Defense of Marriage Act (DOMA) and Taxes

1. Defense of Marriage Act (DOMA) and Taxes The implications of U.S. v. Windsor

2. DOMA 1 U.S.C. § 7 and 28 U.S.C. § 1738C: • Section 3. Definition of marriage (ruled unconstitutional by the Supreme Court) In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife.

3. Scope of DOMA § 3 • Amended the Dictionary Act, Title 1. • Dictionary Act provides rules of construction for over 1,000 federal laws and even more regulations. • More than 200 provisions of the IRC affected.

4. Some IRC Sections Affected • § 2056 Allowance of marital deduction (estate) and §2523 (gift) • § 2040 Joint interests • §§ 2516, 2043 • §§ 7701, 7703 Determination of marital status • § 1 Tax imposed § 2 Surviving spouse • §§ 21, 23, 24, 32 Family tax law credits • § 55 AMT • §§ 71, 215, 1041 Family tax law of divorce • §§ 105, 106 health plans • § 121 Exclusion of gain from sale of principal residence • § 132 fringe benefits • §§ 151, 152 personal exemption and dependents • § 267(b) related persons and the many other sections that refer to § 267 • § 401(k)

5. Other Provisions of Law Affected by DOMA • Employee Retirement Income Security Act of 1974 (ERISA) 29 USC: §§ 205, 417: Spousal benefits and rights – consent. • Social Security Benefits • COBRA • HIPAA • Bankruptcy • Immigration law

6. U.S. v. Windsor, Kennedy opinion • Two women then resident in New York were married in a lawful ceremony in Ontario, Canada, in 2007. Edith Windsor and TheaSpyer returned to their home in New York City. When Spyer died in 2009, she left her entire estate to Windsor. Windsor as executor sought to claim the estate tax marital deduction. She was barred from doing so, however, by a federal law, the Defense of Marriage Act. Windsor sought $363,053 refund. • Court first finds jurisdiction notwithstanding United States concession that DOMA § 2 is unconstitutional.

7. On the Merits • Bipartisan Legal Advisory Group (BLAG) of the House of Representatives voted to intervene in the litigation to defend the constitutionality of §3 of DOMA. • Court allows intervention • Court of Appeals for the Second Circuit affirmed the District Court’s judgment and applied heightened scrutiny to classifications based on sexual orientation. • “State laws defining and regulating marriage, of course, must respect the constitutional rights of persons, see, e.g., Loving v. Virginia, 388 U. S. 1 (1967); but, subject to those guarantees, “regulation of domestic relations” is “an area that has long been regarded as a virtually exclusive province of the States.”

8. Uniformity • “DOMA rejects the long established precept that the incidents, benefits, and obligations of marriage are uniform for all married couples within each State, though they may vary, subject to constitutional guarantees, from one State to the next.” • “What the State of New York treats as alike the federal law deems unlike by a law designed to injure the same class the State seeks to protect.” • “By creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect.”

9. Due Process and Equal Protection • “DOMA seeks to injure the very class New York seeks to protect. By doing so it violates basic due process and equal protection principles applicable to the Federal Government. The Constitution’s guarantee of equality must at the very least mean that a bare congressional desire to harm a politically unpopular group cannot justify disparate treatment of that group.” • “DOMA’s unusual deviation from the usual tradition of recognizing and accepting state definitions of marriage here operates to deprive same-sex couples of the benefits and responsibilities that come with the federal recognition of their marriages.”

10. Animus • “The House concluded that DOMA expresses “both moral disapproval of homosexuality, and a moral conviction that heterosexuality better comports with traditional (especially Judeo-Christian) morality.” • “This places same-sex couples in an unstable position of being in a second-tier marriage. The differentiation demeans the couple, whose moral and sexual choices the Constitution protects, see Lawrence, 539 U. S. 558, and whose relationship the State has sought to dignify. And it humiliates tens of thousands of children now being raised by same-sex couples.”

11. Federalism claim • “The arguments put forward by BLAG are just as candid about the congressional purpose to influence or interfere with state sovereign choices about who may be married. As the title and dynamics of the bill indicate, its purpose is to discourage enactment of state same-sex marriage laws and to restrict the freedom and choice of couples married under those laws if they are enacted. The congressional goal was “to put a thumb on the scales and influence a state’s decision as to how to shape its own marriage laws.”

