Under Poe v. Seaborn, all community income is split between spouses and Registered Domestic Partners (RDPs) for purposes of the income tax. That is because the income is owned equally by the two taxpayers. Does that mean the non-earning spouse or partner is similarly liable for half of the self-employment tax? I don’t think so. But the IRS does.
I have blogged about this issue before. See here. There was a time when I thought the IRS could be convinced that my position was the right one, but I have been told by several IRS folks that it is time for me to let go of that hope. In the meantime, I know many taxpayers have filed returns in which they take the position that all self-employment earnings are allocated to the earner for purposes of the self-employment tax even though they are split 50/50 for purposes of the income tax.
That reporting position, in my view, is perfectly reasonable and the IRS has not yet published anything but informal advice regarding the matter. In other words, there is nothing anyone can cite as authority for the IRS position. The matter is controlled by a particular statute, Section 1402 of the Internal Revenue Code, which defines “net earnings from self employment” for purposes of the self-employment tax. Based on my construction of that statute, earnings are specifically allocated to the earner of the income, not necessarily the owner of the income. Seaborn tells us nothing about how to construe Section 1402. Section 1402 wasn’t even a gleam in the eye of Congress in 1930, the year that Seaborn was decided. Section 1402 was enacted in 1950.
Now taxpayers who have taken the reporting position that all self-employment income is allocated to the earning partner, as opposed to each partner reporting half of such income, are beginning to get notices from the IRS. Typically the notice is in the form of a CP2000 letter directed at the non-earning partner and proposing an increase in tax. And some taxpayers are willing to stand up and protest the IRS position. If their protest is rejected by the IRS (and there is every indication that it will be), then we are likely to see the issue litigated in court.
The National Center for Lesbian Rights (NCLR) is partnering with pro bono tax counsel, Emily Kingston (Sideman & Bancroft), to support this tax litigation if the case does go to trial. I think they have a great chance to succeed. Why? Because Section 1402 should be construed to allocate 100% of the self-employment income to the earner. The statute states clearly:
“The term “net earnings from self-employment” means the gross income derived by an individual from any trade or business carried on by such individual . . .” (my emphasis)
Under the plain-meaning rule, the state means what it says. The net earnings (upon which the tax is levied) means income derived (not owned) by the individual in a trade or business carried on by that individual (and not by his partner or spouse).
The only reason that the IRS thinks that the Seaborn income-splitting rule applies to Section 1402 is based on the fact that subsection (a)(5) of that provision says that in community property states the earnings shall be allocated to the spouse who did the earning. I think that’s a clarification of the general rule requiring allocation to the earner. The IRS thinks it is a special rule intended to reverse the rule that otherwise would apply: income splitting under Seaborn. Thus, in their logic, if you can’t rely on the special rule, in community property states the income would be allocated 50/50.
Unfortunately, this special rule uses the word spouse and, because of DOMA, that means it can’t be applied to same-sex spouses or partners. Of course I think DOMA is unconstitutional. And a number of courts agree. But even short of that, I point to the rule of statutory construction that says, in the words of Mr. Justice Brandeis:
“When the validity of an act of the Congress is drawn in question, and even if a serious doubt of constitutionality is raised, it is a cardinal principle that this Court will first ascertain whether a construction of the statute is fairly possible by which the question may be avoided.”
See Ashwander v. TVA, 297 U.S. 288, 346-48 (1936) (concurring opinion).
The IRS is construing Section 1402 in a manner that raises a serious question about the constitutionality of DOMA. The better rule of statutory construction would be to avoid raising this question at all. If the IRS doesn’t apply this age-old canon of statutory construction, I believe a court will.
