IRS Recognizes Same-Sex Marriages in All States

irs-sealThe U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that legally married same-sex couples will be treated as married for federal tax purposes. In other words, all marriages will be treated identically for all federal tax purposes. The ruling is in response to the June 26 decision in U.S. v. Windsor that invalidated section 3 of the Defense of Marriage Act (DOMA).

The ruling applies regardless of the residence of the married couple – whether that is in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling applies to federal tax provisions where the terms “marriage”, “spouse”, “husband”, “wife”, or “husband and wife” is a factor. Examples of such instances include filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit. The IRS will begin applying the guidance on September 16, 2013.

Any same-sex marriage legally entered into in any state, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status. Couples may also file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

The IRS indicated that further guidance will be released to allow streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Additional guidance will also be forthcoming on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the September 16 effective date.

Read the Revenue Ruling here: Revenue Ruling 2013-17

Read the IRS FAQ here.

DOD Adopts Uniform Policy on Same-Sex Marriage

Last week Secretary of Defense Chuck Hagel announced that the Armed Forces (Army, Navy, Air Force, Marine Corps, Coast Guard) will comply with the U.S. Supreme Court’s decision in U.S. v. Windsor ruling by September 3, 2013. Windsor declared Section 3 of the Defense of Marriage Act (DOMA) unconstitutional.

Sec. Hagel explained that the domestic partner provisions put in place in February will be supplanted by official recognition of same-sex marriages. Recognizing that many same-sex couples have to travel to another jurisdiction to marry, the Department of Defense has amended Department of Defense Instruction 1327.06 “Leave and Liberty Policy and Procedures” to allow “non-chargeable marriage leave where a Service member is a part of a same-sex couple and is assigned to a duty station located more than 100 miles from a U.S. state (or the District of Columbia) that allows same-sex couples to get married.”  Eligible Service members may be granted non-chargeable leave for up to 7 days if they are assigned within the continental U.S (CONUS).  If they are stationed outside the continental U.S. (OCONUS), they will be granted non-chargeable leave for a period of up to 10 days. Same-sex couples will be able to use this nonchargeable marriage leave once in their career.

The memo indicates that there could be more changes to follow, as the Joint Benefits Review Working Group is focusing its efforts on extending spousal benefits to same-sex spouses.  It also gave a firm timeline for enforcement stating that all entitlements are retroactive to the date of the Supreme Court’s decision, June 26, 2013.  

Read the memoranda here:
Extending Benefits to Same-Sex Spouses of Military Members

Further Guidance on Extending Benefits to Same-Sex Spouses of Military Members

DOMA Doomed by Estate Tax Refund Claim

us-supreme-courtThe United States Supreme Court has struck down the Defense of Marriage Act (DOMA) as an unconstitutional violation of the “equal liberty” protections of the 5th Amendment.

The dispute in U.S. v. Windsor began when Edie Windsor filed a claim for refund of estate taxes paid after the death of her same-sex spouse, Thea Spyer. Though the court makes little mention of the $353,053 refund claim in its historic opinion, the high court’s ruling affirmed the Second Circuit Court of Appeals’ decision to award the refund.

Read the entire opinion here:
U.S. v. Windsor, Docket No. 12-307 (U.S.S.C. June 26, 2013)

Supreme Court Allows Foreign Tax Credits for U.K. Windfall Tax

us-supreme-courtThe U.S. Supreme Court has resolved a split in the circuits on the U.S. tax treatment of U.K. windfall tax payments made by U.S. utilities. In a unanimous opinion authored by Justice Thomas, the Court held that the windfall tax qualified as a “creditable tax” for U.S. foreign tax credit purposes. The result is that the appellant here, PPL, and Entergy, who had the companion case, will be able to take a credit against their U.S. income taxes for the amounts paid to the United Kingdom.

The central issue was whether the U.K. tax was a tax on income, the general standard for creditable foreign taxes. The ultimate decision was a bit more nuanced and scholars surely will continue to debate the issue including the algebra (don’t see that often in the tax world) and the potential distinction between the regulatory phrase “in the U.S. sense” and Justice Thomas’ phrase “if enacted in the U.S.”

Practitioners, being the practical folks that they are, will look to expand the decision for the benefit of other clients that may have paid taxes similar to the windfall tax but not received the benefit of foreign tax credits against their U.S. income.

This is what happens when the Supreme Court issues a tax opinion. There will be more to come, as the estate tax case that may decide the fate of DOMA has been heard and likely will be decided this year and another tax case (on overpayment penalties) is being briefed for the Supremes right now. Expect a decision in the latter case, U.S. v. Woods, sometime in 2014.

Read the PPL opinion here:
PPL Corp. v. Commissioner, Docket No. 12-43 (U.S.S.C. May 20, 2013)

Today: Supreme Court to Hear Arguments in DOMA Tax Case

Seal_of_the_United_States_Supreme_Court.svgToday, the United States Supreme Court will hear arguments about the Constitutional rights of homosexual couples courtesy of the Internal Revenue Code.

