When SCOTUS ruled that section 3 of the Defense of Marriage Act was unconstitutional in late June in Windsor , I wrote a lovely blog entry thinking our blog would be live within a day or two. We were slightly naive about what goes into creating a functioning blog, and it was well over a month before we could post. The Congressional Research Service (CRS), which provides research for Congress, has recently issued a report outlining some of the tax effects of the repeal of section 3, which overs some insight into Congress’ thinking on the matter, and allows me to reuse some content I previously drafted. The CRS summary is pretty much in line with most of the other quality commentary that has been offered since the holding, but does add a few interesting facts and shows the issues that CRS thinks should be important to Congress.
The Windsor case removed the prohibition that the federal government had from recognizing same-sex marriages, with SCOTUS stating it violated the equal protection clause of the US Constitution. The Windsor case dealt with the marital deduction for federal estate tax purposes, but the ruling allows all tax provisions applying to married couples and spouses to extend to same-sex couples. Overall, there are close to 200 statute provisions in the Internal Revenue Code that refer to a “spouse” or the term “married”.
Moving forward, same-sex married couples will be able to file joint returns. One of the largest procedural questions surrounding this ruling is whether or not same-sex couples will be able to amend past income tax returns back to 2010 (or further, if protective refunds were claimed)? This could also apply to gift tax returns and estate tax returns; however, there were far fewer of those filed. Generally, taxpayers can file an amended return that results in a refund, within three years of the due date of the return. An exception to the general rule permits a taxpayer to file an amended return claiming a refund within two years of any payment made for a tax year; but in that case the refund is limited to the amount of the payment. For income tax purposes, if the ruling applies retroactively, same-sex married couples could amend prior returns to file married filing jointly. This would potentially save income tax, unless the marriage penalty applies. Here is a great marriage penalty calculator I use on occasion when trying to do a quick calculation: http://calculator2.taxpolicycenter.org/index.cfm.
A second widely recognized question is how the Service will treat couples who were married in a state that recognizes same-sex marriages, but are currently residing in a state that does not recognize a marriage from another state. This issue also extends to the treatment of people who have entered into civil unions or domestic partnerships. Those do not fall within the current definition of “lawful marriage”.
The CRS report does not specifically answer any of these questions. The report states that the law may not extend to couples who are married but reside in a state that does not recognize the marriage and states that over 50% of same-sex married couples live in states that don’t recognize their marriage. See Pg. 2. It specifically states that residence is the key, but that the Service may extend these benefits by regulations. No specific authority for the Service to promulgate such a regulation is stated. If nothing else, the Service should have the authority under Section 7805(a) to issue regulations, which would be subject to notice and comment. Given the subject matter, I would believe there will be lots of comments, many of which probably not actually applicable to the administration of federal taxes. Substantial comments or not, it will be some time before the final regulations are done. Given the potential for disparate treatment of taxpayers depending on residence or the type of legal relationship, they may also be challenged.
For people who have entered into a civil union, or some other legally recognized relationship that was not defined as a marriage, the report is ominously silent, only stating in a footnote that the holding may not extend to these relationships.
For this issue and the issue about residence, IRS guidance may be coming soon. The current guidance to same sex couples can be found on a web page FAQ. FAQs have been a favorite manner of providing guidance to taxpayers by the IRS. These are incredibly helpful, but are not subject to the review like regulations, and the binding effect is not clear. If the FAQ denies the ability to file jointly to someone who has had a civil union, it is not clear the court will have jurisdiction to review the matter, until there were a deficiency or denied refund claim that would generate the possibility for court involvement. See ¶3.04[9] in Saltzman, which has a discussion of the impact of this type of IRS guidance. The report goes on to discuss the estate tax impacts, followed by the income tax impacts. There is an extensive discussion about filing status, marginal rates, and brackets. This is followed with a summary of various credits that may be impacted by filing status and other ancillary benefits from being able to file jointly. Finally, the report then goes to speculate about the potential income tax consequences and quotes statistics indicating that on average there is a marriage penalty imposed of $450 for same sex couples because of equal distribution in income and a lower number of children, and states that the overall budgetary impact will be close to nil.
The CRS report doesn’t answer the question of who should file amended refund claims. Taxpayers consider should first make a determination of whether the marriage penalty would apply. Second, taxpayers should then determine if there is some reason they would not want the Service to have an extended statute to review their returns (i.e. aggressive positions). This matter will not be fully resolved in the near future, but it would appear that same sex couples who have a legally recognized relationship should file protective refund claims prior to the expiration of the period. Guidance from the Service could still be months away, and it seems likely that there will be a few more chapters in this story before taxpayers will know precisely how to navigate this area