Family Law Tax Update by Leslie Dawson
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s we head into tax season, this is a great time to look at some of the tax changes affecting our family law cases. This article will discuss a few of the interesting tax rulings from 2013.
The BIG News: Same Sex Marriages
On June 26, 2013, the United States Supreme Court released their ruling in United States v. Windsor.1 The Windsor ruling struck down, as unconstitutional, Section 3 of the Defense of Marriage Act (DOMA),2 that required same-sex spouses to be treated as unmarried for federal purposes. That same day, the Supreme Court also dismissed Hollingsworth v. Perry3 for lack of standing. This case appealed a lower court ruling,4 that California’s Proposition 8, which limited marriage to opposite-sex couples, was unconstitutional. The dismissal of this case cleared the way for same-sex marriages in California. Both of these rulings were groundbreaking. They allow many benefits to same-sex married couples that were previously only allowed for opposite-sex spouses. However, there are many questions pertaining to the implementation and timing of these benefits. There are also questions regarding the interplay of various state same-sex marriage laws, property laws and tax filings. The above-referenced cases were followed by a number of rulings, including the following: • IRS News Release 2013-72: All same-sex couples must file as married after 9/15/13. • IRS Revenue Ruling 2013-17: 1. Redefined a spouse as one in a legal marriage under state law, and specifically included persons of the same sex. 2. Adopted a “state of celebration” rule. This means that if the marriage is valid in the state in which the marriage is performed, the federal government will recognize the marriage, regardless of where the parties reside. 3. It is anticipated further guidance on retroactive application of employee benefit plans will be issued. • Obergefell v. Kasich, No. 1:13-CV-501, 2013 WL 3814262 (S.D. Ohio July 22, 2013): Ohio must recognize a same-sex marriage if valid in the state where it was “celebrated.”
• Cozen O’Connor v. Tobits, No. 11-0045, 3878688 (E.D. Pa. July 29, 2013): Same-sex spouse was entitled to ERISA survivor benefits even though the death occurred before the Windsor ruling. The effect of Windsor and subsequent rulings on same-sex spouses: • File as married for federal tax purposes. • Ability to receive spousal tax-free health benefits. • Ability to use unlimited marital deduction for gifts and estates. • Opportunity to split gifts. • Tax-free property division under IRC §1041. • Deductible alimony. • Ability to divide pensions via QDRO. • Ability to receive spousal benefits under ERISA plans. • Ability to divide IRAs tax-free. It should be noted that the IRS has issued “Answers to Frequently Asked Questions” for California Registered Domestic Partners and Civil Unions in other states. These unions are NOT recognized as married for federal tax purposes and do not receive the above benefits. There are still a number of unanswered questions, such as filing status for a federally recognized same-sex marriage in a state that does not recognize these marriages. Also, if the gift tax exclusion was used in a prior year to make a gift to a same-sex spouse, can that exclusion now be recovered? Stay tuned as more rulings will hopefully address some of these questions.
Innocent Spouse Relief In the fall, the IRS issued new rulings liberalizing the requirements for “equitable” innocent spouse relief. Equitable relief is one of three types of innocent spouse relief available—a “facts and circumstances”-based decision by the IRS, reviewable by the Tax Court. The rulings—Treas. Reg. §1.6015-5, Prop.Reg. §1.60159 and Rev.Proc. 2013-34—provide for a longer period of time to request relief. This provision is intended to provide relief to those divorced or separated spouses who
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