On my inaugural welcome post to this blog I mentioned that the IRS has issued a CCA holding that California RDPs (Registered Domestic Partners) are covered by the holding in Poe v. Seaborn, a 1930 Supreme Court case that ruled all community income, including earned income from wages, was to be split between the spouses for income tax purposes. That rule mattered for spouses in 1930 when there was no joint return and just one single income tax rate schedule. The ability to split earnings meant that community property spouses would pay lower income taxes in other states.
In 1948 we got joint returns for spouses and so Seaborn matters less forthem. But it is still good law and it continues to apply to allocate income when spouses report separately or when they marry or divorce in the middle of the tax year. The 2010 CCA says that this income splitting rule applies to California RDPs, but only as of 2007. Why? Because before 2007, RDPs were not treated the same as spouses for state income tax purposes. They could not file joint returns and when they filed separate returns they were, by statute, not allowed to split their community wages. This narrowly-focused state tax statute did not say that such wages were not community income. In fact they were and, as such, belonged equally to each partner for all purposes, but under the statute were taxed to the earner.
I argued in 2006 that the initial CCA on this topic, which had been issued in early 2006, was wrong. Now that the IRS has reversed its position, but limited the effect of the new rule to tax years post 2006, I again think they are wrong. State property law, not state tax law, controls this issue. States like Washington and Texas do not tax the income of their residents. The IRS would never accept an argument that because state law treats income as a non-taxable item, the federal law should do the same. Seaborn is about ownership of the income under state law. Federal tax law, under Seaborn, must recognize those ownership rules. Congress is free to change those rules – just like the state legislature in California did for the years 2005 and 2006. (State law as of 2007 requires married status filing for all RDPs and applies Seaborn to any returns filed separately.) But in the absence of any federal legislative provisions to the contrary, Seaborn’s splitting rule should apply.
And who should the rule apply to? Any couple who under the state law of residence is totally subjected to the state community property regime. In my view, that includes RDPs in the states of Washington and Nevada, as well as RDPs in the state of California. It also includes same-sex married couples in California, whether they were married before or after Proposition 8 went into effect (November 5, 2008 – Guy Fawkes Day, by the way). The couple must have a valid marriage in either California (only possible between June 2008 and Guy Fawkes Day 2008) or another jurisdiction before Guy Fawkes Day 2008 (only possible in Massachusetts and certain foreign countries). Or, alternatively, if the couple has a valid marriage post-Guy Fawkes Day 2008 (possible in certain foreign countries and the states of Massachusetts and Connecticut and Iowa and Vermont and New Hampshire and DC and in the future who knows?), their residence in California, under SB 54, subjects them fully to the community property regime. And so they should be covered as well.
The only relevant question for whether Seaborn applies is whether or not the couple is residing in a state that subjects them to the state’s community property regime. Thus same-sex married couples in Texas, Louisiana, and other community property states that don’t recognize the marriage, cannot rely on Seaborn.
A detailed argument about why Seaborn ought to apply to couples who are subject to a community property regime is set forth in the 2006 article I wrote questioning the IRS position in the 2006 CCA. To read that article click here.
