BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AJR 29 - Feuer
Amended: June 16, 2010
Hearing: June 23, 2010 Fiscal: No
SUMMARY: Requests the Internal Revenue Service (IRS) Issue
a Revenue Ruling Stating the Federal Income Tax
Treatment of Community Property Rights of
Registered Domestic Partners and Same-Sex
Partners Defers to California Law
EXISTING STATE LAW provides that all property
"acquired by a married person during the marriage while
domiciled in California is community property" and that the
interests of the husband and wife in community property
during marriage are "present, existing and equal
interests."
EXISTING STATE LAW extends certain rights of married
couples to registered domestic partners (RDPs) who register
their partnership with the California Secretary of State.
"Domestic partners" are defined are 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 persons file a
Declaration of Domestic Partnership with the Secretary of
State and meet specific requirements.
EXISTING STATE LAW recognizes same-sex marriages for
couples granted licenses and married during the period of
June 16, 2008 through November 4, 2008. Strauss v. Horton,
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46 Cal.4th 364 (2009).
EXISTING STATE LAW requires RDPs and same-sex spouses
file state income tax returns using the same rules that
apply to heterosexual spouses. Accordingly, RDPs or
same-sex spouses who file separate income tax returns must
report one-half of the combined income earned by both
domestic spouses rather than their individual income for
the taxable year.
EXISTING FEDERAL LAW recognizes the characteristics of
property ownership, including community property, are
determined by the states, and taxation of that property is
determined by the federal government. Pursuant to the
IRS's Chief Counsel Advisory Memorandum 201021020 (CCA)
released May 28, 2010, for tax years beginning after
December 31, 2006, a California RDP must report one-half of
the community income, whether received in the form of
compensation for personal services or income from property,
on his or her federal income tax return. CCA materials are
written advice or instructions prepared by the Office of
Chief Counsel and issued to field or service center
employees of the IRS or Office of Chief Counsel. (See
Comment C)
THIS RESOLUTION makes a request from the Legislature
asking the IRS to issue a Revenue Ruling that applies the
legal analysis and conclusions of the May 28, 2010 IRS CCA
to both California RDPs and same-sex married couples. This
measure requests that, consistent with established legal
precedents, the IRS defer to California law on treatment of
property belonging to same-sex married spouses, including
the existence of community property, so that for tax years
beginning after December 31, 2010, when filing separate
federal income tax returns, each same-sex spouse must
include in his or her gross income one-half of the
community's income.
THIS RESOLUTION asks that for tax years beginning
before June 1, 2010, the Legislature requests that the
Revenue Ruling referred to above further determine that
same-sex married couples may, but are not required to,
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amend their returns to report income in accordance with the
Revenue Ruling (See Comment D). This resolution also makes
findings to support the request and resolves that the Chief
Clerk of the Assembly transmit copies of this resolution to
specified elected officials.
FISCAL EFFECT:
Committee Staff estimates that AJR 29 does not affect
state revenues.
COMMENTS:
A. Purpose of Resolution
According to the author, "This measure seeks equal
federal tax treatment for same-sex couples. Specifically,
it asks the IRS to issue a binding Revenue Ruling that for
federal income tax purposes, California registered domestic
partners and same-sex married couples must claim a
community property interest in the income of both partners,
instead of reporting all of each partner's income
separately without reference to the other partner's income.
Prior to the May 28, 2010 CCA, for federal income tax
purposes both California registered domestic partners and
same-sex spouses were required to report their incomes
separately and without reference to each other, and could
not claim a community property interest in their incomes.
As a result, in cases where partners or spouses were in
different tax brackets, the partners would pay more in
federal taxes. This faulty interpretation of the law was
set forth in an IRS Memorandum from February 24, 2006. Now
that California registered domestic partners must, for
federal income tax purposes, claim community property
rights in their income under the May 28, 2010 CCA, this
measure seeks the same treatment for California same-sex
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spouses."
B. Background
On September 19, 2003, the California Domestic Partner
Rights and Responsibilities Act of 2003 (Act) was enacted,
effective January 1, 2005 (AB 205, Goldberg, 2003). The
Act granted to RDPs "the same rights, protections, and
benefits and shall be subject to the same responsibilities,
obligations and duties under law whether they derive from
statutes, administrative agencies, court law, or any other
provisions or sources of law, as are granted to and imposed
upon spouses." However, the enacted version of the Act
deleted the original provision to allow RDPs to file joint
income tax returns for California state tax purposes and to
be taxed in the same manner as married couples. SB 1827 by
Senator Migden (Chapter 802 of the Statues of 2006) was
enacted to remove the inconsistencies created between RDPs
and spouses in the Act. Specifically, it permitted RDPs to
file their income tax returns jointly or separately,
similar to those terms governing spouses. Additionally,
the earned income of RDPs was recognized as community
property.
