BILL ANALYSIS
AJR 29
Page 1
Date of Hearing: April 12, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AJR 29 (Feuer) - As Amended: March 15, 2010
Majority vote.
SUBJECT : Federal income tax: domestic partners
SUMMARY : Asks the Internal Revenue Service (IRS) to reconsider
a specified memorandum and to issue a new memorandum with
respect to the federal income tax treatment of property rights
of registered domestic partners (RDPs) and same-sex spouses.
Specifically, this resolution :
1)Contains the following findings and declarations:
a) On February 24, 2006, the IRS issued a memorandum (IRS
Memorandum) indicating that an individual who is a RDP in
California must report all of his/her income earned from
the performance of his/her personal services,
notwithstanding the California Domestic Partner Rights and
Responsibilities Act of 2003;
b) For federal income tax purposes, California RDPs may not
claim a community property interest in the income of both
partners, but instead have to report all of each RDP's
income separately, without reference to the income of the
other partner;
c) The IRS Memorandum found that state community property
laws apply only to a husband and wife in a heterosexual
marriage, and not outside that context;
d) The IRS Memorandum further indicated that the rights
afforded RDPs under the California Domestic Partner Rights
and Responsibilities Act of 2003 were not made an incident
of marriage by the inveterate policy of the state and that
the relationship between RDPs was not marriage under
California law, and that accordingly they could not file
separately with each claiming one-half of the community's
total earned income for federal tax purposes;
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e) Federal case law holds that the characteristics of
property ownership, including community property, are
determined by the states, and taxation of that property is
determined by the federal government;
f) The Supreme Court of the United States has held that the
IRS must defer to state law determining property ownership,
including the existence of community property;
g) Pursuant to a Presidential Memorandum Regarding
Preemption that the White House issued on May 20, 2009,
preemption of state law by executive departments and
agencies should be undertaken only with full consideration
of the legitimate prerogatives of the states and with a
sufficient legal basis for preemption;
h) California statutes and case law confirm that RDPs and
married same-sex couples whose marriages remain valid under
California law have the same rights and responsibilities
under California law as different-sex married couples,
including those rights and responsibilities related to
community property, and further, that California income tax
reporting is the same for RDPs and married individuals;
and,
i) Property, including income, acquired while domiciled in
California by RDPs or married same-sex couples whose
marriages are still valid in California, is community
property under California law.
2)Asks the IRS to reconsider the IRS Memorandum and to issue a
new memorandum based on the fact that settled federal law
acknowledges the state's role in defining property rights and
the federal government's role in deciding how it will be taxed
for federal purposes.
3)Notes that SB 1827 (Migden), Chapter 802, Statutes of 2006,
corrected an exception for state income tax purposes of earned
income from RDPs' community property under AB 205 (Goldberg),
Chapter 421, Statutes of 2003, such that California RDPs and
same-sex spouses now are required to file state income tax
returns using the same rules that apply to heterosexual
spouses, including the choice between filing jointly or
separately with a reference to the filer's marital or
registration status, thus making California income tax
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reporting the same for RDPs and married individuals regardless
of sexual orientation.
4)Requests that, consistent with established legal precedents,
the IRS defer to California law on the treatment of property
belonging to RDPs and same-sex spouses, including the
existence of community property, so that when filing separate
federal income tax returns, each RDP and same-sex spouse
should include in his/her gross income one-half of the
community's income.
EXISTING STATE LAW :
1)Provides that, as a general rule, all property acquired by a
married person during the marriage while domiciled in
California is community property. As a result, a spouse in
California who files his/her tax return separately must
include in gross income one-half of the combined community
income of both spouses.
2)Defines "domestic partners" as two adults who have chosen to
share one another's lives in an intimate and committed
relationship of mutual caring. A domestic partnership is
established when both parties file a Declaration of Domestic
Partnership with the Secretary of State, provided the
following requirements are met:
a) Both individuals have a common residence;
b) Neither person is married to someone else or is a member
of another domestic partnership with someone else;
c) The two individuals are not related by blood in a way
that would prevent them from being married to each other in
this state;
d) Both individuals are at least 18 years old;
e) Both individuals are members of the same sex, or one of
the individuals meets eligibility criteria for social
security benefits; and,
f) Both individuals are capable of consenting to the
domestic partnership.
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3)Provides that RDPs have the same rights, protections, and
benefits, and are subject to the same responsibilities,
obligations, and duties under law, whether they derive from
statutes, administrative regulations, court rules, government
policies, common law, or any other source of law, as are
granted to and imposed upon spouses.
