IRS Adopts Same-sex Marriage Recognition Rule | Practical Law

IRS Adopts Same-sex Marriage Recognition Rule | Practical Law

The Internal Revenue Service (IRS) and the US Department of Treasury issued Revenue Ruling 2013-17, which adopts a general rule, for federal income tax purposes, recognizing a same-sex marriage that is valid in the state where it was entered into, regardless of the married couple's place of domicile. The ruling also addresses other federal tax implications of the Supreme Court's decision holding that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional.

IRS Adopts Same-sex Marriage Recognition Rule

Practical Law Legal Update 1-539-8645 (Approx. 7 pages)

IRS Adopts Same-sex Marriage Recognition Rule

by Practical Law Employee Benefits & Executive Compensation
Published on 03 Sep 2013 • USA (National/Federal)
The Internal Revenue Service (IRS) and the US Department of Treasury issued Revenue Ruling 2013-17, which adopts a general rule, for federal income tax purposes, recognizing a same-sex marriage that is valid in the state where it was entered into, regardless of the married couple's place of domicile. The ruling also addresses other federal tax implications of the Supreme Court's decision holding that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional.
On August 29, 2013, the IRS and the US Department of Treasury issued Revenue Ruling 2013-17, which adopts a general rule, for federal income tax purposes, recognizing a same-sex marriage that is valid in the state where it was entered into, regardless of the married couple's place of domicile. The ruling, which was accompanied by FAQs on same-sex marriage and domestic partnerships, and a news release, also addresses the federal tax implications of the Supreme Court's June 2013 decision in U.S. v. Windsor, which held that Section 3 of the Defense of Marriage Act (DOMA) is unconstitutional (see Legal Update, Supreme Court: DOMA Section 3 is Unconstitutional and Proposition 8 Proponents Lack Standing).

Treatment of Same-sex Marriages Under Federal Tax Law

In Windsor, the Supreme Court ruled that Section 3 of DOMA, which defined the terms "spouse" and "marriage" for purposes of federal law (including the Internal Revenue Code (IRC) and ERISA) as being solely between one man and one woman, was unconstitutional on Fifth Amendment grounds. However, the decision did not address certain broader implications of its holding, including its effect on the IRC and how it would apply in those states that do not currently recognize same-sex marriage.

Recognition of Same-sex Marriage

Addressing recognition of same-sex marriage, the IRS noted in Revenue Ruling 2013-17 that there are more than 200 IRC provisions and Treasury regulations that use the terms "spouse," "marriage" (or a derivative, such as "married"), "husband and wife," "husband" and "wife." The IRS concluded that gender-neutral terms in the IRC that refer to marital status (for example, "spouse" and "marriage") will include, respectively:
  • An individual married to a person of the same sex if the couple is lawfully married under state law.
  • A marriage between individuals of the same sex.
The IRS also concluded that the terms "husband and wife," "husband" and "wife" should be interpreted to include same-sex spouses. Among other reasons, the IRS noted that the terms "husband and wife," "husband" and "wife" are interwoven in the IRC with gender-neutral terms such as "spouse" and "marriage," suggesting that Congress viewed the terms as equivalents.

