TAX LAW: United States v. Windsor and Federal Tax Law

Vol. 31 No. 1

By

Laura R. Westfall (lwestfall@kslaw.com) is an associate, Employee Benefits and Executive Compensation, at King & Spalding LLP, in New York City.

In June 2013, the U.S. Supreme Court held in United States v. Windsor (570 U.S. __ (2013)) that section 3 of the Defense of Marriage Act (DOMA) was unconstitutional as a violation of the Fifth Amendment. Under DOMA, all references in the Internal Revenue Code and other federal laws to terms relating to marital relationships were required to be interpreted as relating only to marriages between a man and a woman. Service Revenue Ruling 2013-17 and two sets of Frequently Asked Questions issued in August 2013 helped to clarify Windsor’s effects on federal tax law, but additional guidance is still needed.

DOMA and Windsor. DOMA section 2 provides that no state must recognize a same-sex marriage entered into in another state or any right or claim arising from such a marriage. DOMA section 3 requires federal laws and agency rulings, regulations, and interpretations to define the words marriage and spouse as referring only to marriages between a man and a woman.

New York State residents Edith Windsor and Thea Spyer married in Canada in 2007; when Spyer died in 2009, she left her entire estate to Windsor. Because DOMA section 3 denied federal recognition of her marriage, Windsor did not qualify for the federal estate tax exemption for surviving spouses under section 2056(a). Windsor paid $363,053 in estate taxes and sought a refund, which the Service denied. Windsor sued for a refund in the U.S. District Court for the Southern District of New York, which ruled against the United States, finding section 3 unconstitutional. The Court of Appeals for the Second Circuit affirmed that judgment.

In a 5-4 decision, the Supreme Court affirmed the Second Circuit’s decision, holding that DOMA section 3 was unconstitutional because it violated the Fifth Amendment’s guarantee of equal protection. The Supreme Court’s decision effectively prohibits any legal differentiation for purposes of federal law between same-sex and opposite-sex marriages validly formed under applicable state law.

Choice of law issues post-Windsor. Because DOMA section 2 was not challenged in Windsor and therefore remains intact, states may continue to ignore a same-sex marriage that was legally performed in another state. Further, Windsor did not specify, and there is no unanimous rule at the federal level regarding, whether the validity of a marriage for federal law purposes should be determined using the laws of the state in which a couple was married (place of celebration) or the laws of the state in which the couple resides (place of domicile). Revenue Ruling 2013-17 clarifies that for federal tax purposes, the Service has adopted the place of celebration rule and will recognize the validity of a marriage that is entered into in a state recognizing same-sex marriage, even if the state of the couple’s domicile does not. However, the Service will not consider comprehensive civil unions or domestic partnerships to be the equivalent of marriage for federal tax purposes. The Revenue Ruling applied prospectively as of September 16, 2013, and retroactively for most purposes, as discussed below.

Specific tax issues post-Windsor. Windsor affects many aspects of federal tax law, including calculation of income taxes and filing of returns, taxation of gifts and bequests to spouses, and tax qualification and taxation of employer-provided benefits. Same-sex couples who are validly married on December 31, 2013, will be required to file their 2013 federal tax return as married. Some married same-sex couples will pay more federal income tax post-Windsor, however. For example, dual-earner couples in higher income tax brackets whose income is relatively evenly split will likely be subject to the “marriage penalty,” just like similarly situated opposite-sex couples. Low-income taxpayers who are beneficiaries of the earned income tax credit (EITC) may also be subject to the marriage penalty because the EITC is reduced if an otherwise-qualifying taxpayer must aggregate his or her income with a spouse’s higher income. Similarly, some same-sex spouses may discover that Social Security benefits that were once tax free will now be taxed owing to required income aggregation. Same-sex couples with children who previously could file separately as single and head of household may see their taxes increase owing to required income aggregation.

Revenue Ruling 2013-17 clarifies that Windsor applies retroactively for the purpose of filing original, amended, and adjusted returns, or claims for credit or refund for tax overpayments, except with respect to certain retirement plans. As such, married same-sex couples may choose to amend returns from prior open years to file as married but must generally do so within three years of the original return’s filing date under section 6511.

The unlimited gift and estate tax marital deductions of sections 2523 and 2056, which were available only to opposite-sex married couples prior to Windsor, are now available to legally married same-sex couples. Such couples are now also able to avail themselves of the portability provisions of section 2010 and the use of a qualified disclaimer under section 2518. In addition, same-sex couples in community property states that recognize same-sex marriage will now receive a double step-up in basis on community assets upon the first spouse’s death. Prior to Windsor, DOMA required the cost of coverage under an employer-sponsored accident or health plan provided to a same-sex spouse to be taxed as imputed income to the employee, pursuant to Sections 105 and 106. Revenue Ruling 2013-17 states that such coverage is no longer taxable to married same-sex couples post-Windsor. Affected couples may file amended tax returns to obtain refunds of, and employers may claim a refund of, or make an adjustment for, tax overpayments made in prior open years relating to such coverage.

Windsor also affects the design and operation of employer-provided benefit plans. For example, prior to Windsor, the rules under section 401(a) relating to qualified joint and survivor annuities and qualified optional survivor annuities under a qualified retirement plan applied only to opposite-sex spouses of participants. Similarly, certain plans were required to obtain consent from a participant’s opposite-sex spouse before certain benefit elections and beneficiary designations could be changed. These rules now also apply to same-sex spouses. The Service has indicated that it intends to issue further guidance on the retroactive application of the Windsor decision to qualified retirement plans, its effect on other tax-favored retirement arrangements, and on plan amendments and corrections.

Other aspects of federal taxation affected by Windsor include the taxation of alimony and property settlements on divorce and the availability of the adoption credit. For example, pre-Windsor, same-sex spouses were able to claim the adoption credit when adopting the child of a spouse owing to DOMA’s application to the Code, a benefit that is no longer available.

Conclusion. Absent comprehensive Service guidance on the retroactive application of Windsor, the full impact of Windsor on federal tax law remains unknown. In the interim, taxpayers should identify how they are affected by Windsor and Revenue Ruling 2013-17, implement any necessary changes applying prospectively, and determine whether to file amended or adjusted returns or claims for refund or credit for prior open tax years. 

ABA Section of Taxation

This article is an abridged and edited version of one that originally appeared on page 18 of ABA Section of Taxation NewsQuarterly, Fall 2013 (33:1).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

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