Alerts and Updates
IRS Guidance Addresses Federal Tax Impact for Employers in Light of Supreme Court Ruling in U.S. v. Windsor
September 3, 2013
The question of how same-sex couples legally married in one state but currently domiciled in a state that does not recognize the validity of a marriage between individuals of the same sex is settled by Revenue Ruling 2013-17.
In Revenue Ruling 2013-17, the Internal Revenue Service (the "Service") addressed for the first time the impact of United States v. Windsor, the Supreme Court decision which held that section 3 of the Defense of Marriage Act was unconstitutional because it violates the principles of equal protection. Please see our prior Alert regarding the Windsor decision for a detailed analysis of the Court's decision.
The Service addressed three issues in Revenue Ruling 2013-17:
- Whether, 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 whether, for those same purposes, the term "marriage" includes such a marriage between individuals of the same sex.
- Whether, for federal tax purposes, the Service recognizes a marriage of same-sex individuals validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the state in which they are domiciled does not recognize the validity of same-sex marriages.
- Whether, for federal tax purposes, the terms "spouse," "husband and wife," "husband" and "wife" include individuals (whether of the opposite sex or 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 whether, for those purposes, the term "marriage" includes such relationships.
Revenue Ruling 2013-17 sets forth the following holdings with respect to those three issues:
- Gender-neutral terms in the Internal Revenue Code (the "Code") that refer to marital status—such as "spouse" and "marriage"—include, respectively, (1) an individual married to a person of the same sex if the couple is legally married under state law; and (2) such a marriage between individuals of the same sex. In addition, the terms "husband and wife," "husband" and "wife" are interpreted to include same-sex spouses. The Service believes that this result is consistent with the Supreme Court's statements about the Code in Windsor, avoids the serious constitutional questions that an alternate reading would create and is permitted by the text and purposes of the Code. Therefore, the Service concludes that, 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.
- The Service formally establishes a general rule in Revenue Ruling 2013-17 that, for federal tax purposes, the Service will recognize the validity of a same-sex marriage that was valid in the state where it was entered into, regardless of the couple's place of domicile. Under this rule, individuals of the same sex will be considered to be lawfully married under the Code as long as they were married in a state whose laws authorize the marriage of two individuals of the same sex, even if they are domiciled in a state that does not recognize the validity of same-sex marriages. The Service contends that a contrary rule would create substantial financial and administrative burdens on employers and administrators of employee benefit plans—for example, the need for and validity of spousal elections, consents and notices could change each time an employee, former employee or spouse moved to a state with different marriage recognition rules.
- For federal tax purposes, the term "marriage" does not include registered domestic partnerships, civil unions or other similar formal relationships recognized under state law that are not denominated as a marriage under that state's law, and the terms "spouse," "husband and wife," "husband" and "wife" do not include individuals who have entered into such a formal relationship. This conclusion applies regardless of whether individuals who have entered into such relationships are of the opposite sex or the same sex.
The Service concludes Revenue Ruling 2013-17 by stating that its holdings will be applied prospectively as of September 16, 2013. However, affected taxpayers may rely on its holdings for the purpose of filing original returns, amended returns, adjusted returns or claims for credit or refund for any overpayment of tax resulting from its holdings, provided the applicable limitations period for such claim has not expired (generally three years from the date the return was filed).
In addition, taxpayers may rely on Revenue Ruling 2013-17 retroactively with respect to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludible from income based on an individual's marital status. For example, if an employee made a pre-tax salary reduction election for health coverage and also elected to provide health coverage for a same-sex spouse on an after-tax basis under a group health plan sponsored by the employer, an affected taxpayer may treat the amounts that were paid by the employee for the coverage of the same-sex spouse on an after-tax basis as pre-tax salary reduction amounts.
The guidance in Revenue Ruling 2013-17 is likely to be welcome to employers who were questioning the treatment of their employees in light of the Windsor decision. However, employers and affected taxpayers should note that the holdings in Revenue Ruling 2013-17 are limited to federal tax treatment and do not address tax treatment at the state level. In addition, Revenue Ruling 2013-17 provides that the Service intends to issue further guidance on the retroactive application of Windsor to other employee benefits and employee benefit plans and arrangements. Such guidance will take into account the potential consequences of retroactivity applicable to all taxpayers involved, including the plan sponsor, the plan or arrangement, employers, affected employees and beneficiaries. The Service anticipates that the future guidance will provide sufficient time for plan amendments and any necessary corrections so that the plan and benefits will retain favorable tax treatment for which they otherwise apply.
The question of how same-sex couples legally married in one state but currently domiciled in a state that does not recognize the validity of a marriage between individuals of the same sex is settled by Revenue Ruling 2013-17. Such individuals will be treated as "married" for federal tax purposes. However, individuals who have entered into a registered domestic partnership or civil union will not be afforded such treatment for federal tax purposes.
About Duane Morris
Duane Morris attorneys assist employers with questions regarding Internal Revenue Service guidance on issues like this, as well as the option issues that the Service will address in future guidance.
For Further Information
If you have any questions about this Alert, please contact any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.