Same-sex relationships, DOMA, and the Tax Code: rethinking the relevance of DOMA to straight couples.

• Author: Terry, Keeva
• Position: Defense of Marriage Act

INTRODUCTION

According to Professor Derrick Bell's seminal article describing his Interest Convergence Theory, the interests of Blacks are only accommodated when they coincide with the interests of Whites. (1) By analogy, the interests of same-sex couples are only accommodated when they coincide with the interests of heterosexual couples. (2) The elimination of discriminatory provisions that cause heterosexual married couples to pay more federal income tax than their same-sex counterparts might just be the mutually beneficial interest necessary to prompt Congress to recognize same-sex legal unions.

Current federal income tax laws require certain heterosexual married couples to pay more federal income tax than domestic partners (3) and same-sex married couples who earn identical incomes. (4) Most domestic partners are same-sex couples not allowed to marry one another. (5) In an earlier article, I recommended that Congress create a new federal income tax filing category to eliminate these disparities and to equalize the tax liability between heterosexual married couples and their same-sex counterparts. (6) If Congress finds this recommendation untenable, this Article proposes another solution to mitigate these inequalities: Repeal Section 3 of the Defense of Marriage Act ("DOMA") which, for federal purposes, limits the definition of marriage to heterosexual marriage ("DOMA's Marriage Definition"). (7)

For purposes of federal law, DOMA defines marriage as "only a legal union between one man and one woman as husband and wife" and limits the application of the term spouse to "a person of the opposite sex who is a husband or a wife." (8) In effect, DOMA precludes the recognition of same-sex marriage for purposes of federal law. (9) There has been ample litigation involving DOMA, but most of the litigation has focused on how DOMA harms same-sex couples (10) with little attention paid to the inequities DOMA creates for heterosexual couples. Economically, DOMA causes many heterosexual married couples to pay more federal income tax than same-sex married couples who earn identical taxable income. (11) While DOMA's legislative history clearly indicates that Congress intended for DOMA to have the effect of "defending and nurturing the institution of traditional, heterosexual marriage," (12) the tax inequities DOMA creates undermines this intent. DOMA blatantly exposes the marriage tax penalty, (13) possibly discouraging traditional, heterosexual marriage in the process. (14) DOMA also adversely impacts the federal budget, thereby restricting available resources for the general public. (15) Additional tax revenues would be generated if same-sex marriage were recognized for purposes of federal law. (16) Contrary to what many may think, the Congressional Budget Office has determined that recognition of same-sex marriage would have a positive net impact on the bottom line of the federal budget. (17)

This Article endorses recent decisions made by the Internal Revenue Service ("IRS") with respect to the federal income taxation of domestic partners and same-sex married couples. First, this Article confirms that the federal income tax inequality between domestic partners and heterosexual married couples is compelled under current federal income tax laws (18) and DOMA does not preclude this federal income tax disparity. (19) Second, this Article shows that same-sex married couples should calculate income for federal income tax purposes in the same manner as heterosexual married couples. (20) In the absence of DOMA, married couples would be taxed equally for federal income tax purposes, but DOMA compels disparate federal income tax liabilities between same-sex married couples and heterosexual married couples, often to the detriment of heterosexual married couples. (21) Congress should act to equalize these tax liabilities. (22) Even those who find the federal income tax inequality between domestic partners and heterosexual married couples tolerable because domestic partnership is not identical to marriage must agree that there is something different about marriage. Once married, all married couples should be taxed equally. This Article ultimately concludes that the repeal of DOMA's Marriage Definition, 1 U.S.C. [section] 7, is the first step necessary to restore equity, not only on behalf of same-sex couples, but also for the benefit of heterosexual couples as well.

