How Decision Not To Defend The Defense Of Marriage Act Affects Same-Sex Married Couples' Taxes

Statement of the Attorney General on Litigation Involving the Defense of Marriage Act

The Attorney General has announced that the Justice Department will no longer defend the constitutionality of Section 3 of the Defense of Marriage Act, which denies recognition of same sex marriages for purposes of administering Federal law. However, Section 3 will remain in effect unless Congress repeals it or there is a final judicial finding that strikes it down. In the meantime, the government will continue to enforce it. This article examines how this controversial development could affect Federal taxes imposed on legally-married same-sex couples.

Observation: The decision not to defend Section 3 has no impact on same-sex couples who are not legally married.

Background. In ’96, Congress enacted, and President Clinton signed, the Defense of Marriage Act (DOMA) into law. Section 3 of DOMA defines marriage for purposes of administering Federal law as the “legal union between one man and one woman as husband and wife.” It further defines “spouse” as “a person of the opposite sex who is a husband or wife.”

Statement of Attorney General. The Attorney General's statement notes that, in the two years since the Obama Administration took office, the Justice Department has defended Section 3 of DOMA on several occasions in federal court. Until recently, those cases were in jurisdictions in which binding circuit court precedents hold that laws singling out people based on sexual orientation, as DOMA does, are constitutional if there is a rational basis for their enactment. While the President opposes DOMA and believes it should be repealed, the Justice Department has defended DOMA because it was able to advance reasonable arguments under the rational basis standard.

More recently, Section 3 of DOMA has been challenged in two cases in the Second Circuit, which has no established or binding standard for how laws concerning sexual orientation should be treated. These cases are Pedersen v. OPM, No. 3:10-cv-1750 (D Conn) and Windsor v. U.S., No. 1:10-cv-8435 (SD NY).

Pedersen challenges the federal government's denial of marriage-related protections in multiple areas of federal law including federal income taxation.

Windsor challenges the denial of an estate tax marital deduction to the estate of a woman who was married in Canada in May 2007 to her same-sex partner of 40 years. New York state, where the couple resided, recognized the marriage but the federal government denied the marital deduction because of Section 3 of DOMA.

The Attorney General's statement notes that, in these cases, the Administration faces for the first time the question of whether laws regarding sexual orientation should be subject to a more rigorous standard. After careful consideration, the President has concluded that classifications based on sexual orientation should be subject to a more heightened standard of scrutiny. The President has also concluded that Section 3 of DOMA, as applied to legally married same-sex couples, fails to meet that standard and is therefore unconstitutional.

As a result, upon the President's instruction, the Justice Department won't defend the constitutionality of Section 3 of DOMA as applied to same-sex married couples in Pedersen and Windsor. Members of Congress have been informed so that they may defend the statute if they wish.

Furthermore, pursuant to the President's instructions, the Attorney General will instruct Justice Department attorneys to advise courts in other pending DOMA litigation that a heightened standard should apply, that Section 3 is unconstitutional under that standard, and that the Justice Department will cease defense of Section 3.

Section 3 of DOMA will continue to remain in effect unless Congress repeals it or there is a final judicial finding that strikes it down and the Executive Branch will continue to enforce the law.

Federal tax impact on married same-sex couples. This is obviously a big development for legally married same-sex couples. If the law is repealed, or struck down, legally married same-sex couples may be able to secure tax breaks that are presently available only to legally married couples of the opposite sex. These include:

... the right to file a joint return, which can produce a lower combined tax than the total tax paid by the same-sex spouses filing as single persons;

... the possible opportunity to get tax-free employer health coverage for the same-sex spouse;

... the possibility of more easily obtaining a dependency exemption for the same-sex spouse;

... the opportunity for either same-sex spouse to utilize the marital deduction to transfer unlimited amounts during life to the other same-sex spouse free of gift tax;

... the opportunity for the estate of the first same-sex spouse to die to get a marital deduction for amounts transferred to the surviving same-sex spouse;

... the opportunity for the estate of the first same-sex spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving same-sex spouse; and

... the opportunity for a surviving same-sex spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first same-sex spouse under more favorable rules than apply for nonspousal beneficiaries (which same-sex spouses presently must use).

In addition to tax breaks, there are numerous other benefits that could derive for a married same-sex couple whose marriage is respected under Federal law. These include, for example, social security spousal protections; the opportunity for the spouse to stay in the family residence should the other spouse need Medicaid for nursing home care; and various benefits provided for spouses of federal employees.

Observation: Presumably, IRS will issue guidance on what legally married same-sex couples can do to make protective refund claims should Section 3 of DOMA be repealed or struck down.

Recommendation: In the meantime or in the absence of any guidance from IRS, one option for legally married same-sex couples would be to file their return applying the current rules denying their marital status. Subsequently, they can file an amended return claiming a tax break that is currently allowable only to spouses of the opposite sex. In making such a claim or claims, they should disclose that they are a legally married same-sex couple and are making the claim on the basis that Section 3 of DOMA is unconstitutional. Presumably, under the policy of continued enforcement, IRS will deny the claim. After IRS denies the claim, the couple can then sue for a refund in district court, which may produce a favorable result as occurred in Nancy Gill, et al. v. Office of Personnel Management, et al., (DC MA 07/08/2010) 106 AFTR 2d 2010-5154.

Observation: If the couple does not have the resources or desire to proceed with a suit, at the very least they will have made a timely claim that may preserve their opportunity to get a refund in the event the law is repealed or struck down.