As mentioned in the first article of this series, the U.S. Supreme Court’s (aka SCOTUS) Windsor decision resulted in a flurry of guidance from several government agencies. The agency leading the charge, because its treatment of estate taxes was called to the carpet in Windsor, was the IRS.
Sidebar: When SCOTUS or an agency, such as the IRS, decides on an overall course of action, the action typically can’t or, better yet – shouldn’t, occur until the agency provides a legal how-to analysis and procedural guidelines (aka “guidance”) for those who depend on the agency when performing their respective jobs. In this case, it would be estate planners, CPAs, and others.
The IRS responded to Windsor faster than most of us have ever seen with respect to an issue of discriminatory treatment of individuals; it’s response was Revenue Ruling (Rev. Rule) 2013-17.
WARNING: Despite my best efforts the following language will likely be a little dry.
Rev. Rule 2013-17 painstakingly crafted an IRS rule based on (1) gender neutrality, (2) the IRS’s historical treatment of common law marriage, and (3) the burdens placed on both the taxpayer and the IRS by the so-called Defense of Marriage Act (DOMA). Though somewhat spliced between most sections of the analysis, the rule provides that in the eyes of the IRS, “husband,” “wife,” and “spouse” each mean a “married person” and that “marriage” is a lawful union between “married people.” Thus, the Rev. Rule completely removed gender from the analysis of tax treatment for married couples.
The IRS reached this conclusion by examining the references to gender within the Internal Revenue Code (Code) itself and found few instances of express, gender-specific terms. Further examination of legislative history and recognition of statutory construction (how laws should be interpreted) supported the gender neutrality basis for the federal tax treatment of married same-sex couples.
Next, to answer whether credence should be given to state law if the state didn’t recognize the marriage as valid (recall, SCOTUS didn’t invalidate DOMA Section 2 which allows a state to not recognize valid same-sex marriages), the IRS considered its historical treatment of common law marriages. More than 50 years ago, the IRS decided that it would recognize common law marriages even if a state didn’t; therefore, it saw no reason to undo more than 50 years of precedent. (I will resist the strong temptation to comment on Citizens United here.) Equally important, the IRS determined that despite the lack of uniformity among the states regarding marriage and state taxes, “uniform nationwide rules are essential for efficient and fair tax administration.”
Considering how inefficient DOMA Section 3 made tax administration, the IRS stated that “more than 200 Code provisions and Treasury regulations” contain terms pertaining to marriage. Additionally, more than 1,000 statutes and regulations are affected by DOMA, placing a huge burden on same-sex couples by forcing them to use a complicated tax return filing process. Finally, the IRS also recognized the increased healthcare costs to these families created by a loss of the tax benefits opposite-sex spouses enjoy though employer benefits.
Also, looking at DOMA and its Section 3’s affect on tax administration, the IRS pointed to Windsor, where the reason for Section 3 was noted as anything but fair but, on the contrary, designed to “injure and disparage” same-sex couples seeking to marry.
The Rev. Rule also acknowledged and agreed with SCOTUS’s Fifth Amendment analysis inWindsor, stating that the IRS would prefer to pass rules and regulations that are more constitutionally valid than not.
Accordingly, the IRS per Rev Rule 2013-17 affords legally married same-sex couples the same tax treatment with respect to the federal tax regime as married opposite-sex couples, even if the couple resides in a state that doesn’t recognize their marriage (an “unfriendly” state). The rule, however, also expressly provides that this treatment does not extend to those couples in a Civil Union, Registered Domestic Partnership, or other relationship that bears a substantial similarity in state law benefits to marriage but are not, in fact, marriages.
IRS v. DOMA: IRS score BIG ONE; DOMA down 1 ½ .
Tune in next week for what this means practically speaking for married LGBT couples.
