Originally published on Passive Activities and Other Oxymorons on April 1st, 2011.
There have been major developments in the tax law affecting same sex couples in the last year. The attitude that I have as a tax advisor is "It is what it is. Deal with it." Whether its fair or makes sense is an interesting question, but not a practical one. When I look at the developments my thought is "What should Robin and Terry do ?" Robin and Terry are a couple of indeterminate gender and relationship status whose role in life is to help me avoid awkward pronoun problems. It's been a big year for Robin and Terry. I've decided that for this post I need to introduce some of their friends. One couple is Alex and Marty. The other is Blynn and Ashley. They are going to be busy this week because despite my advice they put off looking at their 2007 returns to see if they should amend.
Robin and Terry, at least for now, are of the same gender and were married in Massachusetts in 2007. Alex and Marty are of the same gender and are California registered domestic partners. Blynn and Ashley, who know how to act quickly when opportunity arises, are a California same sex married couple. They were married in San Francisco in 2004. Same sex marriage in California has a fairly convoluted legal history. It's arguable that in 2007, there were no same sex married couples in California, but thanks to litigation decided in 2008, now there were.
The development that affects Robin and Terry is the decision in Gill v OPM, which declared that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional. DOMA provides that for all purposes of federal law same sex marriages are not recognized. The Obama administration has announced that it will no longer defend DOMA in court, although it will still be enforced pending appeals. In order to benefit from the ultimate ruling, however, a claim must be filed while the statute of limitations is still open.
For 2007, Robin and Terry filed their returns as single. It may be that they would have paid less tax if they had been able to do a married filing joint return. I discussed the question of whether a joint return is better in a recent post, which was republished in Bay Windows. The short answer is that there are enough potential complications that you really need to do the return in order to tell. Now, Robin and Terry were required to file a joint Massachusetts return so it may be that somebody already prepared a pro-forma federal joint return for them. That's how we would have done it anyway. So one way or another Robin and Terry should compute a joint return and see if it would save them money. It's not a sure bet that Gill v OPM will ultimately be upheld, but there is quite a good chance. Unless there is a timely claim for refund, though, it won't do them any good for their 2007 return.
Alex and Marty have a situation that is more complicated, but not as uncertain. CCA 201021050 holds that the IRS will recognize California community property law as it relates to registered domestic partners. So Alex and Marty will still file as single (or head of household), but each will report half of the "community income", which includes wages. This holding is mandatory for 2010 returns and is causing a lot of heartburn. IRS has reissued a Publication 555 to help explain it. One of the subtleties in this is that not all income is community income and it is only community income that is split. The CCA made filing amended returns for open years optional.
There are a host of phase-outs and thresholds and offsets such that it is really impossible to say with certainty what will happen when you start moving income from one return to another. You have to look at each return. Let's say however that Alex and Marty don't have much other than their jobs and that Alex gets paid a ton of money by Microsoft as an independent contractor and Marty works at Starbucks. Most likely if they prepare amended returns for 2007 Alex will get a big refund and Marty will owe a lot of money. They will, however, net positive, at least on tax, if not on interest.
I did come up with a nasty idea. I've only found one other commentator that has made a similar observation:
Observation: The CCA doesn't say that if one partner amends his or her return, the other must do so as well. So, feasibly the higher income partner could amend his or her return to claim only 50% of his or her earnings while the lower income partner does nothing (i.e., doesn't file an amended return to pick up his or her 50% share). However, as withholding must also be split 50/50, it may be necessary to file both returns to get the full benefit of any savings. Also, the IRS may well require both partners to amend under these circumstances.
That comes from William Bischoff from a National Tax Advisory (NTA-743) (I can't track down a free link to it. I got it from my RIA Checkpoint subscription). I have not found anything to indicate that the IRS has done something to prevent being whipsawed on this issue. So if Alex hurries out and amends for 2007, maybe kind of forgetting to mention it to Marty, it may well be that Marty will be protected by the statute of limitations. I doubt that there is a SWAT team sitting in the service centers ready to issue timely notices of deficiency to the registered domestic partners of people filing refund claims under CCA 201021050, but I never, ever, give advice even to hypothetical clients based on the audit lottery. This particular observation is why I titled my first post on this topic Windfall for "Unmarried" Taxpayers. Other commentators that I have noted are good doobies on this issue. I guess I would say that if Alex amends, maybe Marty should too, but that maybe Marty doesn't have to be in such a rush about it. Also I should note that if Marty had income low enough to not have filed a 2007 return (or didn't file one anyway), there is no statute of limitations protecting Marty.
I won't spend much time on Blynn and Ashley. They do not represent a very large group of people. San Francisco issued same sex couples marriage licences for a brief period in 2004. That was shut down, but the law that declared it illegal was declared unconstitutional in 2008 opening a state wide window, which was closed in November 2008 by Proposition 8. So of the approximately 18,000 legally married same sex couples in California only a small number would have been arguably married in 2007 (at least in retrospect). What is interesting about them is they can either filed an amended joint 2007 return like Robin and Terry or amended 2007 community returns like Alex and Marty. The Alex and Marty option will probably work out better, but I find their situation particularly interesting so I thought I would mention it.
There is another point, which I cannot emphasize enough. If you might benefit from amending your 2007 return and you did not put it on extension,get the amended return done NOW. In CCA 201052003, it was noted that the "timely mailed, timely filed" rule only applies to returns that are "required to be filed". So an amended return to be timely must be received by the IRS before the statute expires. I'm not going to get into whether that is April 15th or April 18th. Don't take chances. Get it done this week and send it return receipt.
Patricia Cain of the Santa Clara Same Sex Tax Blog has set me straight on one issue. The 18,000 figure that I picked up from that unimpeachable source, Wikipedia is the number of California same sex marriages in 2008. She indicates that there were over 4,000 licenses issued to same sex couples in San Francisco in 2004, but none of those marriages were valid. So it may well be that not only do Blynn and Ashley not exist, there may actually not be anybody like them. The principle would apply for 2008 amended returns, but there is no rush to get those done and it is probably better to wait for more guidance.
Ms. Cain does not like the idea of the high income partners amending and the other partner letting it slide. It's not my all time favorite idea either, I just haven't figured out why it doesn't work. You really need to go to the Santa Clara blog for a thorough treatment of same sex tax issues. They are very focused on the issue and don't get distracted by mercenaries and celebrity underwear.
Another point that I also picked up from Ms. Cain that I should have thought of myself is that the lower earning partner might be subject to a six year statute of limitations if his or her share of community income would be 25% greater than the income he or she reported..