Editor’s Note: The Tax Times interviewed Professor Patricia Cain from Santa Clara University. Professor Cain writes frequently about taxation and estate planning for same-sex couples and has co-authored one of the leading texts used in Sexuality and the Law courses. She was named by Tax Notes as a Person of the Year in 2013.
Patricia A. Cain
Q: I’m Tom Greenaway, here with Professor Patricia Cain of Santa Clara University. Welcome Professor, and welcome to the Tax Times.
A: Well, thank you very much. I’m flattered to be here.
Q: Professor, how did you get into tax?
A: One name. Chuck Saunders. He was my tax professor in law school the summer after my first year. I took tax that summer because it was reputed to be a difficult course and I thought I should take care of the requirement quickly. Chuck Saunders had an inquiring mind and was always very thorough. I remember going up to his office and saying, “I’ve got this problem and I have thought about it and thought about it. Here’s what I think the answer would be.” He said, “Wait a minute, Pat. Let’s see what the Code has to say about it.” And he pulled out a Code and read through the relevant language. It was such a great lesson. You know, the facts change, and the meaning of a Code section changes with different facts.
I took that lesson with me, even when I went into practice. I often wanted to answer clients’ questions right away, but I would refrain until I had a chance to run their particular situation through the Code language. So he was just an idol of mine in some ways. And it’s a good thing I took that tax course that summer because that was the building block course that enabled me to take every other tax course that was offered. This was at the University of Georgia, in the early 1970s—and they offered a lot of tax courses.
Q: Can you tell us about how you built the bridge from your interest in tax during law school to where you are now as a tax scholar?
A: Well, I practiced for a very short time, in Montgomery, Alabama. I enjoyed representing taxpayers before the IRS. You know, that means writing protest letters and fighting with the IRS. I always thought the taxpayer was right. I had great respect for the IRS, but I really enjoyed that part of the practice. On the other hand, I wasn’t as interested in working with forms and transactions.
Then I became interested in academia. I had not had a single female tax professor—in fact, no female professor at all in law school. There were very few female professors in law schools generally in the early '70s. I called the head of the appointments committee at the University of Georgia, a man who was also somewhat of a friend. And I said, “You have no women on your faculty, and you just lost two tax professors. Would you consider hiring me to come teach tax at Georgia?”
He said, “Pat, I can get you a job at a much better place than Georgia.”
And before I knew it, he called me back and said, “Send your resume to the University of Texas.”
And I said, “Texas would consider hiring me? I’m not a Harvard or Yale person. I mean, they’re a topnotch school.”
“Oh, yeah, Texas will consider hiring you. Believe me.”
Well, of course they would, because HEW (Health, Education, and Welfare as it was then known) had been on its campus along with a lot of other law school campuses around the country saying, “Why do you not have any women? You are in violation of our antidiscrimination laws.” So they hired me because I was a woman. One of the faculty even told me they hired me because I was a woman.
I now know how to respond to that. My friend Barbara Babcock at Sanford was asked when she became the head of the civil division at Justice Department, “How does it feel to get this job just because you’re a woman?” And she said, “A hell of a lot better than it would feel not to get this job just because I’m a woman.” I’ve been through that. I’ve been denied jobs. And they would tell you to your face: “Oh, we don’t hire women. We’ll interview them but we don’t hire them.” That’s what the early 1970s were like.
Q: When you refer to HEW, are you saying that the federal government was pushing for women to be hired? Was that because of Title IX?
Q: I honestly wasn’t aware that the federal government was pushing universities to diversify hiring in academia that far back.
A: Well, they were, in state institutions specifically. I believe that UCLA hired three women the year before I took the job at Texas. I have a number of female law professor friends who understand that the reason that they were hired was primarily because they were women. And I was the first woman to be hired on the tenure track at Texas. My spouse, Jean Love, was the first woman to be hired on the tenure track at UC Davis. And she was hired just two years before I was.
Q: Now this generation has come of age, and I want to come back to that in terms of the fullness of your scholarship. But let’s first introduce a new aspect here, and that’s your activism. You moved from practitioner to a professor. How about being an activist in tax? Is that different or is that of a piece?
A: Well, it’s part of what I see as public service. You can’t be too much of an activist. A scholar has to keep an open mind and not do politics, and I try to do that. But of course, there are things that I think should be changed, usually for the benefit of the underprivileged. So early in my career in Texas, in 1977, a national organization put on a conference in Madison, Wisconsin called the Women in the Law Conference. For the first time ever, they had a section of panels that were called the Lesbian Law panels. And I thought, “Wow, we don’t even say that word in Texas.” I went to those panels and then I went back to Texas.
