Should Mass Same Sex Couples Consider Amending Returns ?

The recent decision on the constitutionality of California Proposition 8, Perry vs. Schwarzenegger, may have stolen a bit of the thunder from Gill v OPM, which concerns not same sex couples who want to marry, but those who already are or have been married. I'm more interested in Gill, because, among other things, it is a tax case.  Gill is a district court decision.  It's holding is that a portion of the Defense of Marriage Act is unconstitutional.  The ruling was rather harsh on Congress not holding that DOMA needed to be subject to "strict scrutiny", but rather that it had no rational basis.  The Justice Department was required to defend DOMA, even though the Obama administration has indicated that it would favor its repeal.  They refused, however, to advance any of Congress's reasons for passing he bill in the first place. 

DOMA (Defense of Marriage Act) had two main points. One is that states that do not allow same sex marriages are not  forced to recognize such marriages performed in other states. The other is that for purposes of federal law marriage is limited to marriages between members of the opposite sex and the word spouse mean someone of the opposite sex. Gill v. OPM attacked only the second part of DOMA. The plaintiffs were or had been legally married in Massachusetts and were being denied some sort of benefit, because their marriages were not recognized under federal law. The Court found that DOMA had no rational basis. In a follow up ruling that was issued on August 19, the judge spelled out the specific results of the ruling. Among them were refunds of income tax totalling approximately $50,000 to three of the plaintiff couples who were permitted joint filing status. The effect of the ruling has been stayed pending appeal.GLAD (Gay and Lesbian Advocates and Defenders) which managed the case approved of the stay since it would be not good for the plaintiffs to receive the refunds and then have to pay them back if they lose on appeal. The Justice Department has until October 18 to appeal.

Prior to this case, there has not been much in the tax area on DOMA.  The same taxpayer asked the Tax Court to declare it unconstitutional twice and both times appealed to the seventh circuit.  The second time (MUELLER v. COMM., Cite as 90 AFTR 2d 2002-5309), he was cautioned about filing frivolous appeals.  Mr. Mueller, however, was not actually married under the laws of any state, so DOMA had no more bearing the second time he appealed than it did the first time which concerned years prior to DOMA's enactment.

In PLR 9717018, the service ruled that a taxpayer was taxable on otherwise excludable fringe benefits provided to the taxpayer's domestic partner and the domestic partner's dependents. In PLR 9850011 health benefits provided to a domestic partners were excludable, because the taxpayer established that the domestic partner qualified as a dependent under Code Section 152(a)(9)(Note 152 has since been amended).  In INFO 2001-0294 the service informed a taxpayer that partners in a Vermont civil union, who are by definition of the same sex, could not file a joint return because of DOMA.  It is interesting to speculate as to what the answer to that question will be if DOMA is unconstitutional.

Does the Gill decision require any immediate action?

  I have this mythical couple called Robin and Terry who's function in life is to help me avoid awkward pronoun problems.  You may have met them in my post on a potential windfall for California domestic partners or one on the tax advantages of not being married.   For the moment Robin and Terry are of the same gender, at least for now, and were married in Massachusetts in 2006.  They have filed joint Massachusetts returns since then and file federal returns as being single.  They decided not to try to exploit one of the Achilles heels of DOMA (Defense of Marriage Act), which is that the IRS doesn't ask you what your gender is.  Somehow I doubt that they have someone in the service center culling the Adam and Steves out from the Adams and Eves.  I never advise people to exploit the audit lottery, though, and it will certainly not be tolerated in my imaginary clients.


So what should Robin and Terry do ?  If their 2006 return was extended they still have time to file an amended joint return.  If their total income was $250,000 and it was all Terry's, there would be a refund of about $10,000.  If the IRS denies the refund claim they have two years to sue for a refund.  With the variety of phase-outs and thresholds that are built into the tax computations, it is really not possible to come up with a simple formula. In general the closer Robin and Terry are to having equal income, the less likely they are to benefit by joint filing. It is probably worth running the numbers regardless though just to be sure.  Robin might have a capital loss carryover and Terry a capital gain, for example. It is even possible that joint status can cost money, in which case Robin and Terry can thank DOMA for a small blessing.  There is no point in doing anything for years after 2006, since more will be known by the time the next deadline comes up (in April of 2011 for unextended 2007 returns).  If Justice throws in the towel the IRS may issue a revenue procedure giving specific instructions on how to claim refunds.  The probabilities on that are beyond my feeble prognosticating skills.

As I have mentioned elsewhere the decision to file a joint return is not a simple numbers exercise.  By joining in a joint return with Terry, Robin is assuming joint and several liability for any deficiency.  If Terry omitted a very large amount of income, it would not be prudent for Robin to go joint even at this late date, since a six year statute might apply.

I'll be following the ramifications of this case as they evolve in the next few months, so stay tuned.