Many taxpayers and their tax advisers are confused by the Internal Revenue Service’s apparent inconsistency regarding who can split community income on their federal tax returns. Some complain that they can find no binding authority to support the position that Registered Domestic Partners (RDPs) in California, Nevada, and Washington can split community income.
There is a 2006 Chief Counsel Advice memo (CCA) that says California RDPs cannot split community in the form of personal compensation. That position was reversed in a 2010 CCA, based on a 2010 Private Letter Ruling (PLR). None of these pronouncements is authority according to general principles of tax law. The “authority” for splitting community income is a 1930 Supreme Court opinion, Poe v Seaborn. Seaborn holds that under a mandatorily-imposed community property regime (as opposed to one that you can opt into), all community income is owned by each spouse as soon as it is earned. The “owner” of the income under state law is the appropriate taxpayer. Since the community property regimes of California, Nevada and Washington impose the community property system on RDPs, they are covered by Seaborn. The IRS pronouncement in 2010 that Seaborn applies to RDPs in community property states is merely applying existing authority to a new fact situation.
The new web version of IRS Publication 17 became available a few days ago. If you go to page 7 you will find the following paragraph:
California, Nevada, and Washington domestic partners. A registered domestic partner in California, Nevada, or Washington generally can choose to report half the combined community income earned by the individual and his or her domestic partner. See
Publication 555.
This is the first public statement in any IRS publication that acknowledges that RDPs in Nevada and Washington are also covered by the Seaborn rule. Publication 555 is the IRS document that explains the general rules applicable to the splitting of community income. But if you pull up that publication on the web, please be aware that it has not yet been revised to reflect the correct rule for RDPs. That publication still includes a paragraph that was added in 2007 after the 2006 CCA was issued and it says, in direct conflict with Publication 17, that California RDPs cannot split community earned income. I am told that it will take a bit longer to revise that publication, but it is being revised. So for now you should read these two publications as acknowledging the application of the Seaborn rule to RDPs (Publication 17) and setting forth some rules about how to report the divided income (Publication 555).
There should no longer be any doubt about whether income-splitting of all community income is available to RDPs who reside in community property states. Can you split community income? Yes you can.
For more information about this topic, see my blogpost for November 23, 2010.
