As posted earlier, the IRS continues to take the position that Registered Domestic Partners (RDPs) and Civil Union Partners (CUPs) are not married for purposes of federal tax law. As I reported in my January 9 post, this concerns me.
Recently, three judges on the Ninth Circuit Court of Appeals released an opinion finding that it was a violation of equality under the Fifth Amendment to deny spousal benefits to RDPs. [See Fonberg, discussed in my January 9 post.] While the opinion was written in the court’s capacity as a federal employer and not as an opinion in a case, its reasoning supports treatment of RDPs as spouses for federal tax purposes in general.
There is a case currently in litigation that raises the issue of whether or not RDPs should be treated the same as spouses under federal tax law. That case is Dragovich v. United States, 872 F.Supp.2d 944 (N.D. Cal. 2012). The case involves a narrow issue: Should IRC §7702B, which allows a public employer to extend tax-favored long term care benefits to employees and certain relatives of the employee, be extended to cover an employee’s RDP? The initial opinion, handed down by Judge Claudia Wilken, concluded that, under rational basis review, it made no sense to include an employee’s in-laws, siblings, nieces, etc. as permissible beneficiaries, but not to include RDPs. The case was appealed to the Court of Appeals for the Ninth Circuit. Recently, however, the Court of Appeals vacated the opinion and remanded for reconsideration in light of Windsor. Briefing is supposed to be completed this month and oral argument has been scheduled for February 6, 2014.
Since this case involves benefits that are extended not only to spouses, but also to other relatives of the employee, it may not answer the question of whether or not RDPs should always be treated the same as spouses for federal tax purposes. It is also possible, post-Windsor, to argue that the violation of equality principles is now less serious because, after all, RDPs are now free to marry and the IRS will recognize such marriages. Nonetheless, as a practical matter, it makes little sense to treat RDPs and CUPs as legal strangers under the tax code. Some of the difficulties in doing so include:
1. RDPs and CUPs are generally treated the same as married couples for purposes of state tax law. (Colorado is an exception to this rule and some RDP states do not have income taxes, e.g., Nevada.) In this case, they must file income tax returns as married at the state level and as single at the federal level. On the state return they must report all transactions using the federal tax rules that apply to spouses. For example, sales and exchanges between partners will not be taxable at the state level, but will be taxable at the federal level. This results in the taxpayers having a different basis for property for federal tax purposes than for state tax purposes. Keeping two sets of books and filing under different rules creates an undue administrative burden. Tax law is too complex as it is. We don’t need this additional complexity.
2. Some marriage equality states (e.g., Massachusetts, Connecticut) recognize RDPs and CUPs from other states as married. Does that mean they are married for tax purposes only when domiciled in the marriage equality state? Such a result seems contrary to the IRS position that domicile should not matter. Or, perhaps they are not married for federal tax purposes even though recognized as married by the state. That, too, seems odd. When RDPs divorce in Massachusetts do the divorce tax statutes apply? We need some clarity on this issue.
3. Some states have moved from marriage equivalent statuses for same-sex partners to marriage equality. Some of these states are automatically converting the old status into marital status. (E.g., Connecticut, Delaware, New Hampshire, Washington) If an RDP status, registered as such in 2009, is converted into marriage in 2014, what is the effective date of the marriage for federal tax purposes?
Some people object to treating RDPs and CUPs as married for tax purposes. People who are philosophically opposed to marriage may not want the federal government treating them as automatically married for tax purposes when they have intentionally opted out of marriage. I understand the philosophical point. But it just makes no sense to me to treat committed partners as strangers under the tax law. In fact, I think it makes no sense to treat long-term committed cohabitants, whether registered or not, as legal strangers. Other countries recognize such relationships for tax purposes. Of course, those other countries do not require couples, married or not, to file joint tax returns. As a result, all couples in these other countries are less merged for tax purposes. I also think individual, rather than joint, returns is a good idea. But I’ll save that for another day.