be noted that the SSA determines marital status by looking to the residence of the couple, which may create problems for couples who move to states that do not recognize same-sex marriages.
Same-sex spouses will be entitled to the benefits under the Family and Medical Leave Act (FMLA). However, similar to Social Security benefits, the regulations under the FMLA look to the employee's state of residence to determine if the employee is legally married.
Same-sex spouses will be entitled to collect an amount equal to half of the other spouse's Social Security benefit.
Shortly after the Supreme Court issued the Windsor decision, the IRS said that it will "move swiftly to provide revised guidance in the near future," but it did not provide any details on how it would approach the issues presented by the decision. That last update was posted on the IRS website July 2, but nothing had been added as of the time this article posted.
The full impact of the Windsor decision on federal benefits—whether Windsor applies retroactively and which state's law will be used to determine the marital status of a same-sex couple—will have to wait until the IRS issues the guidance it has promised. Hopefully, the guidance on whether a same-sex couple is legally married will be consistent and uniform for all federal benefits and rights.
Reprinted by permission.