Marital Status Based on Place of Celebration

Revenue Ruling 2013-17 also addressed the post-Windsor choice of law question, that is, whether same-sex marriage recognition should be determined by where the marriage was celebrated or where the same-sex couple is domiciled. The IRS applied principles from Revenue Ruling 58-66 ( (1958)), in which the Service concluded that a couple would be treated as married for purposes of federal income tax filing status and personal exemptions if the couple entered into a common law marriage in a state that recognized common law marriage as valid. Under Revenue Ruling 58-66, this position also applied to a couple who:
  • Entered into a common law marriage in a state that recognized such relationships.
  • Later moved to a state in which a ceremony is required to establish the marital relationship.
Based on its 1958 ruling, the IRS concluded in Revenue Ruling 2013-77 that it would apply a general rule, for federal tax purposes, that recognizes a same-sex marriage that is valid in the state where it was entered into, regardless of the married couple's place of domicile. This means that same-sex individuals will be considered lawfully married, for IRC purposes:
  • If they were married in a state whose laws authorize same-sex marriage.
  • Even if the couple is domiciled in a state that does not recognize the validity of same-sex marriage.
The IRS reasoned that a rule based on the state of domicile would:
  • Present significant administrative concerns for the IRS.
  • Raise substantial challenges for employers that operate or have employees in more than one state, particularly in administering benefits that are contingent on marital status.
For example, the IRS noted that if its marriage recognition rule was keyed to current domicile, the need for (and validity of) spousal elections, consents and notices could change whenever an employee, former employee or spouse moved to a state with different recognition rules. Under such a rule, employers and administrators would need to ask whether each employee receiving plan benefits was married and, if so, whether the spouse was the same or opposite sex. Also, errors or delays could result if the tracking of employee and spouse domiciles was inaccurate or untimely.
However, the IRS further concluded that:
  • The term marriage does not include registered domestic partnerships, civil unions or other similar formal relationships recognized under state law that are not marriages under the state's law.
  • The terms "spouse," "husband and wife," "husband" and "wife" do not include individuals who have entered into these formal relationships.
These conclusions applied regardless of whether individuals in these formal relationships were of the opposite or same sex.

Applicability

Revenue Ruling 2013-77 applies prospectively, effective September 16, 2013.
The ruling may also be applied retroactively for employees' federal income tax and employment tax returns (including original returns, adjustments, amendments, credits and refunds) if:
  • All items affected by marital status on the return are consistent with the marital status reported on the return.
  • The applicable limitations period is still open.
Employees may also rely on the ruling retroactively regarding overpayments of federal income or employment taxes under employer-provided health coverage or fringe benefits that are excludable from income under:

FAQs on Same-sex Marriage

In conjunction with the ruling, the IRS issued FAQs addressing the tax implications of same sex marriages under state law for individuals, qualified retirement plans and employers.
According to the FAQs, for the 2013 tax year and going forward, same-sex spouses generally must file using a married-filing-separately or jointly filing status. For the 2012 tax year, same-sex spouses who filed their tax return before September 16, 2013 may, but are not required to, amend their federal tax returns to file using married filing separately or jointly filing status. For 2011 and earlier tax years, same-sex spouses who timely filed their tax returns can amend their federal returns to file using married filing separately or jointly filing status, provided the limitations period for amending the return has not expired.
In addition, if an employer provided health coverage for an employee's same-sex spouse and included the value of that coverage in the employee's gross income, the employee can:
  • File an amended Form 1040 reflecting the employee's status as a married individual.
  • Recover federal income tax paid on the value of the employee's spouse's health coverage.
However, the limitations period for filing a refund claim must still be open.
Also, if an employer sponsored a cafeteria plan that permitted employees to pay premiums for health coverage pre-tax, an employee can file an amended return to recover income taxes paid on premiums that the employee paid after-tax for the health coverage of the employee's same-sex spouse (assuming the limitations period for filing a refund claim is open).
In these situations, employers can claim a refund of (or make an adjustment for) any excess social security and Medicare taxes paid on the benefits (assuming the limitations period for filing a refund claim is open). The FAQs indicate that the IRS will provide a "special administrative procedure," in upcoming guidance, for employers to file claims for refunds or make adjustments for excess social security and Medicare taxes paid on same-sex benefits.
Employers can also make adjustments for income tax withholding that was overwithheld from employees in the current year if the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year. However, employers cannot claim a refund or make an adjustment of income tax withholding withheld from an employee for benefits in prior years.
In the FAQs, the IRS stated that it intends to issue further guidance for qualified retirement plans, and other tax-favored retirement arrangements, including guidance on plan amendment requirements and corrections relating to plan operations for periods before future guidance is issued.

Practical Impact

The September 16, 2013 applicability date of this guidance leaves employers and their advisors little time to prepare for the administrative changes that may be needed to carry out the guidance. In addition to employee communications describing the guidance, these steps may impact systems for imputing income, and preparation of health plan amendments and summary plan description revisions affecting the definition of spouse. As noted, the IRS will issue a special administrative procedure for employers to file claims for refunds involving excess social security and Medicare taxes paid on same-sex benefits. The IRS also plans to issue additional guidance related to Windsor-related issues, including, for retirement plans, plan amendment and correction procedures.