I was teaching wills, so I decided to use an example of a lesbian couple. I used the word, and there was silence throughout the room. That was stunning to me. I thought, “We’ve got to make this population more visible.” I began giving talks, usually about estate planning because that’s what people were concerned about—i.e., a client who says, “I want to leave everything to my partner; the family may contest the will; what can I do to protect it?”
Of course, nobody knew what any tax rules were with respect to these people because the IRS never talked about unmarried couples at all, whether they were same sex or opposite sex. That meant there was a lot to do. You couldn’t be wrong as a scholar writing about these issues because there was no law. You could just make interesting arguments about what the law should be and find some authority to back up that argument. So it was challenging. It was creative, and I’m told it made some difference.
Q: Estate planning is one of the most private elements of practice. It’s interesting to hear you talk about your activism in that context. We’re talking about estate planning and teaching wills in the '70s. How did any of this become public outside of very intimate, quiet, private family conversations?
A: In 1973, Lambda Legal Defense was formed. It was the first, largest, and oldest organization supporting gay rights—other than the ACLU, which hadn’t really supported gay rights much until that time. Lambda was formed specifically to be a public interest law firm for lesbians and gay men. It was dealing with discrimination, but also trying to help move the law along. I became involved with them in 1984; I was on their board of directors. They were only in New York then, and I was on the board of directors until 1992. I also hooked up with other people in the community who were doing estate planning in the LGBT community and who had questions. I was writing materials and outlines and Lambda publications to help these people. It became public because people started talking about it.
Q: What was the government’s response to your planning? Presumably these returns were prepared and filed taking these positions and making these arguments before the Service. Did the government’s response ever change? Was it always the same?
A: It was silence. I mean, we really were an invisible community. There were no rules that specifically applied to us. There’s very little authority from that time.
There’s one reported decision involving an unmarried couple that split up (it was a man and a woman). When they split up, the man made regular payments in intervals to the woman under the terms of a settlement agreement. She claimed they were gifts, so she did not report them. She was audited, and the IRS essentially said “No, this is payment for all your past services of being his partner and his companion for all those many years.” The Tax Court, in a memorandum decision, decided neither was right. These were Marvin-style payments based on the 1976 Marvin v. Marvincase out of California. That was a property division case. She had equitable claims to his property. He was paying her for her interest in the property, the car, the various things that he ended up with for which he needed to compensate her. Nobody had given any evidence as to what her basis was in this property. So the court said there was no gain.
I’ve never seen the case cited since, except incorrectly. And it’s surprising to me that there have not been more audits of unmarried couples, because they are basically in the same situation of lacking appropriate rules to guide them, whether they’re same-sex or opposite-sex couples. The Marvin case in 1976 brought this topic up because it recognized that contracts could be enforced between unmarried couples. Before that, the majority rule was that a contract between a man and a woman who are living together, in sin so to speak, is unenforceable if it has to do with cohabitation because it’s against public policy, and we don’t enforce contracts that are against public policy. Marvin v. Marvin changed that presumption and made a lot of these arguments more visible: you could argue for positions of the cohabitant which you couldn’t argue for before.
Q: Let’s skip forward to when these planning postures became more public, when the federal government took a position on these issues by enacting the Defense of Marriage Act (DOMA).
A: That was in 1996. No issue then, because you couldn’t get married if you were a same-sex couple anywhere in the world in 1996. Nonetheless, the federal government passed DOMA, a law that said the federal government will not recognize marriages except between a man and a woman.
The real point was the federal government’s decision not to recognize same-sex marriages, even though the federal government usually relies on state law in this context. No issue arose in the United States until 2004, which is the first year that a state—Massachusetts—recognized same-sex marriage. You could get married in Canada as early as 2003, so some people did. DOMA clearly applied to such married couples, and so they wouldn’t file a joint return at the federal level even though they were married.
