No Income Splitting for Domestic Partners: How the IRS Erred

By Dennis J. Ventry Jr. Dennis J. Ventry Jr. is a visiting scholar in taxation at the UCLA School of Law. On February 24 the IRS issued guidance on the federal income tax treatment of registered domestic partners in California. 1 The guidance was long overdue. 2 More sig- nificantly, it closed the door on California registered domestic partners who were considering splitting in half the combined domestic partnership income from prop- erty and services for purposes of filing federal income taxes. This article demonstrates that the IRS got it wrong in its unpersuasive, historically inaccurate, and ulti- mately indefensible memorandum. Introduction The California Domestic Partner Rights and Respon- sibilities Act (enacted Sept. 14, 2003; effective Jan. 1, 2005) grants registered domestic partners the same ‘‘rights, protections, and benefits’’ as married couples under California’s community property regime. 3 The law also provides that California domestic partners (a category that includes both same-sex partners and opposite-sex couples in which one partner has reached age 62 and is qualified for old age benefits under Social Security) ‘‘shall Chief Counsel Memorandum 200608038, Doc 2006-3875, 2006 TNT 39-13 (Feb. 24, 2006). Practitioners and scholars have been requesting advice from the IRS for over a year. In December 2005, with the tax return filing season quickly approaching, the California Society of Certified Public Accountants (CalCPA) appealed to the IRS for help. ‘‘We understand that the IRS has been reviewing these and other issues associated with the California Domestic Partner Act for some time . . . and we urge you to issue public guidance as to how to address these issues as early as possible.’’ Guidance, CalCPA pleaded, ‘‘is needed quickly.’’ Doc 2006-268, 2006 TNT 4-42 (Jan. 6, 2006). Similarly, in early February 2006, Pat Cain of the University of Iowa College of Law expressed frustration with the lack of guidance. ‘‘The continued silence from the IRS on this and other tax issues involving registered domestic partners in California leaves a significant number of responsible taxpayers with virtually no guidance.’’ Patricia A. Cain, ‘‘Reli- tigating Seaborn: Taxing the Community Income of California Registered Domestic Partners,’’ University of Iowa Legal Stud- ies Research Paper No. 05-39, p. 9 (February 2006), available at http://www.ssrn.com/abstract=881763. California Family Code section 297(a). TAX NOTES, March 13, 2006 be subject to the same responsibilities, obligations, and duties under law, whether they derive from statutes, administrative regulations, court rules, government poli- cies, common law, or any other provisions or sources of law, as are granted to and imposed upon spouses.’’ 4 Thus, there is a presumption — as there is for opposite- sex married couples during marriage — that all income and property acquired during the domestic partnership is community property, with each spouse enjoying equal ownership interests. Despite equivalent ownership interests of registered domestic partners under California’s community prop- erty law, the IRS concluded in the memorandum that registered domestic partners can’t split income. A Cali- fornia domestic partner, the memorandum concluded, ‘‘must report all of his or her income earned from the performance of his or her personal services.’’ 5 The IRS reached that conclusion even though domestic partners possess ownership interests under California community property law identical to ownership interests enjoyed by opposite-sex married spouses; that is, ownership inter- ests that have allowed California husbands and wives to split income in half when filing federal income taxes for a period that predates by nearly 20 years the enactment of the income-splitting joint return in 1948. The analysis contained in the memorandum relied heavily on Poe v. Seaborn, the 1930 Supreme Court case granting income-splitting privileges to married couples in the community property state of Washington. 6 The following year, the Supreme Court applied the same analysis to California’s community property law in United States v. Malcolm, holding that a wife in California possessed sufficient ownership interests in combined community income and property to justify allowing each spouse to report and pay tax on one-half of that income. 7 According to the IRS, the Supreme Court’s decision in Poe v. Seaborn does not apply to the application of Id. Supra note 1, p. 1. Poe v. Seaborn, 282 U.S. 101 (1930). The Court held similarly in the three companion cases to Seaborn covering married couples in the community property states of Arizona, Louisiana, and Texas. Those cases included Goodell v. Koch, 282 U.S. 118 (1930) (Arizona); Hopkins v. Bacon, 282 U.S. 122 (1930) (Texas); and Bender v. Pfaff, 282 U.S. 127 (1930) (Louisiana). United States v. Malcolm, 282 U.S. 792 (1931). The Court’s rulings in Malcolm and Seaborn prompted the Bureau of Internal Revenue (later the IRS) to extend the holdings to the remaining three community property states of Idaho, Nevada, and New Mexico. Bureau of Internal Revenue, Internal Revenue Bulletin, Mimeograph 3853, Cumulative Bulletin X, Part 1 (January-June 1931), pp. 139-140. (C) Tax Analysts 2006. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. No Income Splitting for Domestic Partners: How the IRS Erred