Wednesday, June 2, 2010
IRS: California Registered Domestic Partners Can Split Income and Tax Withholding 50/50 Without Adverse Gift Tax Consequences
Priv. Ltr. Rul. 201021048 (May 5, 2010):
- Taxpayer must report on his individual federal income tax return one-half of the combined income that Taxpayer and Domestic Partner earn from the performance of personal services and one-half of the combined income derived from their community property assets.
- Taxpayer is entitled to half of the credits for income tax withholding from the wages of Taxpayer and Domestic Partner.
- The requirement under California law to treat Taxpayer’s earnings as community property, and thus half of Taxpayer’s earnings as vested in his partner, does not result in a transfer of property by Taxpayer to his partner for federal gift tax purposes under § 2501.
Chief Counsel Advice 201021050 (May 5, 2010):
On February 24, 2006, the Office of Associate Chief Counsel (Income Tax & Accounting) issued Chief Counsel Advice (CCA) 200608038 concluding that an individual who is a registered domestic partner in California must report all of his or her income earned from the performance of personal services. In light of a change to California law, effective in 2007, you asked us whether California registered domestic partners should each report half of the community income on their federal returns. You also asked whether individuals who filed returns in accordance with CCA 200608038 must amend those returns. ...By 2007, California had extended full community property treatment to registered domestic partners. Applying the principle that federal law respects state law property characterizations, the federal tax treatment of community property should apply to California registered domestic partners. Consequently, for tax years beginning after December 31, 2006, a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return.
You also asked how to treat a registered domestic partner who reported all of his or her earned income in accordance with CCA 200608038. For tax years beginning before June 1, 2010, registered domestic partners may, but are not required to, amend their returns to report income in accordance with this CCA.
Chief Counsel Advice 201021049 (May 5, 2010):
[T]he IRS can consider the assets of the taxpayer's registered domestic partner in the State of California when determining whether to accept the taxpayer's Offer in Compromise under § 7122. State law determines whether there is a property interest, ... and California state law provides that both domestic partners have an equal interest and liability in the community property.
(Hat Tip: Pat Cain, Ann Murphy.)
Update: Theodore P. Seto (Loyola-L.A.):
The headline understates the significance of the IRS's new position:
The IRS will apply Poe v. Seaborn to California registered domestic partners for all federal tax purposes from 2007 on. The positions distinguish CCA 200608038 on the ground that California had not, at the time, applied its mandatory community property rules for state income tax purposes. Since it has now done so, Poe v Seaborn rules.
The consequence, as I have pointed out elsewhere, is that "married" gay couples in California are now taxed at substantially lower effective rates than similarly situated heterosexual couples or than similarly situated same-sex couples in other states. See The Unintended Tax Advantages of Gay Marriage, 65 Wash. & Lee L. Rev. 1529 (2008).