In the aftermath of the Windsor decision, many of us pondered how to apply Windsor retroactively to tax years that were closed under a statute of limitations. The issue was of particular importance to the calculation of gift and estate taxes when marital gifts had been completed before the Windsor decision was handed down. Under the Defense of Marriage Act (DOMA), the IRS could not recognize same-sex spouses and as a result no marital deduction for gifts to a same-sex spouse were allowed.
Consider Albert who transferred $10.0 million to his same-sex spouse, Earl, in 2005. Albert would not only have to pay a gift tax on the transfer, he also would have used up $1.0 million of his lifetime gift tax exemption. By the time Windsor was handed down, striking down DOMA, the statute of limitations for filing an amended gift tax return from 2005 had clearly run.
Now the IRS has issued Notice 2017-15 giving some relief to same-sex spouses who found themselves in Albert’s situation. Yes, the statute of limitations has run. Albert cannot seek a refund of any tax paid. But Albert is entitled to restore the $1.0 million exemption that he used and can add it to whatever remaining exemption he has. He should do so on the next Form 709 (gift tax return) that he files.
A similar remedy is available for anyone who was required to use the Generation Skipping Transfer Tax exemption because of a transfer in which the spouse was treated as being in a younger generation. For example, if Earl were 40 years younger than spouse Albert and the marriage was not recognized, then a gift from Albert to Earl’s child, Edgar, would have been treated as a direct skip and would have triggered the GST tax, or used up the $5.0 million exemption. In such a case, the used exemption can be restored.
The notice announces that the IRS will provide worksheets and instructions to the tax forms to guide taxpayers in properly computing and reporting the recalculated applicable exclusion amount. Look for these documents on the IRS website.
This notice is good news for same-sex couples and gives us additional evidence about how fair the IRS wants to be in the face of being forced to apply an unconstitutional law for so many years.