On Monday, the Court of Appeals for the Fourth Circuit invalidated Virginia’s prohibition on same-sex marriages 1. Bostic v. Schaefer, Docket No. 14-1167 (4th Cir. July 28, 2014). The Fourth Circuit includes Virginia, Maryland, North Carolina, South Carolina and West Virginia. Of those states, only Maryland allows same-sex couples to marry. Virginia, like North and South Carolina, prohibits same-sex marriages by statute as well as constitutional amendment. West Virginia has a statutory ban. In Bostic, the Fourth Circuit held that Virginia’s ban violates the Due Process and Equal Protection Clauses of the Fourteenth Amendment to the United States Constitution. Similar challenges are pending in North Carolina and West Virginia. (Note: The decision is not final until the mandate issues. The defendants may request a stay, an en banc review before the entire Fourth Circuit or review by the United States Supreme Court).
What Does this Decision Have to Do with Taxes?
After the decision of the United States Supreme Court in United States v. Windsor, 133 S. Ct. 2675 (2013),2 the Internal Revenue Service issued Revenue Ruling 2013-17 and News Release IR-2013-72. In the news release, the IRS announced that “same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes.” In the Revenue Ruling, the IRS concluded that, in light of Windsor, terms in the Internal Revenue Code that refer to marital status such as “spouse” and “marriage” include an individual married to a person of the same sex if the couple is lawfully married under state law. The IRS similarly concluded that the terms “husband” and “wife” in the Code should be construed to include same-sex married spouses. The IRS observed that a contrary conclusion would, among other things, “raise serious constitutional questions.” The IRS further ruled that if the marriage is valid in the state it was entered into, it will be recognized for federal tax purposes regardless of whether the couple’s state of domicile recognizes same-sex marriages. Thus, if a same-sex couple were legally married in Maryland but domiciled in North Carolina, they would be permitted to file a joint return for federal income tax purposes.
How Does this Decision Affect My State Tax Filing Status?
For state tax purposes, North Carolina generally requires a husband and wife who file a joint return for federal income tax purposes to file a joint return for North Carolina income tax purposes. N.C. Gen. Stat. § 105-152(e). In addition, N.C. Gen. Stat. § 105-134.1(8) defines “[m]arried individual” as “[a]n individual who is married and is considered married as provided in section 7703 of the Code.” After Revenue Ruling 2013-72, the North Carolina Department of Revenue issued Directive PD-13-1 stating that “[b]ecause North Carolina does not recognize same-sex marriage as valid... the Department of Revenue cannot follow the new definitions in Rev. Rul. 2013-17.” As such, the Directive advises, “individuals who enter into a same-sex marriage in another state cannot file a North Carolina income tax return using the filing status of married filing jointly.” The Directive does not address the mandate in N.C. Gen. Stat. § 105-152(e). The Directive also does not address N.C. Gen. Stat. § 105-134.1(8) or the effect of Winsdor on the interpretation of terms in the North Carolina Revenue Act such as “husband” and “wife.”
Similarly, South Carolina generally requires a husband and wife who file a joint return for federal income tax purposes to file a joint return for South Carolina income tax purposes. S.C. Code § 12-6-5000. After the issuance of Revenue Ruling Rule 2013-17, South Carolina issued Revenue Ruling #14-1, advising that because South Carolina does not recognize same-sex marriages, the Department will continue to interpret “husband” and “wife” as gender specific and “spouse” to refer to a person of the opposite sex. The Ruling concludes that S.C. Code § 12-6-5000 requires the same filing status for federal and South Carolina purposes only for married persons of the opposite sex and that same-sex persons considered married for federal purposes must file separate returns. Although the Ruling mentions the Windsor case, there is no analysis of the decision or its application to South Carolina.
