From time to time, bar associations, tax practitioners and others plead with the IRS to issue guidance dealing with some aspect of the tax law. In an unusual move, the legislature of the State of California has done the same, adopting a resolution calling on the IRS to issue a revenue ruling on the income tax treatment of same-sex couples.
California’s Proposition 8 restricts marriage to opposite-sex couples, but the state continues to recognize same-sex couples in registered domestic partnerships. Its law provides many of the rights and privileges of married couples to domestic partnerships, including the community property rules.
As reported here in June, the IRS issued a Memorandum concluding that California registered domestic partners must report income in accordance with the community property rules. While the Memorandum establishes an internal position, it does not provide a published authority upon which taxpayers can rely. The California legislature calls on the IRS to make issue a published ruling consistent with the position set forth in the Memorandum.
Failure of the IRS to act on this issue places California domestic partners in an untenable position. The tax laws that apply to couples in community property states generally require income to be equally divided between the tax returns of the two individuals when they don’t file jointly. The IRS doesn’t permit same-sex couples to file jointly, so these couples are faced with a dilemma concerning how to report their income. If they file in accordance with the IRS Memorandum, and the IRS fails to adopt that approach as its position applying to all domestic partners, the higher-earning partner, having reported only half his or her earnings, could later be forced to pay additional tax plus interest and penalties. Yet the couple can’t safely file the opposite way with each reporting his or her own earnings, because then the lower-earning partner would face the same issue if the IRS does adopt the approach set forth in the Memorandum. One way or another the IRS must resolve this issue so same-sex couples in California, and in other states with similar laws, know how much income to report on their tax returns.
For earlier reporting on this and related issues click on the “gay-lesbian” tag below.
Tags: gay-lesbian
