Same Sex Marriage and the IRS

Before I begin a discussion of what now may amount to old news, I wish to disclaim as follows. For some same sex marriage is a very emotional issue. And I am well aware that they are following it closely and therefore may know a great deal more than I.  Now that said, let’s get down to it. The Supreme Court has decided the Windsor case and has struck down section 3 of the Defense of Marriage Act which required same-sex spouses to be treated as unmarried for purposes of federal law. There, that seems simple enough. Now the sloppy part. A number of issues will have to be sorted out and IRS will have to get into the business of making important decisions in the very near future.  One example is whether the scope of the decision covers only same-sex couples married in a state that allows same-sex marriages and residing in that state. Will IRS look to the domicile of the same-sex couple to determine their rights? But the benefits to individuals who are properly covered by the decision are numerous. These persons will be entitled to file jointly. Unfortunately, they will also discover the pain of the marriage penalty depending upon the extent of their individual earnings. As was held in Windsor, married same-sex couples will be entitled to use the unlimited estate tax marital deduction and elect portability for any unused estate and gift tax exemption. For gift tax, they will qualify for gift splitting and transfers between them will be exempt. They will qualify for tax-free employer health coverage and may receive reimbursement under health flexible spending accounts. In the retirement area, married same-sex spouses will qualify for survivor death benefits under pension plans and favorable withdrawal rules will apply to those who inherit plans or IRAs. There is some question how IRS, reeling from scandal, losing its Commissioner, knee deep in health care reform rules and facing a reduced budget with forced closings and furloughs under sequester  will handle all of this. My guess will be poorly. Clients are perhaps best advised to file protective claims in anticipation of future IRS rulings. By this I mean, a claim for refund, deduction or credit must be timely filed pursuant to the revenue code. A protective refund claim hedges the client’s bet that any change will be favorable to their prior filed and paid tax returns. IRS has been receiving numerous such claims. Practitioners should note that a letter to IRS is most likely not sufficient to create a protective refund claim and that proper claims must be filed.