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Wednesday, August 27, 2014
10 LGBT Tax Developments in 2011
Originally Published on forbes.com on December 23rd,2011
OverviewMost of the LGBT tax developments this year are related to marriage equality and the Defense of Marriage Act. The best summary I can make on those issues is that although there have been developments, nothing has changed. So all the advice that I gave for 2010 is as good or bad for 2011. Under DOMA a legally married same sex couple is not married for federal income tax purposes. The First Circuit decision in Gill v OPM, however, gives a couple a reasonable basis to file a joint return. The Justice Department’s declaring DOMA unconstitutional reinforces the reasonability of that position. The most important item that you might not pick up in other commentary is that a couple who were married in 2008, who would have benefited from a joint return, need to file a refund claim before the statute of limitations expires on 2008. I could give you a little treatise on exactly when that might be, but better is the advice to just go get it done now, while your tax preparer is not busy
The Justice Department usually defends the constitutionality of laws passed by Congress regardless of the Administration’s opinion. On February 12thAttorney General Holder announced:
“The president and I have concluded that classifications based on sexual orientation” should be subjected to a strict legal test intended to block unfair discrimination, Mr. Holder wrote. As a result, he said, a crucial provision of the Defense of Marriage Act “is unconstitutional.”
2. Congress Takes Up the Defense
No sooner did Justice drop the torch (or the hot potato) of DOMA then did Congress pick it up. House Speaker Boehner announced March 4 that Congress would defend the statute in Court. The continued defense of DOMA, oddly enough, constitutes a kind of subsidy for gay marriage as I explained here. A couple that would be subject to the marriage penalty can clearly continue to file two single returns as long as DOMA is enforced. On the other hand if a joint return would be beneficial there is a reasonable basis for filing one.
3. Gay Advocacy Organization Denied Exempt Status - PLR 201120036
This is not as bad as it sounds. Denying an organization exempt status for advocating gay rights is so seventies. Organization X was applying for 501(c)(3) status. Among its goals was:
You also indicate having the Y Company become the employer of choice for individuals of the lesbian, gay, bisexual, and transgender community where these individuals can work in a culture of equality and enjoy successful employment
The IRS indicated that the organization was too much about Company Y to qualify as a public charity, but that Organization X could qualify under 501(c)(5) (Labor, agricultural, or horticultural organizations). That was not an option though:
In your response you have stated that applying for exemption under section 501(c)(5) is not an option, as this would result in you and your members violating the policies of the Y Company, as the Y Company does not allow its employees to establish labor organizations.
I was unable to infer the identity of the union busting gay friendly Y Company, but there were some clues in my post that a real reporter might be able to use to track it down.
4. Be Careful What You Wish For – CCA 201021050 And the Tax Season From Hell
I noted when CCA 201021050 came out that it constituted a windfall for registered domestic partners(RDPs) and same sex married couples in community property states – mostly California. Federal taxes follow state property laws so RDPs each report half of their own and half of their partner’s income which is likely to be a better deal than a joint return. Amended returns were optional, but the holding was mandatory for 2010. The IRS was not set up to deal with it administratively though and there was much aggravation. In a letter to Senator Boxer it was noted:
The IRS is aware that the extension of community property laws to same-sex couples in California has caused some taxpayers to incur increased tax return preparation fees and has raised some additional legal and compliance issues. The IRS is currently reviewing these issues and considering how best to ensure that same-sex couples receive the information they need to timely and accurately complete their federal income tax returns.
I suggested that the IRS respond to Congress with “Repeal DOMA You Dummies” but the Commissioner is much too diplomatic.
New York went to full marriage equality just in time for it to be the topic ofmy inaugural post on Forbes. Previously New York had recognized marriages performed in other states and countries, but because it followed federal definitions of income had applied DOMA for income tax purposes. Not long afterwards it was announced that the new legislation changed that. Heartening as that might be as a matter of principle it will probably create significant aggravation this tax season. A New York couple with moderately complicated stuff going on will have to run five federal tax computation to pick the optimal result (The New York return falls out of the federal return). A friend of mine suggested that I should have titled my piece – FLORISTS AND CATERERS ARE HAPPY WITH MARRIAGE EQUALITY. OH YEAH, IT’S ALSO A BOON FOR ACCOUNTANTS.
6. What Will it Be Like Post DOMA ?
I missed this one entirely and here I must do my mandatory bow to Patricia Cain’s Same Sex Tax Law blog, which covers these issues with laser like focus not being distracted by things like mercenaries and celebrity underwear. How will civil unions or registered domestic partnerships be treated post DOMA ? The general thinking is that they are not marriages. This IRS letter indicates, though, that they may be. It indicates that an opposite sex couple that has an Illinois civil union will be considered spouses for income tax purposes. The letter is not really authority but it is an interesting take on the issue.
7. Major Employers Line Up Against DOMA
Over 70 employers signed on as amici in Gill V OPM citing the difficulties that DOMA creates for employers:
DOMA creates a few problems for employers in states like Massachusetts where same sex marriages are allowed under state law. The act creates unnecessary cost and administrative complexity and forces companies to discriminate. There are over 1,000 benefits of marriage under federal law, several of which are effectively delivered through employers. Among those are the exclusion for health insurance and the right to make a penalty free withdrawal from a 401-k for a spouse’s medical expenses.
Actions on decision are fairly unusual. When the IRS loses in court, it can be stubborn as long as it was not the Supreme Court where it lost. In an action on decision the Service indicates whether it intends to be stubborn as opposed to acquiescing. In the case of of Rhiannon G. O’Donnabhain which concerned the deductibility of gender reassignment surgery, the IRS lost in Tax Court last year and announced its acquiescence this year. This was another case managed by GLAD.
9. Some Good News From Sarah Palin Country
The Constitution of Alaska has a marriage definition clause that indicates marriage can only be between a man and a woman. The Constitution of Alaska also has very strong equal rights language. The result of mixing these two elements is that any privilege given to married couples is automatically sex discrimination and the same benefit must be given to same sex couples (although not to unmarried opposite sex couples). Granted, it’s a little confusing. The decision by the Alaska Superior Court that laid this out concerned a local property tax exemption.
10. Ending with an Aloha
The Attorney General of Hawaii has announced that civil unions will be treated the same as marriages for state income tax purposes. For people with straight forward returns, this is an unmitigated good deal, due to the way Hawaii’s rates are structured.