Same-Sex Marriage and Federal Tax Law After DOMA

Introduction

Same-sex marriage refers to a legally recognized union between two persons of the same sex. In other words, a same-sex partner is a man legally married to another man, or a woman legally married to another woman. Because same-sex marriage is a relatively recent development in the United States, the federal government has faced challenges in handling the tax issues of same-sex individuals who enter into marriage. The IRS ruling 58-66, published in 1958-1 C.B. 60, determines the tax treatment of individuals who have entered into a common-law marriage. Under state law as administered by federal income tax law, the IRS acknowledges that it recognizes an individual's marital status.

Under IRS Ruling 58-66, the Service states that a couple will be treated as married for federal income tax filing purposes, and the IRS applied this ruling for over 50 years (Internal Revenue Service, 2014).

Article 1, Section 8 of the United States Constitution provides: "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises…; but all Duties, Imposts and Excises shall be uniform throughout the United States" (Trisha, 2013, p. 269).

In 1909, Congress passed the 16th Amendment, which empowered Congress to collect taxes from different sources without regard to enumeration or census. The Revenue Act of 1913 imposed a tax on corporate and individual net income. When practitioners refer to tax law, they most commonly cite the Tax Reform Act of 1986, also known as the Internal Revenue Code of 1986. Under the Tax Reform Act of 1986, a married couple may file taxes jointly or separately.

In the United States, most married couples file income taxes jointly; however, there are cases where a married couple may file separately if one spouse does not agree to a joint return. The married couples recognized by law were defined as one man and one woman legally married in the United States, and these couples were entitled to file joint tax returns. However, many same-sex couples also sought to file joint income tax returns, which many states consequently denied. Similarly, many same-sex partners sought to enjoy the same tax-return benefits available to opposite-sex couples.

In response to this situation, President Clinton signed the Defense of Marriage Act (DOMA) into law in 1996, directing the federal government not to recognize same-sex marriages. The law defined the term spouse as a union between two individuals of the opposite sex — either a husband or a wife. Section 3 of DOMA defined legal marriage as a legal union between a man and a woman serving as husband and wife. Section 2(a) of the Act states:

"No state, territory, or possession of the U.S., or Indian tribe, shall be required to give effect to any public act, record, or judicial proceeding of any other State, territory, possession, or tribe respecting a relationship between persons of the same sex that is treated as a marriage under the laws of such other State, territory, possession, or tribe, or a right or claim arising from such relationship" (Wald, 2013, p. 273).

Constitutionality of DOMA

However, DOMA has faced sustained criticism over the years. President Obama directed the Justice Department to stop defending Section 3 of DOMA. Following public criticism, the Senate Judiciary Committee voted to repeal DOMA in 2011. In 2013, the Internal Revenue Service ruled that same-sex couples who are legally married in the United States would be treated as married for federal tax purposes (IRS, 2013). That ruling applies regardless of whether the couple resides in a jurisdiction that recognizes same-sex marriage or in one that does not. The IRS began implementing this tax treatment following the Supreme Court's decision invalidating a key provision of DOMA. The IRS maintains that same-sex couples will be recognized as married for all federal income tax purposes, including estate and gift taxes.

The objective of this paper is to investigate how the federal and state governments handle the tax treatment of same-sex married couples following the Supreme Court decision declaring DOMA unconstitutional.

On June 26, 2013, the United States Supreme Court struck down Section 3 of DOMA on the ground that it violated the Fifth Amendment's Equal Protection Clause (United States v. Windsor, 133 S. Ct. 2675 (2013)) (Ahroni et al., 2014, p. 58). The ruling represents a significant landmark for same-sex couples with respect to both state and federal tax treatment.

Section 3 of DOMA states:

"In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife." 1 U.S.C. §7 ([University], 2015, p. 5).

Before the Windsor decision, the federal government and many state governments did not permit same-sex couples to file joint tax returns. Instead, the government required same-sex partners to file income tax returns as if they were single. Moreover, if the couple had a qualifying child, DOMA allowed only one partner to claim the child and the associated dependency exemption. Home mortgage interest deductions and real estate tax benefits were also allocated separately for same-sex couples.

