Supreme Court to Hear DOMA Case with Tax Implications

The Supreme Court has agreed to hear a pair of cases challenging the constitutionality of the federal Defense of Marriage Act and of California’s Proposition 8, which banned same-sex marriage, and the cases could have tax ramifications.

The high court granted certiorari to the two cases on Friday. The court will hear arguments in both United States v. Windsor, which challenges the constitutionality of DOMA, and of Hollingsworth v. Perry, which challenges Prop. 8. In the Windsor case, the petitioner, Edith Schlain Windsor, claimed that she overpaid estate taxes after the death of her longtime partner. In 2007, she married Thea Spyer, her same-sex partner of more than 40 years, in Canada. The couple resided in New York.

When Spyer died in 2009, she left her estate to Windsor. In her capacity as executor of Spyer’s estate, Windsor paid approximately $363,000 in federal estate taxes. She then filed a refund claim under a section of the Tax Code that provides that property passing from a decedent to a surviving spouse may generally pass free of federal estate taxes. The Internal Revenue Service denied the refund claim on the ground that she was not a “spouse” within the meaning of Section 3 of DOMA and thus not a “surviving spouse.”

Windsor then filed suit challenging the constitutionality of DOMA Section 3 in the U.S. District Court for the Southern District of New York. She contended that, by treating married same-sex couples in New York differently from opposite-sex couples, Section 3, as applied by the IRS, violates the equal protection component of the Fifth Amendment. She sought declaratory and injunctive relief, as well as recovery of the $363,053 in federal estate taxes paid by Spyer’s estate.

After she filed her complaint, Attorney General Eric Holder informed Congress that he and President Obama had determined that Section 3 of DOMA was unconstitutional as applied to same-sex couples who are legally married under state law. In a letter to Congress, he explained that, while the Justice Department had previously defended Section 3, if binding precedent in the circuit required application of rational basis review to classifications based on sexual orientation, the President and the Department of Justice had conducted a new examination of the issue after two lawsuits (the Windsor case and another case known as Pedersen v. Office of Personnel Management) had been filed in a circuit that had yet to address the appropriate standard of review.

The Attorney General explained that, after examining factors such as the history of discrimination against gay and lesbian individuals and the relevance of sexual orientation to legitimate policy objectives, he and the President had concluded that Section 3 warrants application of heightened scrutiny rather than rational basis review. The Attorney General further explained that both he and the President had concluded that Section 3 fails that standard of review and is therefore unconstitutional.

The Attorney General’s letter reported that, notwithstanding this determination, the President had “instructed Executive agencies to continue to comply with Section 3 of DOMA, consistent with the Executive’s obligation to take care that the laws be faithfully executed, unless and until Congress repeals Section 3 or the judicial branch renders a definitive verdict against the law’s constitutionality.” The Attorney General explained that “[t]his course of action respects the actions of the prior Congress that enacted DOMA, and it recognizes the judiciary as the final arbiter of the constitutional claims raised.” In the interim, the Attorney General instructed the Justice Department’s lawyers to cease defense of Section 3. Finally, the Attorney General noted that the department’s lawyers would take appropriate steps to “provid[e] Congress a full and fair opportunity to participate” in litigation concerning the constitutionality of Section 3. Following the Attorney General’s announcement, the Bipartisan Legal Advisory Group of the House of Representatives, also known as BLAG, a five-member bipartisan leadership group, moved to intervene to present arguments in defense of the constitutionality of Section 3. The district court granted the motion.

Both BLAG and the government moved to dismiss Windsor’s challenge to the constitutionality of Section 3. While BLAG presented arguments in support of Section 3’s constitutionality, the government explained that it was filing a motion to dismiss the plaintiff’s constitutional claim solely for purposes of ensuring that the court had Article III jurisdiction to enter judgment for or against the federal officials tasked with enforcing Section 3. The government’s brief on the merits set forth its view that heightened scrutiny applies to Section 3 of DOMA and that, under that standard of review, Section 3 violates the equal protection guarantee of the Fifth Amendment. The district court denied the motions to dismiss and granted summary judgment in favor of Windsor, concluding that Section 3 of DOMA violates the equal protection guarantee of the Fifth Amendment. The district court also rejected BLAG’s argument that the plaintiff lacked Article III standing because she had failed to prove that New York recognized her marriage in 2009, the relevant tax year, and thus had failed to establish that her injuries were traceable to Section 3 of DOMA.

The district court also rejected BLAG’s threshold argument that Windsor’s equal protection challenge was foreclosed by the Supreme Court’s summary dismissal of the appeal in Baker v. Nelson, a 1972 decision that sought review of the Minnesota Supreme Court’s decision upholding the constitutionality of a state statute interpreted to limit marriage to persons of the opposite sex. The district court explained that Section 3, unlike the statute at issue in Baker, “does not preclude or otherwise inhibit a state from authorizing same-sex marriage (or issuing marriage licenses),” but instead “defines marriage for federal purposes, with the effect of allocating federal rights and benefits.” BLAG appealed the ruling.

The case challenging California’s Proposition 8 also takes into account some of the tax ramifications. “We allow spouses but not siblings or roommates to file taxes jointly, for example, because we acknowledge the financial interdependence of those who have entered into an ‘enduring’ relationship,” said the plaintiffs. “The incidents of marriage, standing alone, do not, however, convey the same governmental and societal recognition as does the designation of ‘marriage’ itself.” The lawsuit noted that both “states and the federal government channel benefits, rights and responsibilities through marital status. Marital status affects immigration and citizenship, tax policy, property and inheritance rules and social benefit programs.”

Tax experts in the Lesbian, Gay, Bisexual and Transgender practice group at the accounting and advisory firm Marcum LLP said Monday that the U.S. Supreme Court’s decision to hear a bellwether case challenging a key section of the Defense of Marriage Act could open the door to equal tax treatment for same-sex married couples under federal law. If the court overturns the act’s definition of marriage as a union between a man and a woman, same-sex married couples will be entitled to the same income and estate tax deductions and many other federal benefits available to traditional families, which are currently denied to them.

“In addition to achieving future tax parity, a favorable ruling would entitle nontraditional couples who are legally married for state purposes to file amended federal tax returns retroactively,” said Nanette Lee Miller, national leader of Marcum’s LGBT practice group and Partner-in-Charge of Assurance Services for the firm’s California offices. “Therefore, we are strongly urging our LGBT clients to immediately file protective claims for refunds of any overpayments, pending the court’s ruling. Since there is a three-year statute of limitations on tax refund claims, it is imperative that claims be filed as soon as possible to protect any potential refunds for returns dating back as far as 2009.”

“An affirmative ruling by the court will also allow same-sex married couples to benefit from tax-advantaged estate planning,” said Janis Cowhey McDonagh, a partner in the firm’s New York City office and a member of its Trusts and Estates Practice group, who frequently lectures on LGBT estate and income tax issues, and is the author of "Top 10 Estate Planning Tips for LGBT & Non-Traditional Families."

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