Many tax return preparers are dealing with community property issues for same-sex RDPs for the first time. Questions arise daily. A recent pressing question is: how do you report income earned by a partner in a non-community property state if the couple is domiciled in California? Yes, the income is split for federal purposes. But what about the state in which the income is earned? What if that state is not a community property state? Will it recognize income splitting?
There is no quick simple authoritative answer to questions like this. But there are principles that ought to apply and that will lead us to a principled answer. The question poses a choice of law issue. If A and B are RDPs domiciled in California, but A earns some income in Oregon, a non-community property state, is the Oregon-source income community? Does California law apply or does Oregon law apply? The universal rule for choosing which state’s law to apply is that as to real property, the law of the state in which the realty is located controls. But for other issues, like who owns personalty (cash income is personalty), it is the law of the marital domicile that ought to control.
This choice of law question is not new for RDPs. It has been applied for decades (at least since the 1930 Supreme Court opinion in Poe v Seaborn) to determine who owns income earned by spouses in cases in which one spouse earns income in a non-community property state. The issue only became relevant once the Seaborn case established the principle that community income is taxed 50/50 to the two spouses. And the issue became relevant for RDPs in California, Nevada and Washington (and same-sex married couples in California) as of tax year 2010, because the IRS has told us that Seaborn now applies to such couples. See CCA 201021050.
Oregon clearly recognizes community property rights and community property income for spouses who are domiciled in community property states. In a reported state tax case from Oregon, Keller v Dept. of Rev. (1981), the Oregon Tax Court held that a wife who was resident in Oregon (a non-community property state) but whose husband was resident in Washington (a community property state) had to report 100% of her own income from Oregon and 50% of her husband’s income because under Washington law it was community property. This was not a good result for the taxpayers because Washington has no state income tax. But for the community property allocation of 50% of his income to his wife, all of his income would have escaped state income taxes. Click here for an edited version of Keller.
As a general rule, one would expect all states to follow the Oregon principle whether the state has a specific statute on point or not. The choice of law rule says marital domicile controls.
But, what if a state has a strong DOMA statute or constitutional amendment that refuses to recognize marriages, partnerships, or any sort of union between two partners of the same-sex? Georgia and Virginia are good examples of such states. The argument that won the day at the federal level, where there is after all a federal DOMA, was that applying Seaborn to couples who are subject to their state’s community property laws is a rule about property ownership and not a rule about marriage. Therefore, DOMA does not apply. But I can see a Georgia or Virginia court saying “we can’t recognize property rights from another state if those rights are founded on a relationship that our state would not recognize.”
From my point of view, though, I say traditional choice of law rules operate until someone tells me otherwise. Besides, many states, like Oregon, apply the federal tax rules as a starting point. If the federal law requires splitting of community income no matter where it is earned so long as the spouses/partners are domiciled in California, Nevada, or Washington, then states that base state tax reporting on the calculation of federal AGI should follow the federal rule. It is the right choice of law rule and it is workable because it is the established rule.
