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Wednesday, August 20, 2014
Same Sex Couples and Community Property - What a Mucking Fess
Originally Published on forbes.com on October 11th,2011
This is an example of one of the most annoying types of original source federal tax material. Congress makes cofusing contradictory laws. Constituents write in to complain. Congress passes the buck to the IRS, which is stuck with the laws Congress passed. This letter to Senator Boxer on the application of community property laws to Registered Domestic Partners and same sex married couples is a prime example. Here is the full text with comments in .
Dear Senator Boxer:
I am responding to your inquiry of June 03, 2011, on behalf of your constituents, [Redacted Text] and [Redacted Text]. They wrote about difficulties that they experienced filing their federal income tax returns for 2010 as a same-sex married couple in California.
The IRS has taken the position that, because federal tax law respects California community property law, registered domestic partners and same-sex married couples in California must each report one-half of their community income for federal income tax purposes ( Chief Counsel Advice 201021050, issued May 5, 2010). 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.
Your constituents asked us to clarify whether social security benefits are community income and how registered domestic partners and same-sex married couples should treat self-employment income. Generally, state law determines whether an item of income constitutes community income. As noted above, federal tax law generally respects state property law characterizations and definitions. U.S. v. Mitchell, 403 U.S. 190 (1971). Accordingly, if social security benefits are community income under California law, then they are also community income for federal income tax purposes. If social security benefits are not community income under California law, then they are not community income for federal income tax purposes.
[That's a great answer. Patricia Cain, who is as far as I can tell the leading expert in this area is also annoyed at the non-answer. She wrote "To be blunt, this explanation is not very helpful". Professor Cain believes that social security benefits are community property, but indicates that other experts disagree.]
If trade or business income is community income, registered domestic partners or a same-sex married couple split the income for federal tax purposes, including self-employment taxes. Although the self-employment tax rules contain a provision that overrides community income treatment in the case of spouses ( section 1402(a)(5) of the Internal Revenue Code), this provision does not apply to registered domestic partners or, because of the Defense of Marriage Act, to same-sex married couples.
[ This one could be kind of nasty. Imagine a couple where one is a partner in a law firm and the other stays at home. SE tax almost doubles. It raises all sorts of possible planning issues. Professor Cain gives a pretty good argument, that it is just plain wrong]
If you have any questions, please contact me or [Redacted Text]at [Redacted Text].
Michael J. Montemurro
Chief, Branch 4
Office of Associate Chief Counsel
“Mucking Fess” is an original Robert Flach expression. The Wandering Tax Pro is the most colorful member of the tax blogosphere. He works 168 hours a week from February to mid April preparing returns by hand. He spends the rest of the year blogging and going to musicals or would were it not for the “GD extensions”. I hope he doesn’t mind me borrowing his expression for this particular travesty created by the “idiots in Congress”.