4)Requires RDPs who file separate income tax returns to each
report one-half of the combined community income earned by
both domestic partners, as spouses do, rather than their
respective individual incomes for the taxable year.
EXISTING FEDERAL LAW provides that California RDPs and same-sex
spouses must report their incomes separately and cannot claim a
community property interest in their incomes.
FISCAL EFFECT : Unknown.
COMMENTS :
1)The author has provided the following statement in support of
this resolution:
This measure seeks equal federal tax treatment for same-sex
couples. Because California [RDPs] and same-sex spouses
must report their incomes separately for federal purposes,
those individuals in a higher income tax bracket than their
partners must pay more federal taxes. This faulty
interpretation of the law is set forth in an IRS Memorandum
from February 24, 2006.
Although the IRS stated that state community property laws
apply only to a husband and wife in a heterosexual
marriage, implicating the federal Defense of Marriage Act,
that Act has nothing to do with the evaluation of the
property rights of [RDPs] and same-sex married couples
under state law. In other words, the federal government
need not recognize the marital status of [RDPs] or same-sex
married couples in order to defer to state law
characterizing their interests in income as community
property.
Federal case law holds that states, not the federal
government, determine the characteristics of property
ownership. So for federal income tax purposes the federal
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government - in this case the IRS - must respect
California's community property rights, which are granted
to both married couples and [RDPs].
This Joint Resolution will be sent to the IRS asking it to
reconsider its statements in the February 2006 Memorandum
and issue a new Memorandum deferring to California law so
that [RDPs] and same-sex married couples receive the same
tax treatment from the federal government as they do under
California law.
2)Proponents state, "In our federal system, family and property
rights are matters of state law. Traditionally, federal tax
authorities recognize state law when applying tax provisions
based on family relationships or community property rights.
The [IRS Memorandum] deviates from this central principle of
our federal system. It should be reconsidered as called for
in AJR 29." In addition, proponents state, "Same-sex couples
in California have legal rights under the Domestic Partner
Rights and Responsibilities Act of 2003 and the California
Supreme Court's 2009 decision in Strauss v. Horton . For state
and federal tax purposes, these are the law of the land.
Federal tax authorities must respect the legal rights of
same-sex couples similar to the manner in which they have
recognized other state law-based family and property
relationships."
3)Opponents state, "This bill would allow the minority in this
state to once again speak for the majority. The people of
this great State have voiced their opinion about who makes up
the family . . . not once but twice. This country was founded
on the fact that the individual could participate in the
process . . . and that the majority rule. Again - the
MAJORITY of the citizens of this state have already decided
the formation of the family - please do not step on us yet
again by choosing to ignore our voices and how this country is
supposed to work."
4)Committee Staff Comments:
a) Community Property Income : In community property states
like California, property that spouses acquire during their
marriage is generally regarded as owned by them together,
with each owning an undivided interest in the whole
property. Similarly, income from the property is divided
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equally between them. While each state has different rules
for classifying income as either separate or community
property, under the general rule, salaries, wages, and
other compensation for the services of either spouse are
considered community income. Thus, if a married couple
residing in a community property state files separate
returns, one-half of the community income must be reported
by each spouse.
b) Treatment of RDPs under California Law : Existing law
provides that RDPs have the same rights, protections, and
benefits, and are subject to the same responsibilities,
obligations, and duties under law, whether they derive from
statutes, administrative regulations, court rules,
government policies, common law, or any other source of
law, as are granted to and imposed upon spouses. This
includes community property rights. Thus, RDPs who file
separate income tax returns must each report one-half of
the combined income earned by both domestic partners, as
spouses do, rather than their respective individual incomes
for the taxable year.
c) The IRS Memorandum : On February 24, 2006, the IRS's
Office of Chief Counsel issued a memorandum addressing the
manner in which the California Domestic Partner Rights and
Responsibilities Act of 2003 is to be taken into account in
computing the federal income tax of a RDP. Specifically,
the IRS Memorandum addressed the question of whether a
California RDP is required to include in gross income all
of his/her earned income or one-half of the combined income
earned by the RDP and his/her partner. The IRS Memorandum
concluded that a California RDP must report all of his/her
income earned from the performance of his/her personal
services. In reaching this conclusion, the IRS Memorandum
acknowledged that, in 1930, the United States Supreme Court
held that a married couple in Washington was entitled to
file separate returns, each treating one-half of the
community income as his/her respective income. Poe v.