Of course, there were some people who wanted to challenge the law. Ultimately, that’s how we got cases in the works. There were a lot of arguments that DOMA was unconstitutional because it simply was not rational. It just gave tax breaks, in effect. You could avoid the marriage tax penalty if you were a married same-sex couple. Wouldn’t opposite-sex couples love to avoid it as well? Of course, it is hard to argue that a particular tax law is unacceptable because it is “irrational”: all tax laws are in some sense irrational because they are just products of politics. As more and more states recognized marriage, DOMA became more of an issue. Then we had states that were recognizing marriage-equivalent statuses, such as registered domestic partnerships. The first was Vermont in 2000 when it recognized civil unions. That raised issues at the federal level as to property rights and family rights of registered domestic partners and civil union partners.
Early on, we got an announcement out of the Social Security Administration that your civil union partner’s child would be your child, because that child qualifies as a step child under state law. DOMA has nothing to do with it because we’re not talking about marriage but about civil unions and registered domestic partners.
So this is when I became more and more active because there were more and more questions raised. How should the alternative statuses be treated? How should you treat marriage when it’s recognized at the state level, but it’s not recognized at the federal level? And what is the best way to challenge the federal law? Then the head of the civil rights litigation team for GLAD (Gay and Lesbian Advocates and Defenders), an organization in Boston, called me up and said, “You’ve been working on this, and I’ve talked to you a lot over the years. I wanted you to be the first to know. We’re filing suit today.” And she sent me a copy of the complaint. It was a perfectly planned suit to challenge DOMA. Because it had many different plaintiffs, many different situations, many different tax issues, whether to file jointly, whether to get the marital deduction, whether to get certain survivor’s benefits, whether to get employment benefits. It wasn’t just about tax issues. The case raised issues about marital status and federal benefits in many areas. It was a typical civil rights-type case. And it was well lawyered.
It was about that time that I started telling people to file protective refund claims. They needed to avoid the statute of limitations, which would otherwise prevent them from claiming refunds once DOMA was struck down. And I was predicting that it was just a matter of time before DOMA was going to be ruled unconstitutional. For any tax year that’s open, of course, couples could go back and claim a refund so long as they’ve met the statute of limitations requirements.
An interesting story one of the lawyers in the GLAD case told me was that when they planned the case, they filed a claim for refund. They knew that was the best way to challenge the law tax-wise—i.e., not to file jointly but to file singly, and then file a claim for refund. But the refund was granted. They had to call up the IRS and say, “No, no, no. You don’t understand: we need standing in this case. Please deny our refund.”
I talked to a number of people around the country around this time, because I’d become known for my expertise on this project. There was a couple in Oregon who were simply registered domestic partners, and they were fed up with how they were being treated by the federal government. So they simply filed a claim for refund saying “We are filing jointly. That’s the way we should file, because that’s how we file under state law.” They didn’t say anything about being married or registered domestic partners, and they got their refund.
Q: God bless the Service Center.
A: Well, yes. People kept saying, I bet there’s somebody who’s working there on our side. And then I said, “No. This is just everyday practice at the IRS.”
Q: Now, take us to the end. How did that litigation come to a head and how was it finally resolved?
A: Well, the Windsor case jumped ahead. It was a pure tax case. I like it that it was a tax case, an estate tax case dealing with the marital deduction. Edie Windsor was just upset. If she had been in a heterosexual marriage, she wouldn’t have had to pay any estate tax because when her spouse died she would have gotten the marital deduction. The district court ruled in her favor. The Second Circuit ruled in her favor in 2012; and ultimately, so did the US Supreme Court in 2013. That’s the point at which all the federal agencies had to figure out how they were going to treat the court ruling, because there were a lot of states at that time that still did not recognize same-sex marriage. The IRS had to figure out whether to recognize marriages on the basis of the laws in the place of celebration, or on the basis of the laws that existed in the couple’s state of residency or domicile.
The IRS came out with its revenue ruling in August of 2013. They came out with it the very day that I was scheduled to do a talk at the Santa Clara bar. I was reading it furiously before going to give my talk: I just threw away my prepared remarks. The IRS ended up adopting a place-of-celebration rule, which made it a lot easier for everyone. There were a lot of different parties interested in having a simple, applicable rule, which the place-of-celebration rule turned out to be. I did a lot of writing at that time. I’ve been told that some of my memos got to the right people in the IRS and that they were helpful.
Q: You never lobbied the IRS? You never sat down at a table at 1111 Constitution to talk issues through?