How Federal and State Governments Handle Taxes of Same-Sex Couples After Windsor

The facts that led to the Windsor case began when Thea Spyer and Edith Windsor were legally married in Canada in 2007. Spyer died in 2009 and willed her entire estate to Windsor. When Windsor sought to claim the estate tax exemption available to surviving spouses, the government denied her claim on the basis of DOMA's provisions. Under the federal statute, DOMA did not include a same-sex partner in the definition of spouse. Consequently, the IRS refused to grant Windsor a spousal tax exemption, and she was required to pay the estate tax.

Windsor paid the tax but filed suit challenging the constitutionality of Section 3 of DOMA. Both the U.S. District Court and the Court of Appeals ruled that Section 3 was unconstitutional. The Supreme Court ultimately struck down Section 3 as well. Following that decision, many states and the federal government reviewed their income and estate tax laws to extend equal benefits to same-sex couples (U.S. Dept. of Health & Human Services, 2013; Department of Labor, 2014).

Following the Supreme Court's ruling in favor of Windsor, the IRS adopted a "place of celebration" approach — rather than a "place of domicile" approach — to determine whether same-sex couples qualify for federal tax benefits. "See Revenue Ruling 58-66 (1958-1 C.B. 60)" (Ahroni et al., 2014, p. 58). Under the place of celebration approach, the IRS treats a same-sex couple as married if they were wed in a state that recognizes same-sex marriage, even if the state in which they currently reside does not. The IRS thus recognizes same-sex marriages as valid even when the couple is domiciled in a domestic or foreign jurisdiction that does not recognize the validity of such marriages.

Before June 26, 2013, only a handful of states had legalized same-sex marriage. Following the Windsor ruling, however, the number grew rapidly. By the end of 2013, Hawaii, New Jersey, and New Mexico had legalized same-sex marriage. In 2014, Pennsylvania, Oregon, and Wisconsin followed. According to an article published by the Calhoun Law Group, 30 states had legalized same-sex marriage in the United States by 2015 (Calhoun, 2015). Among them were Arizona, California, Colorado, and Connecticut. However, Michigan, Arkansas, and Mississippi still did not recognize same-sex marriage (Calhoun, 2015). Some states allowed same-sex married couples to file income taxes as though they were single. States such as Kansas, Georgia, Kentucky, Louisiana, Missouri, Ohio, North Dakota, and Nebraska did not allow same-sex marriage but nonetheless conformed to federal tax law.

In Alabama, the tax treatment of same-sex couples remained unclear. The Alabama Constitution banned same-sex marriage; however, that ban was struck down in 2015 in Strawser v. Strange. Alabama's prohibition on recognizing out-of-state marriages of lesbian or gay couples was also struck down in Searcy v. Strange. Following those court decisions, some Alabama jurisdictions began issuing same-sex marriage licenses while others refused. The Alabama Supreme Court subsequently compounded the confusion by prohibiting the state from issuing such licenses.

At the federal level, same-sex couples are considered legally married following the Supreme Court's ruling that Section 3 of DOMA was unconstitutional. Previously, those couples were required to file federal tax returns as unmarried individuals. Under the new framework, the federal government does not distinguish between same-sex marriages and opposite-sex marriages. The federal government therefore treats the taxes of same-sex married couples the same way it treats those of opposite-sex married couples. Following Windsor, the federal government has allowed same-sex couples to file tax returns using either the married-filing-jointly or married-filing-separately option. These filing choices affect applicable tax deductions and tax rates. For same-sex couples living in states that do not recognize their marriage, the IRS has provided guidance to address their situation: couples may file as married at the federal level, or they may allow the state in which they reside to determine their marital status under state law (IRS, 2014).

Conclusion

The tax issues of same-sex partners had been controversial for more than two decades in the United States because the federal government refused to recognize same-sex marriages. The Clinton administration formalized that non-recognition by signing DOMA into law in 1996. The law defined marriage as a union between a man and a woman serving as husband and wife, which caused the IRS to deny same-sex partners the ability to jointly file taxes or claim tax credits as a married couple.