West Virginia also generally requires a husband and wife who file a joint return for federal income tax purposes to file a joint return for West Virginia income tax purposes. W. Va. Code Ann. § 11-21-51(b). In addition, W. Va. Code Ann. § 11-21-9 provides: “Any term used in this article has the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required. Any reference in this article to the laws of the United States means the provisions of the Internal Revenue Code of 1986, as amended, and any other provisions of the laws of the United States that relate to the determination of income for federal income tax purposes.” The Instructions to the West Virginia Personal Income Tax Return state, however: “When a joint federal return is filed pursuant to Internal Revenue Service Rule 2013-17, each individual is required to file a West Virginia State return... claiming ‘single’ as the filing status.”
Finally, Virginia also generally requires a husband and wife who file a joint return for federal income tax purposes to file a joint return for Virginia income tax purposes. Va. Code Ann. § 58.1-324. In addition, Va. Code Ann. § 58.1-301 provides: “Any term used in this chapter shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required. Any reference in this chapter to the laws of the United States relating to federal income taxes shall mean the provisions of the Internal Revenue Code of 1954, and amendments thereto, and other provisions of the laws of the United States relating to federal income taxes, as they existed on January 2, 2013 [with certain exceptions].” After Revenue Ruling 2013-17, Virginia published Tax Bulletin 13-13. The bulletin states that “[b]ecause Virginia’s income tax law generally conforms to federal income tax law, the marital status of a couple for Virginia income tax purposes is historically based on whether the couple is considered married for federal income tax purposes.” The ruling states, however, that the Department sought legal advice and was advised that Virginia was required to decouple from the federal income tax treatment of same-sex marriage. According to the Bulletin, same-sex married couples who file joint federal returns must file separately for Virginia purposes. In Bostic, two of the plaintiffs alleged that the inability to file a joint state tax return was an economic burden not borne by opposite-sex couples. The Court stated that this was an example of “specific, concrete instances of discrimination.”
How Does Bostic Affect these Rulings?
When (and if) it becomes final, the decision of the Fourth Circuit Court of Appeals will be binding in North Carolina, South Carolina and West Virginia, as well as Virginia. However, there is no decision yet in any of these three other states regarding the constitutionality of that state's law3. Similarly, there has been no decision on whether the administrative interpretation of any of these Departments of Revenue is correct under Windsor or Bostic.
What Should I Do to Preserve My Rights?
If you are a spouse in a same-sex marriage and filing jointly for federal income tax purposes, you should determine whether you would benefit from filing jointly in North Carolina, South Carolina, Virginia or West Virginia. If so, you may want to file protective claims for refund for all open years in the event that the interpretation of the Department of Revenue in any of these states is determined to be invalid in light of Bostic or otherwise.
The constitutionality of other states’ same-sex marriage bans is being litigated in other federal circuits. A discussion of that litigation and any effect on your state tax filing status is beyond the scope of this client alert. In addition, there are other state tax implications arising from whether taxpayers are considered married (for example, the taxation of employee benefits), which are also beyond the scope of this alert.
Parker Poe’s SALT team would welcome the opportunity to discuss this issue with you in more detail.
[1] The Fourth Circuit joins the Tenth Circuit, who invalidated Utah’s ban on same-sex marriages in June of this year. Kitchen v. Herbert, Docket No. 13-4178 (10th Cir. June 25, 2014).
[2] In that decision, the Supreme Court held that Section 3 of the Defense of Marriage Act (DOMA) violates the Due Process Clause. Section 3 created a federal definition of “marriage” and “spouse” applicable to all federal statutes and regulations. That definition provided that a marriage was between one man and one woman and that spouse referred to a person of the opposite sex.
[3] In North Carolina, the Attorney General has announced that his office will no longer defend North Carolina’s law. In South Carolina, the Attorney General announced that his office would continue to defend that state’s law. West Virginia’s Attorney General said that he is reviewing the decision and will not comment until it is final. In Virginia, both the Governor and the Attorney General have refused to defend the ban; the case is being defended by two clerks of court and the state registrar.