Part I of this Article describes the federal income tax disparities that exist under current law because of Congress' refusal to recognize domestic partnerships and same-sex marriages. Part II examines the tax treatment of domestic partners by the Internal Revenue Service and the impact of DOMA on domestic partnerships in contrast to marriage. Part II establishes that the plain language and legislative history of DOMA do not support DOMA's application to domestic partnerships or any other legal union that is not marriage. (23) Part III considers the IRS treatment of same-sex married couples and the proper way for same-sex married couples to calculate income for federal income tax purposes. Premised upon longstanding federal income tax principles which dictate that the test of taxability is ownership determined pursuant to state law, (24) Part III argues that DOMA does not change determinations of ownership. Ultimately, Part III concludes that same-sex married couples should calculate income for federal income tax purposes in the same manner as heterosexual married couples.

1. The Refusal by Congress to Recognize Same-Sex Legal Unions Creates Federal Income Tax Disparities

The federal income tax disparities between heterosexual married couples and their same-sex counterparts will surely increase as more states recognize same-sex marriages and domestic partnerships. This Article uses California as a case study to explore these federal income tax disparities. California is a particularly useful case study because it is a community property state (25) that recognizes and bestows the same rights and responsibilities upon three kinds of legal unions: domestic partnership, same-sex marriage, and heterosexual marriage. (26) However, for federal income tax purposes, only one of these legal unions--heterosexual marriage--is recognized and allowed to file jointly. (27)

The IRS recently released a memorandum from the Office of Chief Counsel addressing the federal income tax consequences of the full extension of community property rights to domestic partners ("IRS Memorandum"). (28) A domestic partner must report one-half of community (household) income, (29) whether received in the form of compensation for personal services or income from property, on his or her federal income tax return. (30) Table 1 reveals the federal income tax inequality that currently exists between domestic partners and heterosexual married couples. (31)

The IRS also recently issued guidance in one of its publications instructing each same-sex married person domiciled in California to report one-half of community (household) income on his or her federal income tax return. (32) Table 2 exposes the federal income tax disparity that currently exists between same-sex married couples and heterosexual married couples. (33) This disparity exists solely because of DOMA.

One critical reason for the federal income tax disparity is the filing status accorded each legal union. (34) Same-sex married couples and domestic partners are not permitted to file jointly for federal income tax purposes, but heterosexual married couples are required to file as married persons. (35) For federal income tax purposes, married persons must generally file their federal income tax returns in one of two filing categories: married filing jointly or married filing separately. (36) Married filing jointly means that both spouses file one joint federal income tax return that reflects the combined income of both spouses. (37) Married filing separately means that each spouse files a separate federal income tax return that reflects only that spouse's respective income. (38) Congress has structured the Internal Revenue Code (the "Code") (39) such that the federal income tax liability of the joint return when couples file married filing jointly is almost always less than the sum of the federal income tax liabilities from both separate returns when couples file married filing separately. (40) As a result, most married persons file their federal income tax returns as married filing jointly.

Individuals who are not married for federal income tax purposes are not permitted to file jointly. (41) Married filing separately has a completely different and less beneficial rate structure than the filing categories for single persons who are not married for federal income tax purposes. (42) A marriage tax penalty occurs whenever a married couple pays higher federal income taxes as a result of their marriage than they would pay if they remained unmarried and filed individual returns. (43) The federal income tax disparities shown in Tables 1 and 2 reflect the marriage tax penalty incurred by heterosexual married couples as a result of their marriage, but not incurred by domestic partners and same-sex married couples who are not recognized as married persons for purposes of federal law. (44)

Clearly, disparities currently exist between the federal income tax liabilities of heterosexual married couples and domestic partners and same-sex married couples. An opportunity for interest convergence is present because the elimination of discriminatory provisions that cause heterosexual married couples to pay more federal income tax than their same-sex counterparts accommodates the interests of both heterosexual and same-sex couples.

2. DOMA Has No Bearing on the Federal Income Taxation of Domestic Partners

   DOMA was enacted in 1996 in response to concerns that the Supreme Court of Hawaii was going to legalize same-sex marriage. (45) Proponents of DOMA...