A: There are a couple of issues that have come up over the years. I have in fact gone to the Treasury building and met with someone to make an argument, which was flatly rejected. It goes back to working with a local attorney here, Don Reed, on a request for a private letter ruling that registered domestic partners in California should be subject to the Poe v. Seaborn income-splitting rule. That’s an entirely different issue. They aren’t married, and DOMA was still in effect when these discussions took place, but those couples did have community income under state law. We were trying to get the IRS to issue a ruling to help inform people about the tax consequences, because people in California were being told not to register because of the tax uncertainty. That seemed bad public policy to me. The best rule, I thought, would have been to recognize that Poe v. Seaborn did apply. Even knowing that it did not apply would have been helpful. They never would rule on our private ruling request; instead, they asked us to withdraw it. We didn’t. Then they came out with a CCA that said Poe v. Seaborn does not apply. It only applies to married couples, not to registered domestic partners. They gave no analysis whatsoever. That was in 2006. Some years later, a friend at the IRS called me and suggested we re-submit that request. We did. I know some of the people who worked on it. In the end, they issued a CCA in our favor in 2010 and said that RDP income was community income for federal tax purposes. That was the right result.
Q: And that’s the answer today?
A: That’s the answer today. So even today, if you’re a registered domestic partner in California and you’re not married, then you are not recognized as spouses. That’s due to another part of the ruling that followed Windsor. It said that registered domestic partners will not be treated as spouses. I had argued otherwise.
I was giving a talk at an ABA meeting in San Francisco that fall, and I got to meet one of the coauthors of the ruling. I said, “I think you did a great job.” And he said, “No, you don’t. There’s one thing I know you disagree with me on, and it was the registered domestic partners.” That was the moment I knew that my memos on how to treat same-sex married couples under tax law had reached the right desks at the IRS.
I do believe registered partners should be treated as spouses under tax law, because California gives registered domestic partners all the same benefits as spouses. They’re required to file a joint return at the state level. But the Service’s position is that they’re not spouses because California doesn’t call them spouses.
Q: But as you know, in tax, sometimes form trumps substance.
A: Correct. If I chose the form, they can argue substance. I can be stuck with the form if I chose it though.
Q: I guess on that theory, choosing to be a registered domestic partner rather than choosing marriage is your choice and you take the consequences.
A: It’s your choice. And that’s fine going forward. It’s the people who died when they could not get married and so were only registered domestic partners. Those taxpayers were not allowed the marital deduction and that bothered me. I argued for a semi-retroactive application of spousal status. It was unconstitutional to deny them marriage; why isn’t it unconstitutional to deny them the marital benefits that came with registered domestic partnerships?
Q: You are one of the few tax practitioners I know who can claim an unconstitutional win. So how does that feel?
A: Well, I don’t think I can claim the unconstitutional win.
Q: I mean on the issue, on your involvement against DOMA and being part of that larger issue.
A: Those were exciting times. It’s less exciting today, because there’s no conflict between state and federal recognition of married same-sex couples, thanks to the Obergefell decision. Thank goodness for that.
There is one other litigated issue I felt strongly about. I got involved in a Ninth Circuit case on this one. I worked with a public interest law firm to submit a pro bono amicus brief.
The issue was the mortgage interest deduction. I’d written a couple of times about that. A lot of people disagree with me, but I do think my position is supported by the Code. If you’re married, the Code treats you as one taxpayer for mortgage interest deduction calculations. I think that’s wrong, but that’s what the Code says.
If you can have one million dollars of acquisition debt as a single individual, two single individuals ought to be able to claim the deduction on one million each of acquisition debt. If you’re a married couple, however, the IRS has taken the position that together you only have one million. I call it another example of a marriage tax penalty in the Code. The IRS audited and claimed that a same-sex couple had claimed too much mortgage interest because they were claiming it on $2.2 million, which was then the aggregate amount that would be allowed if each individual took the full deduction. (Qualified debt at the time included $1.0M of acquisition indebtedness plus $100,000 of home equity indebtedness.)
