An Opinion
First, some basic rules on taxation. California and the United States are independent taxing entities and they have many significant and quirky little differences. That said, the federal rules of definition and interpretation are usually followed, but state law controls. As an example California says that income earned from the date of separation is the separate property of each party whereas Texas says income earned until the divorce is granted is community property until the divorce is granted. The feds don’t care and they follow the law of the individual state in that respect. On the other hand, federal law, §61 of the Internal Revenue Code, defines what income is and all of the states follow that definition. Alimony and the deduction for alimony is defined in §§71 and 215. The states follow those definitions.
Revenue and Tax Code §17024.5 was adopted in 1983 to conform most of California income tax law to the Internal Revenue Code so that basically you are following the federal tax law unless there are exceptions set out in the R & T Code.
Section §61 of the IRC is the fundamental section for the taxation of personal income and it states that income means all income from whatever source derived is income for tax purposes. In subsection (8) it lists “alimony” as one of the includible sources of taxable income.
Section §71 of the IRC defines includible income from alimony as (1) any payment in cash, (2) received under a divorce instrument, (3) where the instrument doesn’t define the payment as non-includible and non-deductible from income under §215, (4) not living in the same household and legally separated from his spouse (5) there is no obligation beyond death and (6) the payments are not disguised child support.
The correlative section - §215 – for deductibility, states that an individual may deduct any payment that is includible under §71.
California Spousal Support
California alimony is defined in §17081 as following the federal definition as outlined in the Internal Revenue Code and the correlative deductibility section, §17201 adopts those Internal Revenue Code sections relating to Additional Itemized Deductions for Individuals.
Domestic Partnership Act
California has adopted the Domestic Partnership Act, effective 1/1/05. The question is what effect does that Act have on tax law since we have two independent sets of laws that are intended to work interchangeably except when they are not.
What happens when a state law permitting same-sex marriages conflicts with the Federal Defense of Marriage Act?
Same-sex marriage became legal in Massachusetts on May 17, 2004. Their definition of a spouse indicates that a spouse is the person you are married to. But in our country, we have state and federal laws. Generally, marriage is under the jurisdiction of state law. So, if a state confirms the validity of a marriage, then the marriage is generally recognized under federal law. For example, being married means you are legally entitled to file a joint income tax return with your spouse. However, federal law can trump state law. So, before we conclude anything we need to review the federal law since most law on taxation is defined in the Internal Revenue Code, and in other federal laws and regulations.
In Section 3(a) of DOMA it states that “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, and the word 'spouse' refers only to a person of the opposite sex who is a husband or wife.” The word “spouse” is defined in a federal law entitled “The Defense of Marriage Act” (DOMA) which was enacted in 1996. The definition explicitly states that a spouse is a person of the opposite sex. The law is all encompassing, in that it applies to all federal laws, regulations, and agencies of the United States.
Summary
The conclusion that must be drawn is that under federal law there is no such thing as spousal support by virtue of the Defense of Marriage Act § 3(a) and under California law there is no spousal support under the Domestic Partnership Act, Family Code §297.5 (g) which requires Domestic Partners to follow federal law and which also precludes considering their joint income as community property income for tax purposes.
Outright Sales - The common problem that will no doubt arise is the division by the court or by agreement of jointly owned property. Under the DPA property acquired during the existence of the partnership will be divided under California’s community property division rules. Obviously that means if the partners have a property, which was purchased for $200,000 and has increased in value to $400,000 they have a potential built-in capital gain of $200,000 (remember we don’t care in any way about the encumbrance in computing capital gain). If they sell it they will have an equal tax consequence to the two of them on their $200,000 gain. If it also qualifies as a residence and both of their names are on title, they should both be entitled to an exclusion under IRC §121 of $250,000, Defense of Marriage Act notwithstanding. If it’s not qualified as a residence, there should be an equal tax impact to both partners under state and federal law in any event.
This is an opinion and any actual tax decisions should only be made after consultation with someone who actually knows what they are doing, such as a CPA or a tax attorney trained and knowledgeable in matters of dividing property and providing support in a family situation.
