Equality or Dysfunction? State Tax Law in a Post-windsor World

• Publication year: 2022
• Citation: Vol. 47

47 Creighton L. Rev. 261. EQUALITY OR DYSFUNCTION? STATE TAX LAW IN A POST-WINDSOR WORLD

EQUALITY OR DYSFUNCTION? STATE TAX LAW IN A POST-WINDSOR WORLD

Nicholas A. Mirkay(fn*)

I. INTRODUCTION

Depending on one's religious and political proclivities, the United States Supreme Court's decision in United States v. Windsor(fn1) can either been seen as a progressive step towards equality(fn2) or a troublesome departure from traditional marriage norms.(fn3) Notwithstanding, from a federal tax perspective, the Windsor decision clearly raised a myriad of issues that spanned virtually the entire Internal Revenue Code (the "Code"), including but not limited to income taxes (including filing status), estate and gift taxes, payroll taxes, and the tax treatment of retirement account contributions and social security benefits. In the aftermath of Windsor, the Internal Revenue Service ("IRS") was left with a quandary in administering marital-status-dependent Code provisions: should it base its administration of the Code on the taxpayer's valid marriage in the state in which it was performed (commonly referred to as the "state of celebration" test) or the taxpayer's state of residence or domicile (commonly referred to as the "state of residence" test)? The IRS resolved most of the federal tax issues raised by Windsor in its issuance of Revenue Ruling 2013-17,(fn4) which chiefly adopted a state-of-celebration test for income and other tax purposes.(fn5) However, the ruling did not extend to quasi-marital statuses, such as domestic partnerships and civil unions, resulting in federal tax non-recognition and complexities for couples in those legally recognized relationships.(fn6)

Windsor also raised innumerable state and local taxation issues, particularly for the majority of the states that outright ban, or otherwise do not recognize, gay marriages. The Windsor decision's failure to completely repeal all provisions of the Defense of Marriage Act ("DOMA"),(fn7) specifically Section 2,(fn8) permits states to continue such bans or lack of recognition, resulting in significant state and local tax complexities for same-sex couples that reside in such states but chose to marry in one of the seventeen states (and District of Columbia) that permit it.(fn9) Thus, a post-Windsor world remains complex and uncertain for a majority of married same-sex couples.(fn10) As with federal taxation, for couples in a domestic partnership or civil union, their state and local taxation issues remain much as they did prior to Windsor and Revenue Ruling 2013-17 - complex and uncertain.

II. OVERVIEW OF UNITED STATES V. WINDSOR

Marriage and domestic relations have long been regarded as within the purview of state law.(fn11) However, states may not impose restrictions on marriages that violate the U.S. Constitution, including restrictions on opposite-race couples and those owing child support.(fn12) In 1993, the Hawaii Supreme Court issued the first state court decision to hold that a state statute restricting marriage to a male and female was unconstitutional as a "sex-based classification."(fn13) The decision was seen as the first step towards legalized marriage for same-sex couples.(fn14) Through its subsequent enactment of DOMA in 1996, Congress sought to "preempt the argument that states would have to recognize same-sex unions from other states,"(fn15) and rejected the long-established principle that marriage was a matter reserved for state law by providing a federal definition of marriage.(fn16) Section 2 of DOMA permits states to refuse to recognize same-sex marriages performed under the laws of other states.(fn17) Section 3 amended the United States Code to define "marriage" and "spouse" for federal law purposes:

In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word 'marriage' means only a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or awife.(fn18)

This definitional provision of DOMA was primarily at issue in Windsor.(fn19)