The Court may rule on a variety of grounds in United States v. Windsor including standing (was the couple’s marriage recognized under New York law) and the proper Constitutional standard (does Intermediate Scrutiny apply to homosexuals) but the case started with a tax return.

Edie Windsor and Thea Spyer were New York residents and a couple for over 40 years. In 2007, they were married in Canada where same-sex marriage was legal. Upon Thea’s death, Edie filed a federal estate tax return, Form 706. Thea’s estate paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC §2056(a) – a benefit routinely applied to married couples of different sexes. Edie filed a claim for refund of the estate taxes paid. When that claim for refund was denied she filed suit in federal district court.

The refund denial was reversed by the U.S. District Court for the Southern District of New York and the Second Circuit Court of Appeals. Read opinions published in those cases here and here.

Whether not the Supreme Court issues a sweeping or narrow opinion on the rights of homosexuals, there is little question that the tax code touches everyone. After all, that’s where this case started.

Tax Question May Determine Supreme Court’s Position on Same-Sex Marriage

Last week, the U.S. Supreme Court granted certiorari in two cases that may decide the constitutionality of same-sex marriage. One of the two cases, U.S. v. Windsor, came to the Court by way of the tax code. In Windsor the high court will consider whether the decedant’s same-sex spouse qualified for the unlimited marital deduction under IRC Section 2056(a). Whether, and how, the court ultimately rules remains to be seen but the tax code may once again be the basis for a far-reaching decision out of the Supreme Court.

Second Circuit: DOMA Unconstitutional In Estate Tax Case

The Second Circuit Court of Appeals has affirmed the ruling of the U.S. District Court for the Southern District of New York that Clause 3 of the Defense of Marriage Act (DOMA) is unconstitutional.

The case originated with a refund claim for overpaid estate taxes. Edie Windsor and Thea Spyer were a married homosexual couple from New York. Upon Thea’s death, Edie paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC Section 2056(a) – a benefit routinely applied to married couples of different sexes. When Edie’s claim for refund of the estate taxes was denied she filed a refund action in U.S. District Court.

The trial court held that DOMA denied Ms. Windsor equal protection under the law as guaranteed by the 5th Amendment to United States Constitution. The three judge appellate panel agreed. It added that “homosexuals have suffered a history of discrimination” and thus the proper legal standard for determining Constitutional protections is intermediate scrutiny. The court held that DOMA could not meet that standard and thus Edie’s 5th Amendment right to equal protection under the law was violated when the provisions of the Internal Revenue Code applied differently to her than to other surviving spouses.

Read the opinion here:
Windsor v. U.S., No. 12-2335 (2d Cir. Oct. 12, 2012)

District Court: Estate Tax Marital Deduction Triggers Unconstitutional Ruling on DOMA

In a case that begin with a claim for a refund of estate taxes paid, Judge Barbara S. Jones of the Southern District of New York ruled that the Defense of Marriage Act (DOMA) is unconstitutional under the Equal Protection Clause of the 5th Amendment.

Edie Windsor and Thea Spyer were a couple for over 40 years and in 2007 were married in Canada where same-sex marriage was legal. Their marriage was later recognized in their home state of New York. Upon Thea’s death, Edie paid $363,053 in federal estate taxes because she was not eligible for the unlimited marital deduction under IRC Section 2056(a) – a benefit routinely applied to married couples of different sexes. Edie filed a claim for refund of the estate taxes on the grounds that DOMA denied her equal protection under the law as protected by the 5th Amendment to United States Constitution.

Frequent readers know that when possible we like to note interesting procedural aspects of the cases we feature here and this cases qualifies in two aspects. First, was the question of the parties. The case was filed in November of 2010. In February of 2011, Attorney General Eric Holder announced that the Department of Justice would not defend the constitutionality of DOMA. Given that DOJ would no longer defend the suit, the Bipartisan Legal Advisory Group (BLAG) of the U.S. House of Representatives moved to intervene under F.R.C.P. 24 and defend the matter in the place of the Department of Justice. The group’s order was granted. Thus, the parties to the final order were Ms. Windsor as plaintiff and BLAG as defendant-intervenor.

The second interesting procedural note before the court was Edie’s standing to bring the suit. Standing generally requires three elements: (1) an injury in fact, (2) a causal connection between the defendant and the injury, and (3) a means of remedy within the power of the court. The defendant-intervenor argued that Ms. Windsor did not satisfy the second of these elements. The court disagreed noting the State of New York’s recognition of Edie and Thea’s marriage at the time of death as a factor in its finding.

On the ultimate question, the District Court granted Ms. Windsor’s motion on summary judgment ruling that section 3 of DOMA was unconstitutional because it failed to establish a rational basis for advancing a legitimate government under the Equal Protection Clause. The court ordered a that Edie’s refund claim be paid with interest.

Read the entire opinion here:
Windsor v. U.S., No. 10-cv-08435 (SDNY June 6, 2012)