On June 26, 2013, in United States v. Windsor, 570 U.S. ___ (2013), the Supreme Court of the US upheld the Court of Appeals for the Second Circuit (the “Appeals Court”) decision in Windsor v. US, which upheld a challenge to Section 3 of the Defense of Marriage Act (“DOMA”). DOMA denies recognition of same-sex marriages for purposes of administering federal law.
In 1993 the taxpayer and the decedent registered as a domestic partnership in New York City and got married in Canada in 2007. Decedent died in February of 2009 leaving her entire estate to Taxpayer, which was above the $3.5 million estate tax exemption. Citing DOMA the IRS claimed the estate did not qualify for the unlimited marital deduction under Section 2056(a) of the Internal Revenue Code. As a result, the estate had to pay $363,053 in federal estate tax. On November 9, 2010, Taxpayer commenced a suit in district court for a refund of the federal estate tax and a declaration that DOMA violates the Equal Protection Clause of the 5th Amendment.
The District Court applied a rational basis standard and held that DOMA was unconstitutional and that Taxpayer was entitled to a refund of the federal estate tax. The Appeals Court upheld the district court opinion. The Appeals Court found that homosexuals are a quasi-suspect class entitled to heightened scrutiny and DOMA’s classification of same-sex spouses wasn’t substantially related to an important government interest and was unconstitutional.
The Supreme Court found Section 3 of DOMA to be unconstitutional “as a deprivation of the liberty of the person protected by the Fifth Amendment.” Justice Kennedy’s decision to strike down Section 3 of DOMA cited the principles of state autonomy, equal protection and liberty. Agreeing with the Appeals Court, the decision states that homosexuals are a quasi-suspect class entitled to heightened scrutiny and DOMA’s classification of same-sex spouses wasn’t substantially related to an important government interest.
The scope of the Windsor decision is not yet known and may bring about a lot of litigation. The Tenth Amendment to the United States Constitution states the solidifies the principle of federalism by providing that powers not granted to the federal government by the Constitution, nor prohibited to the States, are reserved to the States or the people. Thus, each state has the power to outlaw same-sex marriages. For example, how will same-sex couples married in a state that allows a same-sex marriage be treated in a state that outlaws such marriage? This will almost certainly result in litigation and it will be interesting to see if state laws regarding same-sex marriages will be respected or not.
In the meantime, there are plenty of federal tax implications that will keep attorneys and CPAs busy. For example, same-sex married couples should consult their advisers to consider filing protective claims for income tax refunds for 2010, 2011 and 2012 if the couple’s income taxes would be reduced by filing jointly. Further, the surviving spouse of a same-sex married couple should consult their advisers to consider filing an estate tax return for portability if their spouse died in 2011 or 2012.
Important: In the aftermath of the Windsor decision, same-sex married couples will have all of the tax benefits available to heterosexual married couples. Thus, same-sex couples will be entitled to the portability election, the unlimited estate and gift tax marital deductions, and the many income tax benefits available to married couples. Thus, same-sex married couples should consult with their estate planners and advisers to adjust their estate plans for these tax benefits.