In 2005 a letter was sent to the Treasury Department
seeking guidance on how to file federal income tax forms
pursuant to the Act. Chief Counsel Advisory Memorandum
200608038, dated February 24, 2006, concluded an individual
who is a registered domestic partner in California must
report all of his/her income earned from the performance of
his/her personal services notwithstanding the enactment of
the Act. In its Memorandum, the IRS relied on Poe v.
Seaborn, 282 U.S. 101 (1930), which addressed the issue of
whether income earned by a husband is rightfully taxed to
his wife in a community property state. The Court held
that husband and wife were entitled to file separate
returns with each treating one-half of the community
property as his/her respective income. The Memorandum
stated, "The case law relating to income-splitting in
community property states has always arisen solely in the
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context of spouses?.We do not believe that the Poe v.
Seaborn decision applies to the application of a state's
community property law outside the context of a husband and
wife. In our view, the rights afforded domestic partners
under the California Act are not "made an incident of
marriage by the inveterate policy of the State." The
relationship between registered domestic partners under the
California Act is not marriage under California law.
Therefore, the Supreme Court's decision in Poe v. Seaborn
does not extend to registered domestic partners. "
The author asserts, "Although the IRS found in its
2006 Memorandum 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 registered domestic partners and same-sex married
couples under state law. In other words, the federal
government need not recognize the marital status of
registered domestic partners or same-sex married couples in
order to defer to state law characterizing their interests
in income as community property."
The IRS subsequently reversed its position in a Chief
Counsel Advisory Memorandum dated May 28, 2010,
declaring, in part, "By 2007, California had extended full
community property treatment (FN1) to registered domestic
partners. Applying the principle that federal law respects
state law property characterizations, the federal tax
treatment of community property should apply to California
registered domestic partners." (FN1) Prior to January 1,
2007, the earned income of a registered domestic partner
was treated as community property for state property law
purposes but not for state income tax purposes.
C. Speaking the Same Language
As the author states, "The IRS Chief Counsel Advisory
issued on May 28, 2010 deferred to California community
property law and granted equal federal tax treatment to
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California registered domestic partners filing separately,
but was silent as to treatment of same-sex married couples.
A CCA may not be cited as precedent. By contrast, an IRS
Revenue Ruling establishes a precedent. This resolution
requests a Revenue Ruling that requires both California
registered domestic partners and same-sex married couples
to report one-half of the community income on each of their
federal income tax returns."
A CCA is one of three types of IRS Written
Determinations. Written Determinations are documents the
IRS is required to make open to public inspection. They do
not contain propriety information ("Official Use Only") and
cannot be used or cited as precedent. A Revenue Ruling is
an official interpretation by the IRS of the Internal
Revenue Code, related statutes, tax treaties and
regulations. It is the conclusion of the IRS on how the
law is applied to a specific set of facts. Revenue rulings
are published in the Internal Revenue Bulletin for the
information of and guidance to taxpayers, IRS personnel and
tax professionals.
Functionally, for income tax purposes, the state
treats RDPs, married same-sex couples, and married
heterosexual couples the same. The IRS has indicated they
would be inclined to reach the same conclusions for
same-sex married couples based on state law making them
subject to community property rules. A Revenue Ruling
would solidify their position on both same-sex married
couples and RDPs; it would provide clarity and give all
taxpayers a documented decision on which to rely.
D. Technical Amendments
Committee staff suggests the following amendments for
clarification:
1. Page three, line six, after the word "CCA" insert
"and the California case law and statutes cited
above".
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2. Page three, line 16, strike "June 1, 2010" and
insert "January 1, 2011".
Support and Opposition
Support: Equality California (sponsor), Board of
Equalization Chair, Betty Yee, City and County of San
Francisco, Controller John Chiang, Treasurer Bill Lockyer,
City of West Hollywood, Sacramento Lawyers for the Equality
of Gays and Lesbians
Oppose: None received.
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Consultant: Mary Beth Faulkner