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Relationships & Law Today: IRS notice allows same-sex estate tax exclusions
by Matthew J. Ruza
2017-04-19

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The IRS, in conjunction with the Supreme Court's decision in Windsor, 133 S. Ct. 2675 ( 2013 ), issued Notice 2017-15, which now spells out the procedures same-sex married couples should use to recalculate the transfer-tax treatment for property transferred to spouses before the U.S. Supreme Court invalidated Section 3 of the Defense of Marriage Act ( DOMA ).

DOMA, which was enacted in 1996, defined marriage for federal law purposes as the legal union of one man and one woman. Under Section 3 of DOMA, same-sex marriage was not recognized for any federal purposes, including the filing of joint tax returns and the unlimited marital estate tax deduction. In Windsor, the Supreme Court held that Section 3 of DOMA was unconstitutional because it violated the Fifth Amendment's Due Process Clause by denying equal protection to same-sex couples who are lawfully married in their states.

This notice will prove to be very valuable for same-sex couples. According to the notice, the applicable exclusion amount from estate or gift taxes, originally only allowed for opposite-sex couples, now will be applied retroactively to same-sex couples. Same-sex couple taxpayers will now be permitted to establish that the estate tax or gift tax transfer qualified for the marital deduction and recover the applicable exclusion amount previously applied on a return.

What is even more valuable to same-sex couples is that this exclusion amount may still be applied even if the statute of limitations for that return has expired. If the limitations period has not expired, a same-sex couple may just file an amended return. However, if the limitations period has expired, the new IRS Notice allows the same-sex taxpayer to recalculate the exclusion amount as a result of recognizing the taxpayer's marriage to the taxpayer's same-sex spouse.

This complicated tax matter is best viewed through an example. Suppose, pre-Windsor, that John and Jim were a same-sex married couple and wished to purchase a home. John, the wealthier spouse, bought the house but placed the title in both John and Jim's names. If John and Jim had been opposite-sex couples during this time, John would not have used his gift tax exclusion amount by giving Jim half of the home. However, because DOMA caused John and Jim's marriage not to be recognized under federal law, John would have had to file a gift tax form because he gifted half of the house to Jim. If the purchase price of the house was $2 million, John would have made a gift to Jim of $1 million, and John would have had to pay $217,500.00 in federal gift taxes. Now, after the new IRS Notice, John can file an amended return ( assuming the statute of limitations has not ran ) and recoup the $217,500.00 tax he then had to pay to the federal government.

As you can see, prior to Windsor, if a taxpayer made a gift to his or her same-sex spouse, no estate or gift tax marital deduction was allowed and the taxpayer's applicable exclusion amount would have automatically applied to reduce the amount of the gift or estate tax due. This new IRS notice, now garners the same protections as every other opposite-sex couple under the eyes of federal tax law.

For same-sex married couples who were denied federal tax benefits prior to the issuance of the Windsor decision, the Notice is a major step towards the reconciliation of constitutional law concepts and the practical effects when applied to federal tax statutes. While it remains to be seen how the IRS will implement the relief described, the notice does not appear to be complex on its face and should allow for a simple procedure for same-sex couples.

Matthew J. Ruza is an Associate in the Litigation Practice Group in Clark Hill's Chicago Office.


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