In the past few weeks, the IRS has issued two pronouncements on this question, both concluding that if the receipts are community income under the applicable state law then they will be taxed as community income at the federal level.
The IRS made this conclusion in the recently released list of Questions and Answers dealing primarily with taxation of Registered Domestic Partners (RDPs) in community property states. I reported on that release here. The full set of questions and answers can be found here. (See question 9). On Friday (October 7, 2011), Tax Analysts released a copy of a letter from the IRS to Senator Barbara Boxer which addressed the same issue, explaining:
Your constituents asked us to clarify whether social security benefits are community income and how registered domestic partners and same-sex married couples should treat self-employment income. Generally, state law determines whether an item of income constitutes community income. As noted above, federal tax law generally respects state property law characterizations and definitions. U.S. v. Mitchell, 403 U.S. 190 (1971). Accordingly, if social security benefits are community income under California law, then they are also community income for federal income tax purposes. If social security benefits are not community income under California law, then they are not community income for federal income tax purposes.
To be blunt, this explanation is not very helpful. The Service was quite willing to opine in 1963 in a published Revenue Ruling that a Texas spouse who received a social security payment during the marriage had community property under Texas law. That is because all receipts during marriage are presumed to be community and social security, unlike other retirement benefits, simply does not vest until time of receipt. So character is determined at the time of receipt. That ruling is now obsolete because it answered a question about how spouses should be taxed under a provision of the Internal Revenue Code that is no longer in existence, but the reasoning about social security payments as community property remains sound.
California law, like Texas law, presumes that all receipts during marriage are community. So I think social security, the moment it is received by an RDP, is community property. Yet every (other) expert who has opined on this matter has concluded that it is blackletter law that social security payments are not and can never be community property. Why? Because California cases have so concluded in the context of divorce.
But I don’t think the analysis in those cases applies to same-sex partners, whether married or registered. First of all, all of the reported cases involve claims by the non-employee spouse to half of the value of the future social security benefits. There are at least two solid reasons why “future benefits” cannot be community property. First of all, as the IRS concluded in the 1963 ruling, these are not sufficiently vested rights to be considered “property.” Second, remember that the right rule is to characterize the receipts at the time they are actually received. Future receipts will be received after divorce (duh!) and so cannot be treated as community.
There are no reported California cases dealing with the characterization at divorce of past receipts of social security. Those payments, if received during the marriage, are arguably community. There are, however, a handful of unreported cases holding that even past receipts (assuming they have not been comingled) cannot be community. The argument in such a case is that state community property laws, as applied to federal benefits like social security, are pre-empted by federal law.
This is a sound argument and I agree with it, even as applied to past receipts of social security held by opposite sex spouses. To explain a bit further, consider the fact that the federal social security laws have provisions that vest spouses with rights in their employee spouse’s social security benefits – not as community property but as her or his own property. The federal law determines the amount of social security owed to Spouse A by looking at her own earnings records, determining what amount that record would generate as a benefit and then comparing it to an amount equal to one-half of the benefit that is paid to her spouse, Spouse B. The federal law also vests rights in Spouse A even if she is divorced from Spouse B, but only if they were married for ten years or more. And federal law also vests rights in Spouse A if Spouse B predeceases her. So, federal law provides social security amounts for current spouses, divorced spouses, and surviving spouses. To honor state law claims under community property would indeed conflict with these federal rules. As a result, federal law pre-empts state property law.
But same-sex spouses and partners have no federally created rights in the social security benefits of their spouses or partners. And so there can be no conflict between federal law and state law on this matter. Federal law is silent and state law says the receipt should be split 50/50 because it is owned by the community the moment it comes into existence.
And that is why I think social security payments are community property of RDPs and same-sex spouses in the three community property states that recognize their relationships. And I don’t understand why the IRS can’t spend a bit more time analyzing these issues, the way it has analyzed similar issues in the past for spouses in community property states. But I am pleased that they are consistently publicizing the message that they will continue to recognize state property law rights, even when those rights are held by same-sex couples.