After a forty-three-year relationship, Edith Windsor and Thea Spyer celebrated their marriage ceremony in Canada in 2007.(fn20) Spyer died in 2009, leaving her entire estate to Windsor.(fn21) New York subsequently passed its Marriage Equality Act, permitting same-sex marriages in the state beginning on July 24, 2011.(fn22) Because they were both New York residents, Windsor and Spyer's Canadian marriage was validly recognized under New York law.(fn23) At the time of Spyer's death, DOMA effectively denied federal recognition of their marriage, thus precluding Windsor as the surviving spouse from qualifying for the federal estate tax marital deduction that excludes from estate tax "any interest in property which passes or has passed from the decedent to his [or her] surviving spouse."(fn24) Consequently, Windsor incurred $363,053 in estate taxes for which she sought a refund,(fn25) thus initiating the tax refund litigation that ended in the U.S. Supreme Court. In the ensuing litigation, Windsor claimed that DOMA violated her constitutional guarantee of equal protection under the law.(fn26)

The Supreme Court affirmed the lower courts' findings that DOMA violated Fifth Amendment due process and equal protection restraints on actions of the Federal Government.(fn27) The Court explained that "[t]he Constitution's guarantee of equality 'must at the very least mean that a bare congressional desire to harm a politically unpopular group cannot' justify disparate treatment of that group."(fn28) The Court further stated that DOMA departed from the typical deference to state definitions of marriage, thereby depriving same-sex couples of the benefits and responsibilities conferred by the federal recognition of their marriages.(fn29) Accordingly, DOMA resulted in a "disadvantage, a separate status, and so a stigma" upon all individuals lawfully participating in a same-sex marriage.(fn30) The Court determined that DOMA was enacted primarily to interfere with the "equal dignity of same-sex marriages . . . conferred by the States."(fn31) The resulting "second-class" treatment of same-sex marriages under DOMA, opined the Court, raised a "serious question" under the Fifth Amend-ment.(fn32) Finally, the Court found that the differing treatment of same-sex marriages not only "demeans the couple" but also "humiliates tens of thousands of children now being raised by same-sex couples."(fn33) The Court noted that the results of DOMA's unequal treatment of same-sex marriages have been numerous, including denial of government health benefits, inapplicability of certain protective criminal laws, taxation of health benefits to same-sex spouses, and denial or reduction of social security benefits.(fn34) For all of these reasons, the Supreme Court found DOMA to be unconstitutional and invalid, lacking any legitimate purpose for its denial of the equal protection of the laws to same-sex couples in states that permit their lawful marriages.(fn35)

The Windsor decision clearly is a step forward for same-sex marriage. Nevertheless, it presently has wide-reaching consequences as to federal and state tax issues for married same-sex couples, in part because the decision is limited to the seventeen states and the District of Columbia that currently sanction same-sex marriages (hereinafter, the "recognition states").(fn36) Because the decision left Section 2 of DOMA untouched,(fn37) the other thirty-three states are still not required to allow same-sex marriage nor recognize the same-sex marriages lawfully performed in the other states (hereinafter, the "non-recognition states").(fn38) Thus, same-sex couples married in a recognition state, but residing in a non-recognition state, will still incur differential treatment, as discussed further below. Justice Scalia's dissent seemed to foreshadow the difficult choice-of-law issues that would arise in a post-Windsor world:

Imagine a pair of women who marry in Albany [New York] and then move to Alabama, which does not "recognize as valid any marriage of parties of the same sex." . . . When the couple files their next federal tax return, may it be a joint one? Which State's law controls, for federal-law purposes: their State of celebration (which recognizes the marriage) or their State of domicile (which does not)? (Does the answer depend on whether they were just visiting in Albany?) Are these questions to be answered as a matter of federal common law, or perhaps by borrowing a State's choice-of-law rules? If so, which State's? And what about States where the status of an out-of-state same-sex marriage is an unsettled question under local law?(fn39)

The IRS's administrative response to Windsor-Revenue Ruling 2013-17-will answer at least one of the questions posed by Justice Scalia by providing that the state of celebration will govern for federal tax law purposes.(fn40) However, that ruling, like Windsor, is limited to valid state law marriages, and does not include other legally recognized relationships like civil unions and domestic partnerships.(fn41) The limitation of the IRS ruling, along with the continued validity of Section 2 of DOMA, will continue differentiating and complicating state law tax treatment for lawfully married same-sex couples that reside in a...