12. Balancing • “The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect in personhood and dignity.”

13. Justice Scalia on the merits • “But the portion of the majority opinion that explains why DOMA is unconstitutional (Part IV) begins by citing … equal protection cases. And those cases are the only authorities that the Court cites in Part IV about the Constitution’s meaning, except for its citation of Lawrence v. Texas, 539 U. S. 558 (2003) (not an equal-protection case) to support its passing assertion that the Constitution protects the “moral and sexual choices” of same-sex couples.”

14. Standard of Review • “Moreover, if this is meant to be an equal-protection opinion, it is a confusing one. The opinion does not resolve and indeed does not even mention what had been the central question in this litigation: whether, under the Equal Protection Clause, laws restricting marriage to a man and a woman are reviewed for more than mere rationality.” • “I would review this classification only for its rationality.” • “Yet the opinion does not argue that same-sex marriage is “deeply rooted in this Nation’s history and tradition,” a claim that would of course be quite absurd.” as required by 5th Amendment Due process analysis. SEE ALSO ALITO DISSENT.

15. Equal protection • “To be sure (as the majority points out), the legislation is called the Defense of Marriage Act. But to defend traditional marriage is not to condemn, demean, or humiliate those who would prefer other arrangements, any more than to defend the Constitution of the United States is to condemn, demean, or humiliate other constitutions.” • “It is one thing for a society to elect change; it is another for a court of law to impose change by adjudging those who oppose it hosteshumani generis, enemies of the human race.”

16. Other shoe • “In my opinion, however, the view that this Court will take of state prohibition of same-sex marriage is indicated beyond mistaking by today’s opinion. As I have said, the real rationale of today’s opinion, whatever disappearing trail of its legalistic argle-bargle one chooses to follow, is that DOMA is motivated by “ ‘bare . . . desire to harm’” couples in same-sex marriages. How easy it is, indeed how inevitable, to reach the same conclusion with regard to state laws denying same-sex couples marital status.” • “As far as this Court is concerned, no one should be fooled; it is just a matter of listening and waiting for the other shoe.”

17. Ohio (one shoe) • Obergefell v. Kasich (TRO) • “The end result here and now is that the local Ohio Registrar of death certificates is here by ordered not to accept for recording a death certificate for John Archer that does not record Mr. Archer’s status at death as “married” and James Obergefell as his “surviving spouse.” • “Throughout Ohio’s history, Ohio law has been clear: a marriage solemnized outside of Ohio is valid in Ohio if it is valid where solemnized. Thus, for example, under Ohio law, out-of-state marriages between first cousins are recognized by Ohio, even though Ohio law does not authorize marriages between first cousins. Likewise, under Ohio law, out of state marriages of minors are recognized by Ohio, even though Ohio law does not authorize marriages of minors.” • “How then can Ohio, especially given the historical status of Ohio law, single out same sex marriages as ones it will not recognize? The short answer is that Ohio cannot.”

18. Obergefell’s reasons • Reasons: “Last official document recording his existence on earth” would be wrong • Cemetery rules limit to immediate family • Human dignity

19. Rev. Rul. 2013-17, 2013-38 IRB 201 (2013) • 1. For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex.

20. 2. For Federal tax purposes, the Service adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.

21. 3. For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term “marriage” does not include such formal relationships.

22. Application of Rev. Rul. 2013-17 • All federal tax statutes

23. Estate and Gift Tax • Subject of Windsor • § 2056(a) Allowance of marital deduction (and §2523) • Each spouse is a separate transferor under estate and gift tax system. • BUT §§ 2056 and 2523 provide for unlimited deductions for transfers between spouses, inter vivos or on death. • Congressional intent to tax transfers only when property exits the marital unit. • § 2040(b) One-half of the value of the property will be in decedent spouse’s gross estate. No need for tracing contributions of purchase price. (Note: § 1041 step up of only ½ value.)