Seaborn , 282 U.S. 101 (1930). (See also United States v.
Malcolm , 282 U.S. 792 (1931), which applied the holding in
Poe v. Seaborn to California's community property regime.)
Nevertheless, the IRS Memorandum concluded, with little
explanation, that, "The relationship between [RDPs] under
[California law] is not marriage under California law.
Therefore, the Supreme Court's decision in Poe v. Seaborn
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does not extend to [RDPs]." Consequently, for federal tax
purposes, an individual who is a RDP in California must
report all of his/her income earned from the performance of
his/her personal services, notwithstanding California law.
d) Treatment of RDPs and Same-Sex Spouses under Federal
Law : As noted above, for federal income tax purposes,
California RDPs and same-sex spouses must report their
incomes separately and cannot claim a community property
interest in their incomes. The author notes that, in cases
where the partners or spouses are in different tax
brackets, this results in the partners paying more in
federal taxes.
e) What Would This Joint Resolution Do? : AJR 29 asks the
IRS to reconsider the IRS Memorandum and to issue a new
memorandum with respect to the federal income tax treatment
of property rights of RDPs and same-sex spouses. The
author notes, "Although the IRS found that state community
property laws apply only to a husband and wife in a
heterosexual marriage, implicating the federal Defense of
Marriage Act, that Act has nothing to do with the
evaluation of the property rights of [RDPs] and same-sex
married couples under state law." The author also notes
that the federal government need not recognize the marital
status of RDPs or same-sex spouses to defer to state law
charactering their interests in income as community
property.
f) Related Legislation :
i) AB 26 (Migden), Chapter 588, Statutes of 1999,
established California's first domestic partnership
statute. AB 26 defined domestic partners as "two adults
who have chosen to share one another's lives in an
intimate and committed relationship of mutual caring" and
who file a Declaration of Domestic Partnership with the
Secretary of State. (Family Code Section 297.)
ii) AB 25 (Migden), Chapter 893, Statutes of 2001,
expanded the group of individuals entitled to register as
domestic partners, and conferred various new legal rights
on all RDPs. With respect to state tax law, AB 25
provided that the domestic partner of a taxpayer shall be
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treated as the spouse of the taxpayer for purposes of
applying the following provisions of the Internal Revenue
Code (IRC):
(1) IRC Section 105(b), which governs the income
tax treatment of amounts received under accident and
health plans;
(2) IRC Section 106(a), which governs the
exclusion from gross income of employer-provided
coverage under an accident or health plan;
(3) IRC 162(l), which governs the tax treatment of
health insurance costs of self-employed individuals;
(4) IRC 162(n), which provides special rules for
certain group health plans; and,
(5) IRC 213(a), which governs the deduction for
medical and dental expenses.
iii) AB 205 (Goldberg), Chapter 421, Statutes of 2003,
established the California Domestic Partner Rights and
Responsibilities Act of 2003. Specifically, AB 205
provided that RDPs have the same rights, protections, and
benefits, and are subject to the same responsibilities,
obligations, and duties under law as are granted to and
imposed upon spouses. AB 205 provided that, in filing
their state income tax returns, RDPs must use the same
filing status used on their federal income tax returns.
In addition, AB 205 provided that earned income may not
be treated as community property for state income tax
purposes.
iv) SB 1827 (Migden), Chapter 802, Statutes of 2006, was
enacted in response to the inequalities created by the
California Domestic Partner Rights and Responsibilities
Act of 2003. Specifically, SB 1827 contained legislative
findings noting that, "The differential treatment of
[RDPs] with respect to state income taxes discriminates
on the bases of sex and sexual orientation, imposes
unfair tax burdens on many [RDPs], and is inconsistent
with the policy underlying the domestic partnership laws
of reducing discrimination on the bases of sex and sexual
orientation in a manner consistent with the requirements
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of the California Constitution." Thus, SB 1827 allowed
RDPs to either file (a) a joint state income tax return,
or (b) separate state income tax returns by applying the
standards applicable to spouses who file separately under
federal income tax law. In addition, SB 1827 applied
California's community property rules to RDPs. As a
result of SB 1827, RDPs who file separate income tax
returns each must report one-half of the combined income
earned by both partners, as spouses do, rather than their
respective individual incomes for the taxable year.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
Board of Equalization Chairwoman Betty T. Yee
California State Controller John Chiang
City and County of San Francisco
Bill Lockyer, State Treasurer
Opposition
1 individual
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098