The Internal Revenue Service has issued a private letter ruling recognizing California’s community property laws in regard to the tax treatment of registered domestic partners, potentially benefiting same-sex couples.

The private letter ruling treats the income earned by registered domestic partners in California as community property income, reversing an earlier ruling from 2006. The IRS said that a taxpayer must report on his or her individual federal income tax return one-half of the combined income that the taxpayer and his or her domestic partner earn from the performance of personal services and one-half of the combined income derived from their community property assets.

The taxpayer is then entitled to half of the credits for income tax withholding from the wages of the taxpayer and domestic partner. The requirement under California law to treat a taxpayer’s earnings as community property, and thus half of the taxpayer’s earnings as vested in his or her partner, does not result in a transfer of property by the taxpayer to the domestic partner for federal gift tax purposes under Section 2501 of the Tax Code.

The IRS also issued two Chief Counsel Advice memorandums supporting the private letter ruling. In one memorandum, the IRS, in accordance with the principle that federal law should respect state law property characterizations, said the federal tax treatment of community property should apply to California registered domestic partners. Thus, for tax years beginning after Dec. 31, 2006, a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return.

In the other memorandum, the IRS said it could consider the assets of a California taxpayer’s registered domestic partner when determining whether to accept a taxpayer’s offer in compromise.

While the IRS rulings do not mean that the federal government recognizes same-sex marriages, they do indicate that the federal government as usual recognizes state property laws, noted the San Francisco Chronicle, including the community property laws in California for registered domestic partners.

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