24. IRC Definitions • § 7701(17) As used in section 682 (income of a support trust in case of divorce, etc.) • § 2516, Written agreement concerning marital or property rights considered adequate consideration for gift tax. • § 2043(b)(2). Same as §2516 for estate tax. • § 7703 Determination of marital status. (timing of determination)

25. Section 1 and section 2 • §1(a) Married individuals filing joint returns and surviving spouses. • §1(b) Heads of households defined in § 2(b) • § 2(b) may be head of household only if NOT married • § 1(c) unmarried individuals • 1(d) married individuals filing separate returns • §1(f) phaseout of the marriage penalty

26. §§ 21 Child Care • §21 Expenses for household and dependent care services necessary for gainful employment. • (d) Earned income limitation.-- • (1) In general.--Except as otherwise provided in this subsection, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed-- • (A) in the case of an individual who is not married at the close of such year, such individual's earned income for such year, or • (B) in the case of an individual who is married at the close of such year, the lesser of such individual's earned income or the earned income of his spouse for such year.

27. § 21 continued • (e) Special rules.--For purposes of this section— • (2) Married couples must file joint return.--If the taxpayer is married at the close of the taxable year, the credit shall be allowed under subsection (a) only if the taxpayer and his spouse file a joint return for the taxable year. • (3) Marital status.--An individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be considered as married

28. § 23 Adoption expenses • (f) Filing requirements.-- • (1) Married couples must file joint returns.--Rules similar to the rules of paragraphs (2), (3), and (4) of section 21(e) shall apply for purposes of this section.

29. § 24 child tax credit • (b) limitation – Phaseouts differ for unmarried individual and married individuals • NOTE unlike § 21 married may file separately.

30. 32 EITC • § 32(b)(2) phaseouts differ for unmarried and married individuals. • § 32(d) joint returns required of married individuals • § 32(c)(1)(A)(ii)(II) individual eligible for EITC who does NOT have a qualifying child. “Such individual (or if the individual is married, either the individual or the individual's spouse) has attained age 25 but not attained age 65 before the close of the taxable year.”

31. § 55 AMT • § 55(d)(1) exemption amounts differ • § 55(d)(3) phaseout amounts differ

32. § 63 Taxable income defined • § 63(c)(2) basic standard deduction differs • § 63(c)(6) Certain individuals, etc., not eligible for standard deduction.--In the case of-- • (A) a married individual filing a separate return where either spouse itemizes deductions, • § 63(f) (3) Higher amount for certain unmarried individuals.--In the case of an individual who is not married and is not a surviving spouse, paragraphs (1) and (2) shall be applied by substituting “$750” for “$600”.

33. § 68 Limitation on itemized deductions • Different threshold amounts for phaseout.

34. §§ 71, 215 and 1014 • All three now fully applicable

35. §§105 and 106 health plans • Previously domestic partners were required to include in their income amounts paid by the employer of their partners for health insurance.

36. § 121 Exclusion of gain from sale of principal residence • § 121(b)(2)(A)(iii) Special rules for joint returns: (iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3). • §121(b)(3) Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.

37. § 132 Fringe benefits • § 132(h)(2)(A) In general – any use by the spouse or a dependent child of the employee shall be treated as use by the employee

38. § 151 and 152 personal exemption and dependents • § 151(b) taxpayer and spouse • § 151(d) phaseout tied to section 68(b) • § 152 Domestic Partners sometimes used §152(d) qualifying relative. Problems arose under §152(d)(1)(B) because gross income of dependent had to be less than exemption amount under §151(d)

39. § 267 Losses … between related taxpayers • § 267(b)(1) and (c)(4): The family of an individual shall include only his brothers and sisters, spouse, ancestors and lineal descendants. • Applies to sales between related parties. • See also attribution rules pertaining to partnership and corporate formation, distributions, and liquidations.

40. 401(k) • Rollover by surviving spouse. You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a de-ceased employee. The rollover rules apply to you as if you were the employee. You can roll over the distribution into a qualified retirement plan or a traditional or Roth IRA. For a rollover to a Roth IRA, • A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible roll-over distribution. However, see Rollovers by nonspouse beneficiary next.

41. § 401(k) continued • Rollovers by nonspouse beneficiary. If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. For information on inherited IRAs, see Publication 590.

42. Thank you for your patience • Richard J. Wood • Professor • Capital University Law School