The Internal Revenue Service (“IRS”) and the Department of the Treasury have released a notice of proposed rulemaking to follow the rulings of Windsor v. United States, 133 S. Ct. 2675 (2013) and Obergefell v. Hodges, 135 S. Ct. 2584 (2015) that legalized same sex marriage. These proposed regulations sought to clearly define what marital terms including “spouse,” “husband,” and “wife” mean, to recognize for federal tax purposes a marriage that would be recognized by any state, possession, or territory of the United States, and to clarify that “marriage” would not include alternate legal relationships such as civil unions or domestic partnerships.
This article reviews the final implementation of these regulations, the decisions the IRS made on marital terms and how to recognize the legality of marriage, and the IRS’s decision to not include alternate marital relationships. The article additionally speaks to what taxpayers and practitioners should especially give attention to following these regulations.
In the aftermath of the holdings of Windsor v. United States, 133 S. Ct. 2675 (2013) and Obergefell v. Hodges, 135 S. Ct. 2584 (2015) as well as the publication of IRS Revenue Ruling 2013-17 (2013-38 IRB 201), the Department of the Treasury and the IRS published a notice of proposed rulemaking on October 23, 2015 to reflect those holdings and rulings and define marital terms in the Internal Revenue Code (“IRC”) for federal tax purposes. These proposed regulations reflect the current law that same sex marriage is legal by allowing for a more gender neutral view of the marital relationship for purposes of federal tax.
In Windsor v. United States, the U.S. Supreme Court ruled that Section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional in that it required the definition of marriage for federal purposes to be between one man and one woman. DOMA, before Windsor, had essentially ignored individual states’ laws that may have allowed for same sex marriage at the time when it came to federal matters such as federal tax and employee benefits. Revenue Ruling 2013-17 reflected this holding by stating that the IRS would recognize any marriage that was legal in the state in which it was performed for federal tax purposes. It did not include alternate legal relationships such as domestic partnerships or civil unions. Obergefell v. Hodges took this one step further by recognizing that a restriction on same sex marriage was unconstitutional and so was the refusal of one state to recognize the validity of a same sex marriage performed elsewhere (assuming it was a valid marriage where entered into). The proposed regulations by the IRS sought to tie all of these cases and rulings together in one “final voice” and were finalized in the Federal Register on September 2, 2016.
The final regulations first made a point to take gender out of the marriage equation by defining the terms “spouse,” “husband,” and “wife” to mean an individual lawfully married to another individual. It also continues to define “husband and wife” as two individuals lawfully married to each other.
Next, these final regulations reflect the “state of celebration rule” which states that for federal tax purposes, a marriage of two individuals will be recognized by the IRS if it is recognized by the state, possession, or territory of the United States in which the marriage is entered, regardless of domicile. This too would include common law marriages as discussed below. If the couple is married outside of the United States, the final regulations state that their marriage will be recognized for federal tax purposes if the marriage would be recognized under the laws of at least one state, possession, or territory of the United States, regardless of domicile.
Lastly, the final regulations make it clear that for federal tax purposes, the terms “spouse,” “husband,” and “wife” do not include individuals in domestic partnerships or civil unions. Likewise, “husband and wife” and “marriage” do not include these alternate legal relationships that are not recognized by the state of where such relationship was entered into as being a marriage.
2. Defining Marital Terms
The IRS’s final regulations specifically looked to make the language pertaining to marriages for federal tax purposes gender neutral by shifting the definitions of “spouse,” “husband,” and “wife” to mean an individual lawfully married to another person. Also “husband and wife” is to mean two individuals lawfully married to each other. Likewise, in § 301.7701-18(b) of these final regulations the language used to specify the “state of celebration” rules reflects the same gender neutral language by expressing a “marriage of two individuals”. The IRS has purposely made these changes to reflect the holdings of Windsor and Obergefell. The IRS felt that by defining marital terms in this way, there was no need to specifically mention “same sex marriages” in the regulations. These gender neutral definitions would apply in the context of same sex marriages and eliminates the need of a specific reference.
3. Where to Recognize the Marriage
These regulations reflect that marriages entered into in any state of the United States as well as any United States’ territory or possession will be honored if it is a valid marriage in the state in which it was performed. The IRS included this even though it was essentially expressing what the law in every state was already after Obergefell so that practitioners and individuals could rely on these regulations instead of sub-regulatory guidance.
