Don Read, Tax Law for Family Law Attorneys

In Revenue Ruling 2013-17, the Internal Revenue Service held, following Windsor that persons of the same sex who were lawfully married under state law would be recognized as married and as spouses for federal tax purposes, even if they moved to a state that did not recognize same sex marriages. However, the Service also held that persons in registered domestic partnerships or civil unions would not be treated as married or as spouses. This appears to be the case even if those persons have all of the rights and responsibilities of spouses under state law.

Here are a few federal tax issues that arise for registered domestic partners that do not arise for married couples (and should not be problems for state tax purposes):

Splitting Community Income on Individual Federal Returns
In response to a private ruling request Don Read submitted on behalf of a client in November 2009, the IRS ruled on May 5, 2010, that California registered domestic partners must equally split their community income when filing their individual federal income tax returns. The private ruling (201021048) was made public in a redacted version on May 28, 2010, the same date a Chief Counsel Advice (201021050) was issued announcing the same rule. The private ruling and CCA also state that the partners must equally split the credits for income tax withheld by the employer from the partners' wages. The CCA says partners can amend past tax returns to switch to this method of reporting, and the IRS informally advises that both partners must choose the same method. For 2010 and later years the new method is required. The private ruling says that each partner obtains ownership of half of the community income by operation of law and not by a transfer, deemed or otherwise. Thus, the sharing of income does not result from a transfer independently subject to gift or income tax.

Taxation of Support
If a registered domestic partnership is dissolved and one ex-partner is ordered to pay the other ex-partner support, there is general agreement that the support is non-deductible for federal income tax purposes. It is not altogether clear whether the support is taxable to the recipient, although there is some argument that it should not be.

Property Transfers
The federal income, gift and estate tax provisions that make certain property transfers between spouses and former spouses incident to divorce do not apply to registered domestic partners. However, the equal division of the partners' community estate should be tax free; but the IRS has not ruled on the issue, so it remains an issue of concern.

Principal Residence Sales
The special federal rule that treats a former spouse as using his or her former marital residence so long as he or she has an ownership interest in it and his or her former spouse is using it as a principal residence under the provisions of a divorce or separation instrument does not apply to former registered domestic partners.

Employee Benefits
Qualified domestic relations orders (QDRO's) that assign interests in qualified plans and that shift the tax burden along with the assigned benefits are not available to domestic partners as they are to spouses. Whether a former partner can qualify as a dependent to at least be able to be assigned an interest in the plan is unclear. Section 408(d)(6) orders transferring interests in IRA's are also unavailable.

Personal Deductions
When community income is used to pay one partner's deductions (e.g., a partner's medical expenses or the mortgage on a house owned by only one of the partners) who gets the deduction, or whether part of the deduction may be lost, is unclear.

Head of Household Filing Status
One domestic partner cannot qualify the other domestic partner for head of household filing status even though the first partner is a dependent of the second.

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Donald H. Read - Attorney and Certified Tax Law Specialist     Cell Phone: (510) 409-4927     E-Fax: (413) 677-0609