Marriage Definitions for the IRC Revised in Final Regulations to Comply with Supreme Court Holdings

Final regulations have been issued by the IRS (TD 9785) revising regulations under IRC §7701 for the definitions related to marriage as they apply to the Internal Revenue Code.  These regulations take into account the Supreme Court’s holdings on same sex marriage found in the cases of Obergefell v. Hodges (135 S. Ct. 2584 (2015)) and  Windsor v. United States (133 S. Ct. 2675 (2013)).

The final regulations generally reflect the revisions found in the proposed regulations (REG-148998-13) issued in October 2015.  Rather than revised the language throughout the regulations to remove the terms “husband” and “wife” the IRS decided to issue a broad clarifying definition in Reg. §301.7701-18.

Reg. §301.7701-18(a) provides:

(a) In general. For federal tax purposes, the terms spouse, husband, and wife mean an individual lawfully married to another individual. The term husband and wife means two individuals lawfully married to each other.

Effectively, the IRS has provided the terms “husband” and “wife” will be treated as gender neutral under the tax law.

A valid marriage is tested by looking at whether it is valid in the state, possession, or territory of the United States where the marriage was entered into, regardless of the domicile of the individuals involved. [Reg. §301.7701-18(b)(1)] If a marriage is entered into in a foreign country, it will be recognized as a marriage for federal tax purposes if the marriage would be recognized as valid by at least one state, possession, or territory of the United States, regardless of domicile.  [Reg. §301.7701-18(b)(2)]

The preamble spends significant time addressing three comments regarding individuals with a “civil union”, “registered domestic partner” or similar status other than marriage under a state law.  The final regulations, consistent with the proposed regulations, provide that such individuals are not treated as married.  Reg. §301.7701-18(c) provides:

(c) Persons who are not lawfully married for federal tax purposes. The terms spouse, husband, and wife do not include individuals who have entered into a registered domestic partnership, civil union, or other similar formal relationship not denominated as a marriage under the law of the state, possession, or territory of the United States where such relationship was entered into, regardless of domicile. The term husband and wife does not include couples who have entered into such a formal relationship, and the term marriage does not include such formal relationships.

The comments had proposed that these individuals be treated as married for federal tax purposes.  The IRS declined to do so, noting that the states in question define this as a status other than married even if the rights and responsibilities of the parties are similar or identical those who are married under the same state law.  Presumably the couple in question has made a conscious decision at this point to remain “not married” rather than change their status to married, so the IRS will not require the couple to be treated as married. 

The IRS also declined to limit the application of community property treatment to only those individuals who are married under state law, finding that was outside the scope of these rules.  As the IRS noted in the preamble:

These regulations provide definitions for purposes of determining marital status for federal tax law purposes. These regulations do not provide substantive rules for the treatment of married or non-married couples under federal tax law. Accordingly, because the federal tax treatment of issues that arise under community-property law involves resolution of issues under substantive tax law, which is outside the scope of these regulations, the commenter's recommendation is not adopted by these final regulations.

One planning point to note is that this means that those who obtain an alternative status other than marriage in a state that applies community property provisions to such individuals may find they have a significant federal tax advantage over those who get married in the same state if the income of the couple is predominantly community income. 

That couple would have the community income divided evenly between the couple but, rather than being subjected to the married filing separate rates, would rather be able to use either the single or head of household filing statuses—either of which will produce a significantly better tax result than the married separate returns or a single married filing joint return.

The good news for advisers is that these regulations don’t provide for any change from the original IRS positions announced following the Supreme Court decisions.