One point that the IRS did take heavily into consideration was to clarify in what circumstances the “state of celebration” rule would be used. Amending the proposed regulations that stated a couple would be deemed married if would be so in any state, possession, or territory of the United States, the IRS finalized the regulations to separate how they would view a marriage depending on whether it was entered into in the United States or in a foreign country. The IRS really focused on eliminating potential confusion over issues in which a couple could be deemed married by the IRS because they may have been living together for an adequate period of time to establish a common law marriage in one state of the United States, but were doing so in a different state. Likewise, couples may have a valid divorce in one state but would still be legally married in another, leaving them married in the eyes of the IRS.
The IRS was very intentional to point out that they would view a marriage entered into internationally only if it was a relationship deemed to be a marriage internationally and would be a valid marriage in one state, possession, or territory of the United States. This eliminates concern over alternate legal relationships being viewed as a marriage for federal tax purposes when the couple did not intend for such a result. It likewise eliminates the same concern that may arise for unintended common law marriages which may be valid in some states, but was not valid in the country in which the couple was living together. This too follows the “state of celebration” rule as not only does the marriage have to be a valid marriage somewhere in the United States, but it has to be a valid marriage where it was actually entered into. This essentially is the same rule for both domestic and international marriages but the IRS used careful drafting to avoid any confusion or potential issues.
4. Alternate Legal Relationships: Situations that the IRS will NOT Recognize as Marriage
These final regulations made clear that for federal tax purposes, “married” or “spouse(s)” would mean that the couple is actually in a legal marriage and not in some alternate legal relationship. The IRS looked at this issue of what to actually deem a marriage to express clarity in its own treatment of what would and would not be counted. Other reasons to support their position included the fact that states that allowed for relationships such as civil unions and domestic partnerships deliberately separated those from legal marriage, that many of the couples in these relationships enter into them with the intention of not being married, and that Congress did not intend to specifically include these relationships to mean marriage.
As a matter of governmental efficiency and resourcefulness, the IRS held to this decision to avoid looking into specific rights or obligations that these relationships may afford or require to see if they would “align” with those in a marital relationship.
Likewise, after Obergefell, couples that may have entered into these relationships because previously they could not marry have the option to convert their relationship into a marriage. The IRS sees this as a reason also to only view valid marriages as marriages. Couples’ expectations of what type of relationship they are entering into could be confused if the IRS started recognizing some other relationships as married for federal tax purposes. Essentially, the IRS is taking out the possibility of onerous litigation or farther rulemaking by setting up clear boundaries of what gives a couple marital status and what does not. Even though the IRC is silent as to alternate legal relationships, the IRS decided to hold to the longstanding view that Congress has never acknowledged such relationships as achieving marital status for federal tax purposes.
5. Practical Considerations
Moving forward, these final regulations essentially reiterate the holdings of Windsor and Obergefell. Revenue Ruling 2013-17 has been made obsolete as of September 2, 2016, except for the provisions pertaining to employee benefit plans and the benefits provided under such plans (including Notices 2013-61, 2014-37, 2014-19, 2014-1, and 2015-86). It is important for taxpayers and practitioners to pay attention to employee benefit plans now if the plan participant was in an alternate legal relationship. Many ERISA governed plans have recognized such relationships as married but may cease to do so since same-sex couples can marry.
It is important to also realize that the IRS will only recognize two individuals as married if the marriage is valid both where it was entered into and in at least one state, possession, or territory of the United States (if the marriage is valid and was domestic it meets both). Taxpayers need to be aware of this requirement if trying to achieve marital status.
Lastly, even though civil unions or domestic partnerships would not be valid as marriages, common law marriage, if legal in the place in which the couple has entered into the relationship, may be another way to achieve marital status even though it may have previously only been available to opposite sex couples. When tax planning make, sure to explore this alternate avenue when the alternate legal relationship door may be closed.
Alec Roberson’s practice focuses on estate planning and administration, post-mortem estate planning, wealth transfer tax matters, fiduciary dispute resolution, ERISA, and tax qualified retirement plans and welfare benefit plans.
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