TaxProf Blog op-ed: The Tax Implications of Obergefell v. Hodges, by Theodore P. Seto (Loyola-L.A.):
In Obergefell v. Hodges, 576 U. S. ____ (June 26, 2015), the Supreme Court held that (1) state laws banning same-sex marriage are “invalid to the extent they exclude same-sex couples from civil marriage on the same terms and conditions as opposite-sex couples” and (2) “there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State on the ground of its same-sex character.” The decision’s most profound impact will undoubtedly be on individuals’ lives and relationships, not on their tax returns. Nevertheless, it has significant implications for the substance and administration of both state and federal tax law.
1. What is Marriage?
Until United States v. Windsor, 570 U.S. ___ (2013), for federal tax purposes, only married opposite-sex couples could be “married”; state marriage rules varied from state to state, as did state tax rules. In states that recognized same-sex marriage or one of the so-called “marriage-lite” relationships – civil unions or registered domestic partnerships – same-sex couples in married or marriage-lite relationships were generally treated as “married” for state tax purposes. In states that did not, they were not.
Thus, same-sex couples whose relationships were state-recognized could generally file joint state returns but were required to file as unmarried for federal tax purposes. Same-sex couples with filing obligations in more than one state might be required to file as married in one and as unmarried in another.
Windsor required the federal government to give effect to state-recognized marriages; it did not, however, address the federal status of marriage-lite relationships. Giving effect to the Court’s failure to address this latter question, Rev. Rul. 2013–17, 2013–38 IRB 201, held that (1) couples married for state law purposes would be treated as married for federal tax purposes, (2) the IRS would use a place of celebration choice of law rule to determine whether couples were married for state law purposes, and (3) couples in marriage-lite relationships would continue to be treated as unmarried for federal tax purposes.
After Windsor and Rev. Rul. 2013-17, same-sex couples whose relationships were state-recognized could generally file joint state returns. Whether they were required to file as married or unmarried for federal tax purposes, however, depended on whether they were “married” or in some other state-recognized formal relationship. As a result, some number of same-sex couples remained in state-joint-filing but federal-single-filing limbo. Same-sex couples with filing obligations in more than one state continued to face the possibility that they would have to file as married in one and as unmarried in another.
Obergefell eliminates all but one of these complexities. All states must recognize same-sex marriage “on the same terms and conditions as opposite-sex couples.” It follows that all states that permit joint filing by opposite-sex married couples must now permit joint filing by same-sex married couples. Same-sex married couples will no longer face the expensive administrative burden of filing jointly for some purposes and singly for others.
One administrative complexity remains – unnecessarily in my view. Although couples in marriage-lite relationships generally file jointly for state purposes, under Rev. Rul. 2013-17 they are not “married,” nor are they “spouses,” for federal tax purposes. This means that they continue to escape the Code’s many related-party anti-abuse rules. See Seto, The Unintended Tax Advantages of Gay Marriage, 65 Wash. & Lee L. Rev. 1529 (2008). For example, a taxpayer in a marriage-lite relationship can continue to qualify for the earned income tax credit even if his or her partner is a multi-millionaire. Similarly, marriage-lite couples escape all federal marriage penalties.
I view Rev. Rul. 2013-17 as, at best, a transitional accommodation. There is no principled reason to exclude marriage-lite from “marriage” for federal tax purposes. Once the IRS by revenue ruling, the Treasury by regulation, or Congress by statute fixes this problem, the tax advantages and complexities of marriage lite will disappear.
One further consequence of Obergefell for the definition of marriage merits note. Several states, including Alabama, Colorado, District of Columbia, Iowa, Kansas, Montana, Rhode Island, South Carolina, Texas, and Utah, recognize common law marriage. In common law marriage states, a couple that holds itself out as married is married for state law purposes, even without a marriage license or ceremony. It is possible that some same-sex couples whose relationships have heretofore not been recognized for state purposes are now married (and, since Obergefell is not prospective only, have been married) under these rules. If so, they are and have been married for both state and federal tax purposes as well.
2. What is Parentage?
One of the worst consequences of states’ refusal to recognize same-sex marriage has been its impact on legal parentage. Opposite-sex couples benefit from an irrebuttable presumption of parentage for all children born within the marriage. Same-sex couples in states that recognize same-sex marriage often do as well; until Obergefell, same-sex couples in other states did not. This meant that the non-birth parent had to undertake the expensive and burdensome process of adoption; roughly half of all states prohibited “second-parent” adoptions. This, in turn, meant that a parent in a same-sex couple might not be recognized as a child’s parent when the family crossed state lines.
The federal tax law of parentage follows state law. Until Obergefell, determining parentage for federal tax purposes was one of the most difficult and expensive tasks a family with same-sex parents had to undertake.
In my view, Obergefell resolves this problem. If states must recognize same-sex marriage “on the same terms and conditions as opposite-sex couples,” then states must recognize parents in such marriages as parents “on the same terms and conditions as opposite-sex couples.” It follows that the children of same-sex parents should be treated as their children for state and federal tax purposes as well.
3. State Tax Implications
The federal government has been gearing up to deal with the administrative issues raised by same-sex marriage for quite some time now. Many states have not. States will need to address this question promptly, not only for the 2015 taxable year, but for prior years as well. Obergefell is not by its terms prospective only. All states must recognize validly-created same-sex marriages, and must do so retroactively. In the wake of Windsor, the IRS permitted but did not require retroactive joint filing; states that permit joint filing for opposite-sex couples may wish to issue guidance on this question before the otherwise inevitable flurry of lawsuits.
State and local taxes other than income taxes may also be affected. Inheritance taxes often exempt transfers to spouses. Transfers between spouses are often similarly exempted from property transfer taxes and from rules permitting revaluation of property upon transfer for property tax purposes. Retroactive application of Obergefell may entitle same-sex spouses or survivors to refunds for past payments of these and other taxes.
In the short run, change is difficult, and the changes required by Obergefell may require tax administrators to act more quickly than they would like. In the long run, however, the uniform treatment of same-sex and opposite-sex marriages mandated by Obergefell at both the state and federal level will make the substance and administration of the relevant tax rules much simpler for both taxpayers and tax administrators.