In 2009, the IRS had issued a CCA saying that the allocation was per residence, not per taxpayer. If two individuals claimed mortgage interest deductions on the same residence that they shared, they would be limited to $1.1 million of qualified debt just as a married couple would be. That made a lot of people in the LGBT movement upset because the tax law did not give us spousal rights, since DOMA was still in effect. The IRS would not recognize our marriages because of DOMA, but for this purpose they were treating us as married. That didn’t seem fair. Well, that inequality argument is a tricky argument to make. I thought the better argument to make was that if you read the Code correctly, the $1.1 million limitation should be construed as applying “per taxpayer.” Then to my surprise, the Tax Court ruled against that position, and the taxpayers in that case were not planning to appeal to the Ninth Circuit. I think they had had their fill of the courts. Their lawyer had represented them at a reduced rate, and they didn’t think they had the money for an appeal. Finally, their lawyer called me because I had talked to him earlier. Their lawyer said, “You know, they’re changing their mind but they need an attorney and I can’t do it. They think it is an important thing to do for the LGBT community when they are denied spousal rights in all other areas and then treated as spouses when it is harmful to them.” I said, “If I can find them a pro bono attorney, will they take it to the Ninth Circuit?” The taxpayers agreed and that’s what we did. Aubrey Hone, a San Francisco tax attorney, agreed to represent them and Emily Kingston (Sideman and Bancroft) agreed to make the oral argument. We won at the Ninth Circuit, so that felt good.
Q: And did the Ninth Circuit agree with you that the proper reading of the Code is per taxpayer, not per residence?
A: Yes. They agreed it was per taxpayer, in Voss v. Commissioner. One of the arguments I made in my amicus brief was that the Code says that the interest must be paid per period. Taxpayers have yearly tax reporting periods; residences do not. It makes no sense to say this rule applies per residence. I felt good that they got that argument. They didn’t cite the amicus brief, but they did cite that argument in their opinion.
Q: So where do we go from here? Where’s the next challenge?
A: Well, that’s a good question. In the LGBT community, it’s not so much tax as it is discrimination. So now everybody says, “You’re married on Sunday and fired on Monday because so many states don’t have protections for LGBT people.” Discrimination and religious liberty are the key issues coming up. In the tax field, my current focus is on the so-called marriage tax penalty. I’ve been arguing about this for years, but I have never come up with a perfect solution (though I do think there is one). The question is whether we ought to assess taxes on an individual basis or on a joint basis. If it’s joint, who should be covered jointly? I think it should be per taxpayer. I would like to get rid of the marriage tax penalty. The government always says, “We don’t tax marriage.” But we do: we tax marital status differently because Congress wrote the laws that way. There are all these provisions built in, whether it’s the rates or the mortgage interest deduction or the capital loss deduction. The capital loss deduction is $3,000 against ordinary income per taxpayer, but a married couple only gets $3,000 for the two of them. Sometimes I call that tax coverture. It makes the husband and wife or the two spouses one again for tax purposes. So I’ve been working, giving a lot of talks, and working out drafts. But I haven’t yet published what I really want to publish about how we should assess taxes and avoid the marriage tax penalty.
Q: Do you see an administrative or a judicial remedy to that problem, or do we have to go to Congress?
A: That’s the problem. The marriage rules are built into the Code. Congress has to change the rate structure. Under my solution, you wouldn’t have joint returns as they are structured today. You’d have to change the whole reporting method. Congress has become more sensitive to the marriage tax penalty. They’ve taken it out in the rate structure at the lowest rates. But at the higher marginal brackets it comes back in, and it comes back in other places in the Code. I don’t know that anyone in Congress has really looked at it in any detail, but they seem amenable to getting rid of the marriage tax penalty. If that’s the primary argument, and especially if it would do something to simplify tax law, then I think you could get the attention of Congress. Maybe not this Congress, but some future Congress.
Q: This is not an LGBT issue per se; this is a marriage issue, right?
A: It’s a marriage issue. I mean, it's a couples issue. And I would like the rules to be a lot clearer for unmarried couples. A lot of couples, whether they’re same sex or opposite sex, decide for whatever reason to live together rather than marry. Now states are beginning to recognize this status—cohabitation. In the state of Washington, if you are in such a relationship when you split up, you’re treated as though you have quasi-community property and that property gets split evenly. Same thing at death. No other state has gone quite that far. Other states deal with the Marvin v. Marvin remedy for that problem rather than creating quasi-community property or even quasi-marital property in separate property states. But there ought to be property law rules to protect those couples, and there ought to be tax rules that are predictable to protect those couples. So there’s still this important tax question. I am working right now on issues for unmarried couples. The two issues—taxation of cohabitants and taxation of married couples—are not disconnected. How unmarried couples should be treated is not so different today from how married couples should be treated.
Q: Any last thoughts as we finish our conversation?
A: I just wish I had more time. To write. To study. To get this done.
Q: Don’t we all? Professor, thank you so much for your time, and all the best.
A: Thank you. It’s been a pleasure. ■