On Oct. 19 the Internal Revenue Service (IRS) published a list of questions that are frequently asked by same-sex couples. In summary the IRS reiterated that it would apply tax law literally, including complying with Section 3 of the Defense of Marriage Act (DOMA). In other words, in the Internal Revenue Code (IRC) "marriage" means a legal union between a man and a woman as husband and wife. It's likely that the FAQ was published in response to the cases challenging the constitutionality of Section 3 of DOMA. On Wednesday, March 27, the Supreme Court will hear oral arguments in one of these cases, United States v. Windsor, and the justices are expected to issue their ruling in late June. If they rule that Section 3 of DOMA is unconstitutional, then the IRS FAQ will be incorrect.
The technical issues in Windsor are extremely interesting and will no doubt enhance the already tremendous interest in the case. The Supreme Court also agreed to hear a similar case, Hollingsworth v. Perry, which challenges the constitutionality of California's Proposition 8 (which does not involve tax law). The justices will hear oral arguments in that case on Tuesday, March 26, and are expected to issue their ruling around the same time as the Windsor ruling, in late June.
Background
The IRC provides tax breaks to married persons. For example, a wealth transfer at death to a spouse is not subject to an estate tax (that's the "marital deduction"). A married couple may also file a joint-income tax return (Form 1040) and thus may pay less in taxes than if each filed a separate return. It is dangerous to generalize about tax matters.
DOMA was enacted in 1996. It defines marriage, for federal law purposes, as "a legal union between one man and one woman as husband and wife." As a result, legally married same-sex couples cannot file joint-income returns, take advantage of the marital deduction or otherwise be treated as married for federal tax purposes.
The Windsor case was brought by the estate of the deceased spouse in a legal same-sex marriage. Edith "Edie" Windsor married Thea Spyer, her partner of 40 years, in Canada in 2007. Thea died in 2009, leaving her estate to Edie and naming Edie executor of the estate. Thea's estate filed an estate tax return claiming a marital deduction for the bequest to Edie. The IRS denied the deduction. Thea's estate paid the estate tax as if not entitled to a marital deduction and filed a claim for a tax refund.
Normally a claim for a tax refund is defended by the U.S. Department of Justice (DOJ). If the DOJ had defended the refund claim, it would have had to take the position that DOMA is a valid law (that is, it would have to maintain that a same-sex spouse is not a spouse for tax purposes). The DOJ announced in 2010 that it would not defend the constitutionality of DOMA; therefore, the DOJ would not defend the refund claim. But the U.S. House of Representatives has something called the Bipartisan Legal Advisor Group (BLAG), a congressional committee that can participate in litigation that is of interest to Congress. Here, on behalf of House Republicans, BLAG decided to defend the IRS position and argue against Windsor. BLAG was permitted by the Federal District Court to intervene in the case and defend the refund claim. In essence BLAG assumed the DOJ's usual role.
The litigation is procedurally and legally complex but extremely interesting, legally. For this purpose, it is sufficient to say that BLAG supports DOMA, and that Windsor's claim is that DOMA is unconstitutional. Two separate courts (the Southern District of New York and the Second District Court of Appeals) sided with Windsor and held DOMA unconstitutional, and other courts have reached the same decision. If the Supreme Court agrees with these lower courts, it is presumed that in the future, legally married same-sex couples will be entitled to marital deductions for bequests to a surviving spouse and will be able to file joint-income tax returns. They will be treated as married under the IRC and can take advantage of all provisions of the IRC that benefit married people.
A taxpayer can file a refund claim generally during the three-year period after the return in question was filed. For example, if you filed a separate income tax return and would like to amend and file jointly because it will reduce tax liability, that amended return must be filed within the three-year statute of limitations period.
Of course, no one knows how the Supreme Court will rule, but there is anticipation that DOMA will fall. If a person files a protective refund claim when the state of the law is unknown, the three-year period may expire before the law is clarified. Legally married same-sex persons might consider a protective refund claim.
The purpose of this short note is to provide background and suggest that legally married same-sex couples consider their options as they relate to tax law. The issues are extremely complex, with few cut and dried answers. However, it makes sense to at least consider the options and discuss them with a professional advisor.